FDIC second quarter bank earnings report
Published: August 31, 2010
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FDIC second quarter bank earnings report:
ALL INSTITUTIONS PERFORMANCE, Second Quarter 2010
Quarterly Earnings Are Highest in Almost Three Years
Reductions in loan-loss provisions underscored improvement in asset quality indicators during second quarter 2010. The industry’s quarterly earnings of $21.6 billion are up dramatically from the year-ago loss of $4.4 billion and represent the highest quarterly earnings since third quarter 2007. Almost two out of three institutions (65.5 percent) reported higher year-over-year quarterly net income. The proportion of institutions reporting quarterly net losses remained high at 20 percent but was down from more than 29 percent a year earlier.
Reduced Loan-Loss Provisions Boost Net Income
Insured institutions added $40.3 billion in provisions to their loan-loss allowances in the second quarter. While still high by historic standards, this is the smallest total since the industry set aside $37.2 billion in first quarter 2008 and is $27.1 billion (40.2 percent) less than the industry’s provisions in second quarter 2009. Fewer than half of all institutions (41.3 percent) reported year-over-year reductions in quarterly loss provisions. Only 40 percent of community banks (institutions with less than $1 billion in assets) reported year-over-year declines. Reductions were more prevalent among larger institutions. More than half (56.2 percent) of institutions with assets greater than $1 billion had lower provisions in the second quarter.
Margins Improve at a Majority of Banks
Net interest income was $8.5 billion (8.6 percent) higher than a year ago, as more than 70 percent of all institutions reported year-over-year increases. Net interest margins at almost 60 percent of institutions (58.6 percent) improved from a year earlier, as average funding costs fell more rapidly than average asset yields. The magnitude of the increase in net interest income was largely attributable to the application of Financial Accounting Standards Board (FASB) Statements 166 and 167 in 2010 at a small number of institutions with significant levels of securitized consumer loans; among other things, the new rules require that revenues from securitized loan pools that had previously been included in noninterest income be reflected in net interest income.1
Noninterest Income Is Lower
Noninterest expense was $1.5 billion (1.5 percent) less than in second quarter 2009, when insured institutions paid $5.6 billion in a special assessment to bolster the Deposit Insurance Fund. More than half of all institutions (52.1 percent) reported year-over-year reductions in quarterly noninterest expense. Noninterest income was $7.6 billion (11.0 percent) lower than a year earlier, with some of the decline reflecting reporting changes attributable to FASB 166 and 167. The components of noninterest income that registered the largest year-over-year declines were servicing income (down $6.9 billion, or 63.9 percent) and gains on sales of loans and other assets (down $4.4 billion, or 89 percent). Income from service charges on deposit accounts was $752 million (7.1 percent) lower than a year earlier at banks that filed Call Reports. This is the seventh consecutive quarter that service charge income has declined year-over-year.
Charge-Offs Fall for First Time Since 2006
Net charge-offs totaled $49 billion in the second quarter, a $214-million (0.4 percent) decline from a year earlier and the first year-over-year decline since fourth quarter 2006. Charge-offs were lower than a year ago in most major loan categories except for credit cards and real estate loans secured by nonfarm nonresidential properties. Charge-offs on loans to commercial and industrial (C&I) borrowers were $3.1 billion (37.0 percent) lower than a year ago, while charge-offs on real estate construction and development (C&D) loans were $2.7 billion (34.6 percent) lower. Charge-offs of one-to-four family residential mortgage loans were down by $1.4 billion (16.0 percent). Credit card charge-offs were $8.6 billion (86 percent) higher than in second quarter 2009. Most, if not all, of this increase was attributable to the inclusion of charge-offs on securitized credit card balances, which were not included in reported charge-offs in previous years. The change in reporting was the result of the application of FASB 166 and 167. In contrast, the $1.8 billion (107.2 percent) year-over-year increase in charge-offs of nonfarm nonresidential real estate loans reflected further deterioration in commercial real estate portfolios. Almost half (49.1 percent) of insured institutions with more than $1 billion in assets reported lower net charge-offs, while only 43.6 percent of community banks reported year-over-year declines.
Noncurrent Loans Post First Decline in More than Four Years
The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) declined by $19.6 billion (4.8 percent) during the second quarter. This is the first quarterly decline in noncurrent loans since first quarter 2006. Noncurrent levels declined in most major loan categories during the quarter. The sole exception was nonfarm nonresidential real estate loans, where noncurrents increased by $547 million (1.2 percent), the smallest quarterly increase in three years. The largest reduction in noncurrent loans in the quarter occurred in real estate C&D loans, where noncurrents fell by $5.9 billion (8.3 percent). This is the third consecutive quarter that noncurrent C&D loans have declined. Noncurrent C&I loans also declined for a third straight quarter, falling by $2.7 billion (7.3 percent), while noncurrent residential mortgage loans declined by $4.7 billion (2.5 percent) and noncurrent credit cards fell by $4.2 billion (19 percent). Slightly fewer than half of all institutions (48.9 percent) reported declines in their noncurrent loan balances during the quarter. Noncurrent loan balances fell by 5.3 percent at institutions with more than $1 billion in assets and rose by 0.3 percent at community banks.
