FDIC Reports Continued Deterioration in Earnings Performance, Asset Quality
The FDIC’s third quarter, 2008 Quarterly Banking Profile was released on November 25, 2008. The industry snapshot shows a continuation of negative trends, including depressed earnings and deteriorating asset quality. The report also provides detail on the proposed changes to the FDIC’s assessment system.
Earnings continue to slide
Greater than 58 percent of member institutions reported year-over-year declines in quarterly net income, while 64 percent generated a reduced quarterly return on assets (ROA). Profitability issues appear to be magnified at the larger banks; institutions with assets greater than $1 billion experienced a 47-basis point, year-over-year ROA decline. Community banks fared somewhat better with a 25-basis point decline. Nearly one-quarter of member banks failed to earn a profit in the quarter; this is the highest level for this metric since the fourth quarter of 1990.
Income a mixed bag
Member banks reported declines in several categories of noninterest income, including securitization income and gains on sales of assets other than loans. Losses on sales of bank-owned real estate increased almost six-fold to $518 million. Loan sales, however, showed a marked improvement with net gains of $166 million. This compares to net losses of $1.2 billion in the third quarter of last year.
Net interest income also improved by 4.9 percent versus a year ago. The average net interest margin (NIM) remained flat with last quarter, but rose 2 basis points relative to the year-ago quarter. This trend was more pronounced among larger institutions.
Credit losses still piling up
As expected, expenses related to credit losses drove much of the earnings decline. Industry-wide, credit loss-related expenses topped $50 billion, eating up about one-third of the industry’s net operating revenue. Aggregate loan-loss provisions tripled from the year-ago level, reaching $50.5 billion in the quarter. Net charge-offs increased by 156.4 percent to $27.9 billion, with two-thirds of the increase related to loans secured by real estate. Charge-offs related to closed-end first and second lien mortgages, real estate construction and development loans, and loans to commercial and industrial borrowers all showed increases well in excess of 100 percent. The quarterly net charge-off rate jumped 10 basis points sequentially to 1.42 percent; this is the highest quarterly net charge-off rate since 1991.
Past-due loans still rising
Noncurrent loans and leases, defined as being 90 days or more past due or in nonaccrual status, increased by $21.4 billion sequentially to $184.3 billion. Nearly half of this growth came from closed-end first and second lien mortgages. The percentage of loans and leases that are noncurrent rose to 2.31 percent, which is the highest percentage recorded since 1993.
Loan-loss reserves ticked up by 8.1 percent, bringing the ratio of reserves to total loans and leases to 1.95 percent. Reserves to noncurrent loans fell to $0.85, which is the lowest level recorded since the first quarter of 1993.
Watch list grows 46 percent, number of new charters shrinks
banks collapsed during the third quarter, and another seventy-three were merged
into other institutions. While the number of failures marks a
Twenty-one new institutions were chartered during the quarter. This marks a decline from the twenty-four new charters that were added last quarter.
Noninterest-bearing deposits rise, DIF reserve ratio declines
The total assets of all FDIC-insured member institutions rose 2.1 percent to $273.2 billion during the quarter. Most of the increase, some 57 percent, came from noninterest-bearing deposits. Interest-bearing deposits on the other hand showed a slight decrease of 0.3 percent.
Insured deposits continued an upward trend, rising 1.8 percent on top of a second quarter increase of 0.6 percent. Fifty-eight percent of member institutions reported an increase in insured deposits, 42 percent reported a decrease and the remainder reported no change.
The Deposit Insurance Fund decreased by $10.6 billion, primarily due to an $11.9 billion increase in loss provisions for bank failures. As of September 30, 2008, the reserve ratio was 0.76 percent, down 25 basis points from three months prior. Nine insured institutions failed during the quarter, bringing year-to-date failures to thirteen; those thirteen failed institutions had combined assets of $348 billion and are estimated to have cost the DIF $11 billion.
Restoration plan involves increases, changes to risk-based assessments
The FDIC adopted a restoration plan on October 7 to increase the DIF’s reserve loss ratio to 1.15 percent within five years, as required by Federal Deposit Insurance Reform Act of 2005. In accordance with the plan, the FDIC Board approved the publication of a notice of proposed rule making to increase the assessment and shift a larger proportion of that increase to riskier institutions. For the first quarter of 2009, the FDIC seeks to increase assessment rates by 7 basis points across the board.
The proposed assessment system, to be effective April 1, 2009, establishes base assessment rates ranging from 10 to 45 basis points for Risk Categories I through IV. Those base rates would then be adjusted for unsecured debt, secured liabilities and brokered deposits. The adjusted assessment rates would range from 8 to 77.5 basis points.