WASHINGTON — After a string of quarters marked by bad loans and tepid earnings, the Federal Deposit Insurance Corp. shared some genuinely upbeat news Thursday, suggesting the industry is headed toward recovery.
Banks slashed their loss provisions in the first quarter by 18%, which, combined with a 3% drop in noninterest expenses, helped drive the industry's best earnings performance in two years.
"The positive signs I've outlined today suggest that the trends continue to move in the right direction," FDIC Chairman Sheila Bair said in releasing the Quarterly Banking Profile.
The $18 billion quarterly profit was a turnaround from the end of 2008, when losses neared $40 billion. While officials said credit distress is still a reality — 73 banks were added to the problem bank list — they signaled more optimism for the future, including more lending.
"As banks and thrifts continue to strengthen their balance sheets, they are putting themselves in a better position to meet the growing demand for credit that is being generated by a recovering economy," Bair said.
Banks earned more than three times their year-earlier profit, and soared above the $1.3 billion loss in the previous quarter. While the largest banks had the biggest improvements, the FDIC said a majority of institutions made money in that period, and less than one in five reported a loss for the quarter.
The loan-loss provision of $51 billion was almost 17% less than the year-earlier figure, and the 4.4% rise in noncurrent loans from the previous quarter, to $409 billion, was the lowest increase in almost three years.
The positive results also reflect the decline in noninterest expenses — to $95 billion — which the agency attributed to a decrease in goodwill impairment losses.
Total net income was not affected by a new Financial Accounting Standards Board rule requiring institutions to report securitized assets on balance sheets, although the change did skew some of the quarterly results.
For example, Bair said the loss provision would have been even lower if securitizations were not added, and the new requirements — forcing banks to report credit distress in securitized assets — also masked some improvement in chargeoffs and noncurrent loans.
"The actual extent of improvement in these indicators in the first quarter is understated because" of the rule change, she said.
The accounting switch also caused industry assets to increase for the first time since the end of 2008 — by nearly 2%, to $13.3 trillion — and helped boost lending 3%, to $7.5 trillion.
Bair, who has leaned on the industry in recent quarterly briefings to make credit available, said the loan balances would still have declined — for the seventh quarter in a row — if it were not for the accounting changes.
Still, it looks as though lending growth is near, Bair said.
"Allowing for the effect of the accounting change, it appears that the rate of decline in loan balances may have already peaked," she said. "At the nation's largest banks, the rate of decline has slowed in each of the past two quarters."
There were also signs of improvement in the FDIC's balance sheet.
Although 41 failures and assorted mergers in the first quarter helped push total number of insured institutions below 8,000 — to 7,932 — FDIC officials predicted failures will hit their peak this year.
The agency set aside just $3 billion in the first quarter for future collapses, 83% less than a quarter earlier. Overall, its set-aside for pending failures fell 7%, to $40.7 billion, the first such drop in three years.
The small provision helped the Deposit Insurance Fund balance register its first increase since the first quarter of 2008, although it was slight. Even though the DIF is still in the red, its balance rose by $145 million, to negative-$20.7 billion.
The ratio of reserves to insured deposits rose 1 basis point, to negative-0.38%.
Bair and other officials said insurance reserves are benefiting as failed-bank bidders agree to more competitive terms, including more conservative loss-sharing.
"The extreme risk aversion we saw two years ago has really receded somewhat," said Richard Brown, the FDIC's chief economist. "Investors are getting a little more confidence about what the outlook is, what the assets are worth and their bids are reflecting that. … It does help the outlook for the DIF."
Still, the report cautioned the industry is not completely out of the woods. Despite the lower loss provision, just a third of institutions had lower provisions from a year earlier.
Officials said credit distress is now focused on smaller institutions, which have grappled with commercial real estate losses and have made up the bulk of the FDIC's failure load.
"There will be more failures, to be sure," Bair said. "The banking system still has many problems to work through, and we cannot ignore the possibility of more market volatility."
Banks on the agency's "problem list" now number 775, and their assets rose 7% over the quarter, to $431 billion.
The category with the biggest increase in noncurrent loans was credit cards, but that was because of the securitization accounting change. (Credit card receivables now dominate the securitization market.)
Noncurrent credit card loans rose 52%, to $22.1 billion, and noncurrent mortgages rose 7.2%, to $192 billion.
For the second straight quarter, however, noncurrents fell for both commercial industrial loans (down 12%, to $36.9 billion) and construction and development loans (down 2.5%, to $70.3 billion).
"We want to see noncurrent loans declining in all loan categories," Bair said, and the reporting data "shows the industry is moving steadily in that direction."
Though the FASB change boosted loss provisioning, it also helped drive up more positive indicators. With more loans now on institutions' books, net interest income grew 9.7% from a year earlier, to $109 billion, and the average net interest margin rose 30 basis points from the fourth quarter, to 3.83%.
Total noninterest income declined 9.7% from a year earlier, to $61 billion, because of a loss in securitization income from the accounting rule change.