Reserves Fall as Large Banks Reduce Loan-Loss Provisions
Total loan-loss reserves of insured institutions fell for the first time since fourth quarter 2006, declining by $11.8 billion (4.5 percent), as net charge-offs of $49 billion exceeded loss provisions of $40.3 billion. Almost two out of three institutions (61.7 percent) increased their loss reserves in the second quarter, but a number of large banks reduced their loss provisions, producing net declines in their reserve balances. In particular, some institutions that converted equity capital into reserves in the first quarter in accordance with the requirements of FASB 166 and 167 reported lower provisioning in the second quarter. Although the industry’s ratio of reserves to total loans fell from 3.51 percent to 3.40 percent during the quarter, it is still the second-highest level for this ratio in the 63 years for which data are available. The industry’s "coverage ratio" of reserves to noncurrent loans improved for a second consecutive quarter, from 64.9 percent to 65.1 percent, as the reduction in noncurrent loans slightly outpaced the decline in loss reserves.
Rising Securities Values Contribute to Equity Capital Growth
Bank equity capital increased by $27.4 billion (1.9 percent), as retained earnings contributed $8.7 billion and appreciation of securities holdings added $13.7 billion. More than half of all institutions (52.7 percent) increased their leverage capital ratios during the quarter, while an even larger percentage (57.6 percent) increased their total risk-based capital ratios. Insured institutions paid $12.9 billion in dividends in the second quarter, more than double the $6.1 billion they paid a year earlier.
Loan Balances Continue to Decline
Industry assets declined for the fifth time in the past six quarters. Total assets fell by $136.2 billion (1 percent), as net loan and lease balances declined by $95.7 billion (1.3 percent). All major loan categories had reduced balances during the quarter. Real estate C&D loans fell by $34.7 billion (8.3 percent), credit card balances dropped by $17.6 billion (2.5 percent), residential mortgage loans declined by $13.2 billion (0.7 percent), and C&I loans were down $12.1 billion (1 percent). Loans to small businesses and farms declined by $13.3 billion (1.8 percent) during the quarter, while loans to larger businesses and farms fell by $5.3 billion (0.4 percent). Balances at Federal Reserve banks declined by $49 billion (8.2 percent) during the quarter at banks that filed Call reports. Intangible assets fell by $15.1 billion (3.6 percent), led by a $13.9 billion (18.7 percent) decline in mortgage servicing assets. The few areas of asset growth in the second quarter included federal funds sold and securities purchased under resale agreements (up $11.3 billion, or 2.7 percent), and U.S. Treasury securities (up $8.1 billion, or 5.2 percent). The industry continued to reduce holdings of riskier assets; the ratio of risk-weighted assets (as defined for risk-based capital purposes) to total assets fell from 69.4 percent to 69.1 percent during the quarter. This is the lowest level for this ratio since the second quarter of 1995.
Banks Reduce Nondeposit Funding
Deposits fell for the second quarter in a row, declining by $57.8 billion (0.6 percent). Interest-bearing deposits in domestic offices were down by $45.4 billion (0.7 percent), while noninterest-bearing domestic deposits increased by $20.8 billion (1.4 percent). Deposits in foreign offices declined by $33.2 billion (2.2 percent). Nondeposit liabilities fell by $105.4 billion (3.9 percent), as institutions reduced Federal Home Loan Bank advances by $35 billion (7.3 percent) and short-term unsecured borrowings by $48.2 billion (23 percent).
No New Charters Were Added During the Quarter
The number of FDIC-insured institutions reporting financial results fell by 104 in the second quarter, from 7,934 to 7,830. This is the first time in almost ten years that the number of reporting institutions has fallen by more than 100 in a single quarter (the number declined by 113 in third quarter 2000). During the quarter, 57 institutions were absorbed by mergers into other charters, including 29 charters that were consolidated as part of a single corporate reorganization, and 45 insured institutions failed. For the first time in the 38 years for which data are available, no new insured institutions were added during the quarter. The number of institutions on the FDIC’s "Problem List" increased from 775 to 829 during the quarter. Total assets of "problem" institutions fell, from $431 billion to $403 billion.
