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Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported net income of $7.6 billion in the first quarter of 2009, a 60.6% decline from the $19.3 billion during the same period a year ago, according to the FDIC's Quarterly Banking Profile released today.
Higher loan-loss provisions, increased goodwill write-downs and reduced income from securitization activities all contributed to the year-over-year earnings decline, the report states. Three out of five insured institutions reported lower net income in the first quarter and one in five was unprofitable.
"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," FDIC Chairman Sheila C. Bair said of the report's findings.
"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," Bair said. "We're now in the cleanup phase for the banking industry. It will take some more time. But in the end, we'll have a stronger banking industry that's better able to meet the demand for credit as the economy recovers."
Insured institutions set aside $60.9 billion in provisions for loan losses in the first quarter, a 63.7% increase from $37.2 billion during the first quarter of 2008. Expenses for goodwill impairment and other intangible asset expenses totaled $7.2 billion, up from $2.8 billion a year earlier.
These negative factors outweighed the positive effects of increased non-interest income, which increased 12.8%; higher net interest income, up 4.7%; and higher realized gains on securities and other assets, up $1.9 billion, according to the report.
Twenty-one FDIC-insured institutions failed during the first quarter, the largest number since the fourth quarter of 1992. The FDIC's "Problem List" grew during the quarter to 305 institutions from 252, and total assets of problem institutions increased to $220 billion from $159 billion.
The FDIC also noted that asset-quality indicators continue to decline. Insured institutions charged off $37.8 billion in bad loans in the first quarter, almost twice the $19.6 billion of a year earlier. The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) rose by $59.2 billion during the quarter, and are $154.3 billion higher than a year ago.
"Troubled loans continue to accumulate and the costs associated with impaired assets are weighing heavily on the industry's performance," Bair said. "Nevertheless, compared to a year ago, we see some positives. Net interest income is higher, and non-interest revenue is up at larger banks, particularly trading revenues. Realized gains on securities and other assets improved, too. But these positive factors were outweighed by higher expenses for bad loans and for goodwill impairment."
Tier 1 capital rose to almost $70 billion, the largest quarterly increase reported by the industry. However, much of the increase occurred at institutions that received capital from the U.S. Treasury Department's Troubled Asset Relief Program (TARP). Dividend payments in the first quarter totaled $7.2 billion, about half the $14 billion insured institutions paid in the first quarter of 2008. The FDIC noted that 97% of insured institutions were well-capitalized by regulatory standards.
Downsizing by a few large banks caused total industry assets to fall by $302 billion, or 2.2%, during the first quarter. Two-thirds of all institutions reported asset growth in the quarter, but reductions at eight large banks caused the industry total to decline. Total loans and leases fell by $159.6 billion, or 2.1%, while assets in trading accounts declined by 14.9%, or $144.5 billion, according to the report.
Growth in insured deposits and a shrinking fund balance caused the Deposit Insurance Fund's (DIF) reserve ratio to decline from 0.36% of insured deposits to 0.27% in the first quarter. Insured deposits increased by $82.4 billion, or 1.7%, during the quarter. The DIF balance declined from $17.3 billion at the end of 2008 (amended from the originally reported unaudited balance of $19 billion) to $13.0 billion on March 31, 2009.
However, the FDIC Board of Directors approved an amended restoration plan in February that is designed to restore the DIF reserve ratio to 1.15% within seven years. The FDIC has already set aside $28 billion in reserve to cover projected losses for the next 12 months. In addition, the FDIC will collect more than $8 billion in premiums during the second quarter, including $5.6 billion from the special assessment the FDIC Board approved last week.
"Insured deposits increased 1.7% in the quarter, some $82 billion, and they are up by 9% over the last 12 months," Bair said. "This growth in insured deposits is a vote of confidence from bank customers. They obviously see the value of the FDIC guarantee."
