Today the Federal Deposit Insurance Corporation (FDIC) released their quarterly compilation of the health of federally insured banks in the
Given that mammoth banks, Washington Mutual and Wachovia, both nearly trillion dollar banks had to be rescued during the quarter, it is no surprise that net profits in all FDIC insured banks dropped by 94% ($27 billion) to $1.7 billion. During the quarter there were only nine banks that failed. The FDIC watch list of troubled banks increased from 117 to 171. These 171 banks represent $115 in assets.
There were several other notable pieces of information provided on the FDIC quarterly report. Most notably that community banks (defined as those banks with less than $1 billion in assets) were under increased pressure from bad loan losses.
I have written a number of times in this blog about what this means to small business owners. Some of my prior entries are outdated now as the FDIC has temporarily raised the insured limit per depositor to $250,000 and since we have now seen the federal government step in and protect all assets above the FDIC limit in each case of banks that failed in the third quarter.
What does all this really mean?
The community banks that are now feeling more pressure from loan losses are the source for most main street business loans. Since there is no way to predict the bottom of the crisis, these banks are simply not making loans except to their most creditworthy customers. The old adage applies that only those customers who don’t need to borrow are eligible to borrow.
Banks make net profits several ways but the most important way is to lend money and earn interest. It is not surprising to me that when you examine the statistics of the community bank group you see a trend of decreased income because of two reasons. First, for those loans that are tied to the prime lending rate, banks have seen profits from good loans drop as the prime rate dropped. Second, as loans are maturing they aren’t being replaced by new loans at any rate, so banks are loosing interest on new loans.
The federal government’s liquidity program was designed to encourage banks to loan money to businesses and consumers, however that simply hasn’t happened. Banks that have taken the funds have used the funds to shore up their capital which is necessary to cover increased reserves for bad loans.
Loans written off for the third quarter increased to a rate last seen in 1991.1991 was at the height of the last major banking crisis in which nearly 1,500 banks failed. The report noted that current loan losses are spreading to a wider range of lenders and types of businesses.
Today’s report is further signs that things are not going to soften on main street anytime soon.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
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