Federal Deposit Insurance Corp. (FDIC)-insured institutions reported a $21.6 billion aggregate profit in the second quarter – the highest quarterly earnings total since the third quarter of 2007. The second-quarter profit represents a $26 billion improvement from the second quarter of 2009, when FDIC-insured banks and institutions posted a $4.4 billion net loss.
Although nearly two out of three banks reported better year-over-year earnings, the second-quarter figures nonetheless remain below historical norms. Moreover, the number of institutions on the regulator's ‘Problem List’ rose from 775 to 829 – the highest level since the first quarter of 1993.
‘Without question, the industry still faces challenges,’ says Sheila C. Bair, FDIC chairwoman. ‘Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high. But the banking sector is gaining strength. Earnings have grown, and most asset-quality indicators are moving in the right direction.’
The total assets of ‘problem institutions’ declined from $431 billion to $403 billion in the quarter. The number of noncurrent loans and leases fell for the first time since the first quarter of 2006, and for the first time since the fourth quarter of that year, net charge-offs posted a year-over-year decline.
The main cause for the year-over-year improvement in quarterly earnings was a more than 40% reduction in loan-loss provisions, the FDIC says. Quarterly provisions totaled $40.3 billion – $27.1 billion lower than a year earlier.
Loan-loss reserves also declined for the first time since the fourth quarter of 2006. Although almost two out of every three banks increased their loan-loss reserves in the quarter, the industry's total reserves declined by $11.8 billion due to a number of large banks having reduced their loan-loss provisions. The industry's ratio of reserves to total loans and leases fell from 3.5% to 3.4% during the quarter, but is still the second-highest ratio in the 63 years for which data are available.
‘Particularly given economic uncertainties, we believe all banks should continue to exercise caution and maintain strong reserves,’ Bair says.
The Deposit Insurance Fund (DIF) balance, meanwhile, improved for the second consecutive quarter. The DIF balance (i.e., the net worth of the fund) improved from a deficit of $20.7 billion to deficit of $15.2 billion during the second quarter.
The FDIC's projections suggest the regulator's current resources ‘are more than enough to resolve anticipated failures,’ Bair adds.
SOURCE: Federal Deposit Insurance Corp.