Banks' 3Q profits drop by 25 percent

Third-quarter profits at federally insured banks and thrifts plunged to a four-year low as large institutions set aside billions to cover losses from bad mortgages, data released Wednesday show.

The quarterly banking industry statistics, made public by the Federal Deposit Insurance Corp., highlighted a dramatic deterioration in the third-quarter as the slumping housing and mortgage markets dragged down banks' results.

Profits at the 8,560 FDIC-insured institutions dropped $9.4 billion, or 24.7 percent, to $28.7 billion, hampered by soaring loan defaults and provisions for loan losses, the FDIC said.

While declining profits were seen in about half of the institutions, the FDIC said the largest share of the declines were seen in larger banks, with 10 institutions accounting for more than half of the drop.

It was the worst bank and thrift performance since the first quarter of 2003. Provisions for loan losses totaled $16.6 billion, more than double last year's levels and the largest amount since the second quarter of 1987.

Sheila Bair, the FDIC's chairman, said delinquencies and loan losses were up in several loan categories — not just the residential mortgage loans that have worried investors worldwide this year. Real estate construction loans are also having problems, she noted.

Noncurrent loans — those that are 90 days or more past due — jumped by 58 percent from a year earlier to $83 billion, with most of that increase coming from residential mortgages.

"Credit performance is going to get worse before it gets better," Bair said at a briefing for reporters, noting that about 1.5 million borrowers are expected to see their loans reset at higher interest rates next year. "We are just now getting into the thick of the mortgage reset problems."

Bair, however, said the mortgage mess is unlikely to destabilize the U.S. financial system, pointing out that banks are coming off of several years of record profits. "I think they can handle what's coming at them," she said.

James Chessen, chief economist with the American Bankers Association said in a statement that banks "are adjusting to the economic stress in the housing market and are taking the necessary steps to put the losses behind them."

Numerous banks, including Wachovia Corp. and Bank of America Corp., have reported big declines in third-quarter profit. Wells Fargo, the fifth-largest U.S. bank, said late Tuesday it will recognize $1.4 billion in losses in the fourth quarter on home equity loans that aren't being repaid as the real estate slump deepens.