The results are in for the First Quarter 2008 Banking Profile - and they are not looking good! The squeeze is getting tighter, but, taking a comprehensive perspective, it does look like we'll make it through. Among the first quarter challenges and trends, real estate problems continued to hold down earnings; restatements dramatically shrank fourth quarter, 2007 profits; market-sensitive revenues remained weak; interest rates tightened margins; charge-offs hit a five-year high; noncurrent loans grew; reserve coverage shrank; dividends were cut; growth in credit slowed; interest-bearing retail deposits posted strong growth; and the number of problem banks grew. The following are some key highlights.
Earnings were hit hard as banks suffered from "deteriorating asset quality concentrated in real estate loan portfolios." Higher loan loss provisions reduced quarterly earnings to $19.3 billion compared to $35.6 billion a year earlier. Insured institutions set aside $37.1 billion in loan loss provisions, four times the $9.2 billion set aside a year earlier. This really hit earnings - return on assets (ROA) was only 0.59 percent compared to 1.20 percent in the first quarter of 2007. The downward trend in profitability was broad; slightly more than half of all insured institutions reported declines in quarterly earnings, however, more than half the $16.3 billion decline in industry net income came from four large institutions.
Industry net income for the fourth quarter of 2007 was restated to $646 million from a previously reported $5.8 billion. This is the lowest quarterly earnings since 1990. First quarter, 2008 was also the second consecutive quarter that lower noninterest revenues contributed to the decline in earnings. The net interest margin checked in at 3.33 percent, compared to 3.32 percent for the first and fourth quarters of 2007. For community banks, those with less than $1 billion in assets, the rate fell to 3.70 percent - the lowest level since the fourth quarter of 1988.
Banks charged off $19.6 billion during the first quarter, 2008, an increase of $11.4 billion over the same quarter in the previous year. This is a five-year high. The first quarter was also the second consecutive quarter of very high charge-offs, following the previous quarter's charge-off total of $16.4 billion. "The average net charge-off rate at institutions with more than $1 billion in assets was 1.09 percent, more than three and a half times the 0.29 percent average rate at institutions with assets less than $1 billion."
With the high level of charge-offs, noncurrent loans (loans 90 days or more past due) rose by $26 billion in the first quarter, following a $27 billion increase in the fourth quarter of 2007. "Loans secured by real estate accounted for close to 90 percent of the total increase, but almost all major loan categories registered higher noncurrent levels." Total noncurrent real estate construction and development loans increased by $9.5 billion, and 1-4 family residential loans increased by $9.3 billion.
The reserve coverage continues to lose ground after adding $37.1 billion in loan loss provisions. "The industry's ratio of loss reserves to total loans and leases increased from 1.3 percent to 1.52 percent, the highest level since the first quarter of 2004." The growth in reserves was outpaced by noncurrent loans, allowing the "coverage ratio" to slip for the eighth consecutive quarter to 89 cents for every $1.00 of noncurrent loans.
Most institutions cut dividends to preserve capital - only $14 billion in total dividends were paid in the first quarter, down from $12.2 billion from the first quarter of 2007. Of the 3,776 banks that paid a dividend in the first quarter of 2007, 666 paid no dividend in 2008. Those that did pay a dividend, paid 48 percent less, on average. This assisted the banks' ability to bolster their capital levels; tier 1 capital increased by $15 billion and tier 2 capital increased by $10.5 billion.
Loan growth slowed in the first quarter, increasing by only $335.4 billion or 2.6 percent. At the same time, interest-bearing deposits increased by $150.4 billion or 1.8 percent. Savings accounts and interest-bearing checking accounts accounted for more than three-quarters of the growth. Non-deposit liabilities increased by $171.6 billion, or 5.2 percent, led by securities sold under repurchase agreements (accounting for $65 billion of the increase) and trading liabilities (accounting for $63.2 billion of the increase).
The number of banks on the regulators' problem list grew from 77 to 90, while the number of total banks decreased from 8,534 to 8,494 during the first quarter. In this quarter, there were two bank failures, 38 new charters issued, 77 institutions merged into other banks, and two mutual banks converted to stock ownership. With 82 banks converting to Subchapter S Corporations during the first quarter, almost 30 percent of all banks now operate under that structure.
You may download the full report at: http://www4.fdic.gov/qbp/2008mar/qbp.pdf