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Bank profits take a big hit

Quarterly numbers at federally insured banks and thrifts reach a 16-year low.

WASHINGTON - Profits at federally insured banks and thrifts plunged to a 16-year low in the fourth quarter as institutions set aside a record-high amount to cover losses from bad mortgages, data released Tuesday show.

The quarterly banking industry statistics, compiled by the Federal Deposit Insurance Corp., highlighted a dramatic deterioration in the fourth quarter as major Wall Street banks such as Citigroup Inc. took large write-downs in the value of their assets to reflect losses on mortgage-related investments.

"Weakness in the housing sector and the credit squeeze in financial market made it a very challenging time for many institutions," said Sheila Bair, the FDIC's chairwoman. "We can expect these problems to continue throughout 2008."

Bair also noted that the agency is planning to beef up its staff - including temporarily hiring up to 25 retired FDIC employees who worked in the agency's more-than-200-person division that handles failed banks - to handle an anticipated increase in bank failures. She declined to predict the extent of bank failures this year.

Profits at the 8,544 FDIC-insured institutions between October and December dropped by 83.5 percent to $5.8-billion, hampered by soaring loan defaults and provisions for loan losses, the FDIC said. A year ago, these banks recorded $35.2-billion in profits.

It was the worst bank and thrift performance since the fourth quarter of 1991. Money set aside to cover loan losses totaled a record $31.3-billion, up from $9.9-billion in the same quarter a year ago and $16.7-billion in the third quarter.

Losses were concentrated in six large institutions, which accounted for more than half of the total decline in profits, the FDIC said.

However, FDIC officials said problems were also seen in community banks, with more than half of all banks insured by the FDIC reporting lower fourth-quarter earnings and half reporting growth in troubled loans.

The number of institutions categorized by the FDIC as "problem" institutions based on an assessment of finances has also grown from 50 at the end of 2006 to 76 at the end of 2007. For all of 2007, banks earned $105.5-billion, down 27.4 percent from a record profit of $145.2-billion in 2006.

Lenders with assets concentrated in commercial real estate, a "high-risk" area, are under close scrutiny, said John Corston, the FDIC's associate director of large bank supervision.

"The way a lot of these credits are structured, it will take a while for problems to begin to show up on the financial performance of the institutions," Corston said.

Regulators have warned lenders with assets concentrated in commercial real estate, mainly smaller community banks, to take extra precautions against potential losses.

The FDIC insures deposits at 8,533 institutions with $13-trillion in assets.

[Last modified February 27, 2008, 00:08:53]