The FDIC released their Quarterly Banking Profile today and it looks pretty grim.  The banking sector is getting hammered by the credit meltdown and there is no end in sight.  Net banking income declined 87% from  $31.8 billion in the second quarter of 2007  to $5 billion last quarter.  With the exception of the fourth quarter last year, this was the lowest level of bank earnings since the fourth quarter of 1991. 

"By any yardstick, it was another rough quarter for bank earnings, but the results were not unexpected as the industry coped with financial market disruptions, the housing slump, worsening economic conditions and the overall downturn in the credit cycle," said FDIC Chairman Sheila C. Bair.

The number of problem banks on the FDIC "problem list" grew from 90 to 117.  That's the highest number of problem instituations since 2003.  Total assets of problem institutions increased from $26 billion to $78 billion, with $32 billion coming from IndyMac Bank, F.S.B., Pasadena, CA, which failed in July. "More banks will come on the list as credit problems worsen," Chairman Bair added. "Assets of problem institutions also will continue to rise."

Chairman Blair also announced that beginning in February, the FDIC will begin to replenish its Deposit Insurance Fund, which experienced a large drop due to Indymac and several other banks.  This will require the FDIC to levy an extra fee on every FDIC insured bank, something that is only going to further lower bank profitability.

Some other findings from the report include:

Provisions for loan losses continue to be the main cause of falling earnings. Rising levels of troubled loans, particularly in real estate portfolios, led many institutions to increase their provisions for loan losses in the quarter. Loss provisions totaled $50.2 billion, more than four times the $11.4 billion the industry set aside in the second quarter of 2007. Almost a third of the industry's net operating revenue (net interest income plus total noninterest income) went to building up loan-loss reserves.

Noncurrent loans are still rising sharply. The amount of noncurrent loans and leases (90 days or more past due or in nonaccrual status) increased by $26.7 billion (20 percent) during the second quarter, following a $26.2 billion increase in the first quarter and a $27.0 billion increase in the fourth quarter of 2007. Almost 90 percent of the increase in noncurrent loans and leases in the last three quarters consisted of real estate loans, but noncurrent levels have been rising in all major loan categories. At the end of June, 2.04 percent of all loans and leases were noncurrent, the highest level for the industry since 1993.

Assets of insured institutions declined. Total assets of FDIC-insured institutions declined during the quarter for the first time since 2002. The $68.6 billion (0.5 percent) decline was caused by a reduction in trading assets at a few large banks. Assets in trading accounts, which increased by $135.2 billion in the first quarter, declined by $118.9 billion (11.8 percent) in the second quarter. In addition, the industry's holdings of one- to four-family residential mortgage loans fell by $61.4 billion (2.8 percent). Real estate construction and development loans declined for the first time since 1997, falling by $5.4 billion (0.9 percent).

The FDIC's Deposit Insurance Fund reserve ratio fell. Due to a significant increase in loss reserves, including reserves for failures that have occurred since June 30th, the DIF balance fell to $45.2 billion at the end of the second quarter, down from $52.8 billion at the end of the first quarter. While insured deposits rose only 0.5 percent during the quarter, the decline in the fund balance caused the reserve ratio to fall to 1.01 percent as of June 30th from 1.19 percent one quarter earlier. Because the reserve ratio is now below 1.15 percent, the Federal Deposit Insurance Reform Act of 2005 requires the FDIC to develop a restoration plan that will raise the reserve ratio to no less than 1.15 percent within five years