WASHINGTON — The worst of the financial crisis has passed for most institutions, but new Federal Deposit Insurance Corp. data shows aftershocks are still being felt.

On Tuesday the agency said banks and thrifts shrank at a historic pace in 2009, with declines in loan balances across nearly every category. The number of "problem" institutions reached its highest level in almost 17 years, noncurrent loans continued to soar and a key measure of FDIC reserves fell to its lowest point since the agency's creation.

For the year, the industry's total assets fell 5.3%, to $13.1 trillion, the largest decline in FDIC history. Total loans dropped 7.5%, to $7.3 trillion, the biggest decline since 1942.

The deleveraging — which in the fourth quarter was mostly driven by large banks — improved capital ratios and helped the industry turn a small profit.

Presenting the report, FDIC Chairman Sheila Bair said banks should resume lending.

"Small-business lending has been disproportionately impacted by the capital constraints on the smaller community banks, but I do think the larger banks do need to do a better job of stepping up to the plate here," she said.

The industry made $914 million in the fourth quarter, a dramatic improvement from the $37.8 billion quarterly loss a year earlier.

Full-year earnings of $12.5 billion were more than double the disastrous results of 2008, but were "well below historical norms," the FDIC said.

Bair said the industry "essentially" broke even in the quarter.

"Usually, a lack of profits is not considered a good result. But compared to the record loss the industry reported a year ago, it represents significant improvement," Bair said. "It's not that this was a strong quarter. It's simply that everything was so bad a year ago."

Bair said it is no longer just large banks showing earnings improvement.

"Slightly more than half of all institutions reported year-over-year improvement in their quarterly net income, the highest share in three years," she said. "But for about one in five of these institutions, improvement was a smaller quarterly loss than a year ago."

Indeed, the FDIC said nearly 30% of institutions reported negative income for 2009, up from 24.8% in 2008. "This is the highest proportion of unprofitable institutions in any year since at least 1984," according to the report.

The FDIC cited higher noninterest income, lower noninterest expense, trading revenue and servicing income among the factors behind the slight earnings rebound.

Noninterest income in the quarter totaled $62 billion, which was 53% higher than a year earlier. Meanwhile, trading revenues totaled $2.8 billion, compared with a $9.2 billion loss in the fourth quarter of 2008. Servicing income totaled $8 billion, compared with a $390 million loss. Meanwhile, noninterest expenses declined 14%, to $98 billion.

Capital ratios improved last year. The industry's leverage ratio increased by about 1.2%, to 8.65%. But Bair said institutions have improved those ratios through reduced lending.

"Large banks were responsible for 90% of the decline in loan balances" in the fourth quarter, she said. "These banks have been cutting back significantly on lines of credit to consumers and small business."

Bair reiterated that institutions should take a holistic approach to assessing borrowers' credit.

"They should neither over-rely on models to identify and manage concentration risk … nor automatically refuse credit to sound borrowers because of those borrowers' particular industry or geographic location," Bair said.

The 1.7% decline in loans in the fourth quarter was not as sharp as the record 2.8% drop in the third quarter, but it was still the sixth straight quarterly decline in lending.

Commercial and industrial loans fell by 4%, to $1.2 trillion, construction and development loans fell by 8%, to $451 billion, and mortgages fell by 0.6%, to $1.9 trillion. Credit card loans were an exception, increasing 7%, to $422 billion.

Institutions have not finished working through the problem assets they originated when their lending levels were higher.

The industry posted its 12th straight quarter of higher net chargeoffs. The $53 billion in chargeoffs in the fourth quarter were 37% higher than in the fourth quarter of 2008. The annualized net chargeoff rate rose almost 1% from a year earlier — and 17 basis points from the third quarter — to 2.89%, the highest level on record.

Overall, 5.37% of all loans were noncurrent at the end of the year, which is the highest in the 26 years that such data has been available. Noncurrent loans were driven by mortgages, which rose by 14.9%, to $178 billion.

But the agency cited some signs that asset deterioration was slowing. While total noncurrent loans rose 6.6% in the quarter, to $391 billion, noncurrent commercial and industrial loans dropped by 7.7%, to $42 billion, and noncurrent construction and development loans fell by 2.7%, to $72 billion.

The report made it clear that the crisis is still weighing heavily on the FDIC's books.

The agency's fourth-quarter loss provision of $17.8 billion was 18% less than in the third quarter, but high enough to indicate the wave of failures will continue.

As a result, the Deposit Insurance Fund slid another $12.6 billion to a $20.8 billion deficit, which is -0.39% of insured deposits. That ratio, 23 basis points below its Sept. 30 level, is the lowest ever recorded.

The 702 "problem" institutions, 150 more than in the third quarter, hold $402.8 billion of assets. Both of those totals are at their highest level since June 1993.

Bair predicted failures this year would exceed the 140 institutions seized in 2009.

Following the $45 billion premium prepayment the industry made in December, the FDIC is not foreseeing the need for additional funding, Bair said. "We've got some pretty severe stress in earnings, and even with those we think the cash balances should position us well," she said.

"So much of this is about the economy, which is beyond our control. Assuming we don't have a significantly more adverse scenario than most people think, I think we'll be in good shape this year, and we'll start seeing the DIF balance go back up."

The industry's average net interest margin fell by 2 basis points to 3.49% in the fourth quarter, but that was still 16 basis points higher than in the fourth quarter of 2008. A majority of institutions had a higher margin than they did in the third quarter, and from a year earlier.

Still, the average return on assets in all of 2009 grew just 6 basis points from 2008, to 0.09%. The industry's annualized ROA in the fourth quarter was 0.03%.

The agency said deposit growth remained strong in the fourth quarter. Total deposits grew 1.4%, to $9.2 trillion, with domestic deposits growing 1.9%, to $7.7 trillion.

Insured deposits rose by 1.8% from the third quarter — and by more than 13% from a year earlier — to $5.4 trillion.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access