WASHINGTON — Banks and thrifts managed to earn $7.6 billion in the first quarter, but that was where the good news ended in the Federal Deposit Insurance Corp.'s industry update.
The agency's Quarterly Banking Profile released Wednesday said almost 4% of all loans were noncurrent at March 31 — the highest level since the savings and loan crisis — and the industry's 1.94% chargeoff rate was just shy of the record set in the previous quarter.
Banks and thrifts set aside $61 billion in loan-loss provisions — a 64% increase from a year earlier — but this was still not enough to keep pace with troubled loans. The ratio of loan-loss reserves to noncurrent loans sank to 66.5% — the 12th consecutive quarterly decline in the ratio, which is at its lowest since 1992.
"Industry earnings returned to the plus column in the first quarter," FDIC Chairman Sheila Bair said at a press conference announcing the results, but "troubled loans continue to accumulate, and the costs associated with impaired assets are weighing heavily on the industry's performance."
The report contained equally grim data on the prospects for bank failures. The agency's list of "problem" banks grew by 21%, to 305, and assets held by these institutions jumped 38%, to $220 billion.
The FDIC's reserves, meanwhile, continued to drop, shrinking 25%, to $13 billion, at March 31. The ratio of reserves to insured deposits fell 9 basis points, to 0.27%, its lowest point since the end of the savings and loan crisis.
At least part of the drop was due to failures that cost more than expected.
Though the FDIC is charging banks a $5.6 billion special assessment to help rebuild the fund, Bair said she expected the ratio to continue declining.
"I believe it will continue to decline this year, and we may need to do another special assessment in the fourth quarter," she said. "I'm hoping that we'll start to get into positive territory next year."
Though failures are probably the most important source of pressure on the Deposit Insurance Fund, another factor is likely to come into play, FDIC officials said. A law enacted last week extended, through 2013, an increase in the deposit insurance limit to $250,000 per account and allowed the agency to factor in the coverage increase to future assessments.
FDIC officials said the agency will start collecting data in September on deposits between the previous limit of $100,000 and $250,000. At the briefing, Diane Ellis, a deputy director in the FDIC's insurance division, said that "rough estimates" put the increase in insured deposits at 15% due to the higher coverage. This would reduce the current reserve ratio to 0.24%.
"We will start adding" a larger amount of insured deposits "to the denominator in the future," Ellis said.
During the briefing, Bair also gave an update on the FDIC's plan to help banks purge troubled whole loans. Amid questions on whether banks would be able to be buyers in the Public-Private Investment Program, which would match Treasury equity and FDIC-guaranteed debt with private-sector contributions to form loan investment pools, Bair said buyers in the program would not be able to "bid on their own assets."
"There has been some confusion about that," she said.
She reiterated, however, that policymakers are discussing letting banks buy others' assets and, potentially, hold equity stakes in the public-private funds.
But Bair said banks' recent success in raising capital has led some institutions to feel less urgent about selling off their bad loans.
"The good news is, banks have been able to raise a lot of new capital, even before taking more aggressive steps to cleanse their balance sheets, so the incentives to sell may be less, but that's for good reasons," she said.
Bair added that further issues, including the implementation of legislative changes to the program, need to be worked out before the program is started. A recent measure sponsored by Sens. Barbara Boxer, D-Calif., and John Ensign, R-Nev., seeks to prevent collusion or conflicts of interest in the PPIP, but Bair said officials need to make sure the provision does not curb interest in the program.
"We're finding that both on the buyer and seller side there continues to be discomfort about Congress' view of this program — whether the rules could potentially change," she said. "The Boxer-Ensign amendment, I think, is a good amendment. It addressed strong conflict of interest rules, and we want that, too. Nonetheless, I think this has created some uncertainty about certain aspects of the Boxer-Ensign amendment, and Treasury will need to issue regulations."
The sole good news for banks and thrifts was that they earned more in the first quarter than they had in any of the previous three quarters, and appeared to recover from the fourth quarter's steep, $37 billion loss. Positive signs in the quarter included the largest quarterly capital increase — $82 billion — since third quarter 2004, though much of it was attributed to the government's capital infusions; higher trading revenue that pushed up noninterest income and lower funding costs resulting in a slight margin increase, mostly at larger institutions.
Total equity capital rose 6.4% in the quarter, to $1.37 trillion. Noninterest income rose 12.8% from the first quarter of last year, to $68.3 billion. Net interest income was 4.7% higher, and gains on securities and other assets jumped 153%.
Still, earnings were 61% lower than a year earlier, and delinquencies indicated persistent and growing troubles in numerous loan sectors, particularly commercial real estate and credit cards. More than 20% of institutions lost money in the quarter, the FDIC said.
The 3.76% noncurrent loan rate — up 81 basis points from the fourth quarter — was the highest since the second quarter of 1991. Total noncurrent loans rose 25.5%, to $291 billion, the biggest quarterly increase since delinquent loans started rising three years ago.
Noncurrent residential mortgages increased 28%, to $121.7 billion, and construction loans that were noncurrent rose 20%, to $61.8 billion. Noncurrent commercial and industrial loans rose 26.6%, to $32 billion.
Although chargeoffs declined slightly — by 1.8% — from the $38.5 billion charged off in the previous quarter, they were almost twice as high as in the first quarter of 2008 and hit all categories.
C&I chargeoffs increased 170%, to $7 billion, from a year earlier; credit card chargeoffs grew 68.9%, to $9 billion; construction and development chargeoffs increased 162%, to $4.7 billion, and residential chargeoffs jumped 64.9%, to $7.1 billion.
The 1.94% annualized net chargeoff rate was just a basis point off the record set in the fourth quarter, which was the highest in the 25 years since such data had been reported.
The industry's average return on assets was 0.22%, or less than half the first-quarter 2008 ROA of 0.58% and less than one-fifth the 1.20% achieved two years earlier.
"The first-quarter results are telling us that the banking industry still faces tremendous challenges and that, going forward, asset quality remains a major concern," Bair said. "Banks are making good efforts to deal with the challenges they're facing. But today's report says that we're not out of the woods yet."
Officials also highlighted differences in net interest margins between small and large institutions. While the average margin rose 5 basis points in the quarter to 3.39%, the highest level since the middle of 2006, that improvement was reserved for mostly big banks. Margins fell for over half - 55.4% - of total institutions. Banks and thrifts with less than $1 billion in assets reported a 3.56% margin, 10 basis points lower than in the previous quarter and the lowest total in 21 years.
Agency officials that a lower margin at a community bank has an impact. "While a majority of banks of all sizes reported narrower margins, this trend is of particular importance at community banks," said Ross Waldrop, the FDIC's senior banking analyst. "These community banks obtain more than three quarters of their total net operating revenue from net interest income. Narrower margins have greater implications for their profitability."
Total deposits fell almost 1%, to $8.9 trillion, though domestic deposits grew modestly, by 0.6%, to $7.5 trillion. A large portion of the deposit decline was attributed to foreign deposits, which fell 8%, to $1.4 trillion.
The industry's total assets fell 2.2% during the quarter, to $13.5 trillion, the largest percentage quarterly decline in the 25 years that such data has been recorded. Eight large institutions accounted for the entire decline in industry assets, the FDIC said.
