Net income of commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) declined $11.7 billion or 60.8 per cent to $7.6 billion in the first quarter of 2009 from the $19.3 billion for the same period of 2008.

Higher loan-loss provisions, increased goodwill write-downs, and reduced income from securitisation activities all contributed to the year-over-year earnings decline, the FDIC said in a press release yesterday.

Three out of five insured institutions reported lower net income in the first quarter and one in five was unprofitable.

"The first quarter results are telling us that the banking industry still faces tremendous challenges, and that going forward, asset quality remains a major concern," said FDIC chairman Sheila C Bair.

"Banks are making good efforts to deal with the challenges they're facing, but today's report says that we're not out of the woods yet," she said.

"As I see it, we're now in the cleanup phase for the banking industry. It will take some more time. But in the end, we'll have a stronger banking industry that's better able to meet the demand for credit as the economy recovers," Bair added.

Insured institutions set aside $60.9 billion in provisions for loan losses in the first quarter, an increase of $23.7 billion (63.6 per cent) over 2008. Expenses for goodwill impairment and other intangible asset expenses totaled $7.2 billion, up from $2.8 billion a year earlier.

However, non-interest income rose $7.8 billion or 12.8 per cent, while net interest income was up $4.4 billion or 4.7 per cent.

Twenty-one FDIC-insured institutions failed during the first quarter, the largest number since the fourth quarter in 1992.

The FDIC's "Problem List" grew during the quarter from 252 to 305 institutions, and total assets of problem institutions increased from $159 billion to $220 billion.

The FDIC also noted that asset-quality indicators continue to decline. Insured institutions charged off $37.8 billion in bad loans in the first quarter, almost twice the $19.6 billion a year earlier. The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) rose by $59.2 billion during the quarter, and are $154.3 billion higher than a year ago.

"Troubled loans continue to accumulate, and the costs associated with impaired assets are weighing heavily on the industry's performance," Bair noted.

Meanwhile, Tier 1 capital rose to a record high of almost $70 billion, the largest quarterly increase ever reported by the industry. However, much of the increase occurred at institutions that received capital from the US Treasury Department's Troubled Asset Relief Program (TARP).

A number of institutions also reduced their dividends to support capital growth. Dividend payments in the first quarter totaled $7.2 billion, about half the $14 billion insured institutions paid in the first quarter of 2008. The FDIC noted that 97 per cent of insured institutions were well-capitalised by regulatory standards.

However, total assets declined by $302 billion during the first quarter. Two-thirds of all institutions reported asset growth in the quarter, but reductions at eight large banks caused the industry total to decline.

Total loans and leases fell by $159.6 billion (2.1 per cent), while assets in trading accounts declined by $144.5 billion (14.9 per cent).

The FDIC's insured deposits increased by $82.4 billion during the quarter. The Deposit Insurance Fund (DIF) balance declined to $13 billion on March 31, 2009, from $17.3 billion at the end of 2008.

The FDIC has already set aside $28 billion in reserve to cover projected losses for the next 12 months. In addition, the FDIC will collect more than $8 billion in premiums during the second quarter, including $5.6 billion from the special assessment the FDIC Board approved on May 22.