Bank Profits Up Sharply, but Revenues Falter

Commercial banks and savings institutions reported a big drop in loan-loss provisions and continued improvements in asset quality as industry profits climbed to $29 billion in the first quarter of 2011, and the FDIC’s Deposit Insurance Fund (DIF) inched closer to positive territory. However, some of that improvement was offset by a 3.2% drop in net operating revenue, and a continuing decline in loan balances.


The FDIC’s Quarterly Banking Profile, First Quarter 2011 said income grew 66.5% from $17.4 billion in the year-ago period to the highest level since the second quarter of 2007—before the financial crisis. This is the seventh consecutive quarter that year-over-year earnings increased. Loan losses were down for a sixth consecutive quarter.


“The industry shows continuing signs of improvement,” FDIC Chairman Sheila Bair said in a press release, though she added, “There is a limit to how far reductions in loan-loss provisions can boost industry earnings.”


First-quarter loss provisions were $20.7 billion, less than half the $51.6 billion that insured institutions set aside a year ago. Net operating revenue (net interest income plus total noninterest income) was $5.5 billion (3.2%) lower than a year earlier, and realized gains on securities fell by $1.7 billion. The revenue drop was only the second in the 27 years data have been collected.


Asset quality continued to improve as noncurrent loans and leases (those 90 days or more past due or in nonaccrual status) fell for a fourth consecutive quarter. Insured banks and thrifts charged off $33.3 billion in uncollectible loans during the quarter, down $19.9 billion (37.5%) from a year earlier.


Total loans and leases fell for the 10th time in the past 11 quarters (the one exception in the first quarter of 2010 resulted from changes in reporting rules, not from actual loan growth). More than 70% of all insured institutions reported declines in loan balances in the first quarter. The net decline in balances in the first quarter totaled $126.6 billion (1.7%). The largest reductions in loan portfolios occurred in one-to-four family residential mortgages (down $63.8 billion, or 3.4%), credit card balances (down $38.9 billion, or 5.5%), and real estate construction and development loans (down $25.9 billion, or 8.1%). Balances in loans to commercial and industrial borrowers increased for a third consecutive quarter, rising by $18.1 billion (1.5%), but nearly half of this growth represented loans to foreign borrowers. Small loans to businesses and farms declined by 2.8%.


The FDIC added four institutions to its “Problem List,” increasing the total to 888, the most on the list since March 31, 1993, when there were 928. Total assets of problem institutions increased from $390 billion to $397 billion. Problem institutions are those most at risk of failure. Twenty-six insured institutions failed during the first quarter, the smallest number in the last seven quarters.


The DIF balance—the net worth of the fund—rose from negative $7.4 billion to negative $1 billion during the first quarter. Assessment income and continued improvement in the outlook for anticipated bank failures helped the fund balance. Bair said the fund’s balance is expected to turn positive by June 30 after seven consecutive quarters in the red.

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