Banking on Recovery

Is the bank vault half full or half empty?

Tuesday’s quarterly report from the Federal Deposit Insurance Corp. offers a few glimmers of hope for the banking industry, along with signs of continued weakness.

First, the good news, because that won’t take long: FDIC-insured banks and savings institutions reported total net income of $2.8 billion in the third quarter, compared with a net loss of $4.3 billion in the second quarter. So earnings are improving.

James Chessen, chief economist for the American Bankers Association, also pointed out that capital ratios hit their highest levels in 19 years. Plus, even though problem loans are growing, they’re growing more slowly.

“Equity capital—the core financial support banks used to back loans—continued to grow, and banks put aside more reserves to cover additional losses,” Chessen said.

Also, 96 percent of banks are still classified as well capitalized, he noted.

Now for the bad news: Loan balances declined by the largest percentage since the FDIC began tracking this on a quarterly basis in 1984. That’s not a good sign for economic recovery.

“We need to see banks making more loans to their business customers,” FDIC boss Sheila Bair said. “This is especially true for small businesses that rely on FDIC-insured institutions to provide over 60 percent of the credit they use.”

Banks are hesitant about making new loans because of continued problems with their old ones. FDIC-insured institutions charged off nearly $51 billion in uncollectible loans during the third quarter, the highest net charge-off rate in at least 26 years. The percentage of noncurrent loans also hit record highs.

At the end of September, there were 552 institutions on FDIC’s “problem list,” the most since 1993. Fifty banks failed in the third quarter.

When will the number of banks on the problem list decline?

“It really is all about the economy, at this point,” Bair said.

It will take “at least a couple of more quarters before we see a meaningful improvement” in banks’ overall credit picture, Bair said. But if the economy improves, lending should pick up sometime next year, she said.

Last week, at a Small Business Financing Forum held at the Treasury Department, Bair said, “There are no quick fixes here.” She hoped that an FDIC policy statement on commercial real estate workouts would encourage banks to continue make good loans, especially to small businesses. Buildings and land won’t be classified adversely solely because their values have declined, she said.

Two bankers at the forum talked about their plans to increase lending to small businesses. Kevin Watters, head of business banking at Chase, said his bank plans to add 325 bankers specializing in small-business loans at 5,000 branches across the country. The bank has even told its underwriters, “If you’re not sure, approve the loan,” he said.

Wells Fargo, which makes more Small Business Administration loans than any other bank in the country, was represented by Dave Rader, head of its SBA division. He said his bank plans to increase its SBA lending even further and is hiring more small-business lenders, especially in the East.

The flip side of the story, however, was told by Lani Hay, owner of Lanmark Technologies in Fairfax, Virginia. Her bank dropped her company’s line of credit after her revenue declined last year, even though she was awarded a sizable contract from the Department of Defense this year.

Her bank? Wells Fargo, after it acquired Wachovia.

Hay’s story has a happy ending, though. She was able to get a new line of credit at a smaller regional bank.

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Kent Hoover is the Washington bureau chief for bizjournals.