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From Banking and Finance Law Daily, August 28, 2014

Banks and thrifts earned $40.2 billion in latest quarter

By John M. Pachkowski, J.D.

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation have reported aggregate net income of $40.2 billion in the second quarter of 2014. This is a 5.3 percent increase in earnings that banks and thrifts reported a year earlier. The proportion of banks that were unprofitable during the second quarter fell to 6.8 percent from 8.4 percent a year earlier.

The increase in earnings was mainly attributable to a 22.4 percent decline in loan-loss provisions and a 1.4 percent decline in noninterest expenses. Strong loan growth also contributed to an increase in net interest income compared to a year ago.

Community bank performance. According to the FDIC’s Quarterly Banking Profile, second quarter net income at community banks stood at $4.9 billion. This figure represents an increase of $166 million or 3.5 percent from a year earlier and was driven by higher net interest income and lower loan loss provisions. The FDIC began reporting on community bank performance in the first quarter 2014 Quarterly Banking Profile and the FDIC uses the criteria developed for the its Community Banking Study to determine what constitutes a community bank.

“Problem banks.” The FDIC also reported that the number of banks on its “Problem List” declined from 411 to 354 during the quarter. The number of “problem” banks now is 60 percent below the post-crisis high of 888 at the end of the first quarter of 2011. Seven FDIC-insured institutions failed in the second quarter, compared to 12 in the second quarter of 2013.

DIF balance increases. Finally, the second quarter results showed that the Deposit Insurance Fund (DIF) balance—the net worth of the Fund—rose to $51.1 billion as of June 30 from $48.9 billion at the end of March. The FDIC noted that assessment income was the primary contributor to the growth in the Fund balance. In addition, the DIF reserve ratio—the Fund balance as a percentage of estimated insured deposits—rose to 0.84 percent as of June 30 from 0.80 percent as of March 31. A year ago, the DIF reserve ratio was 0.64 percent. By law, the DIF must achieve a minimum reserve ratio of 1.35 percent by 2020.

Commenting on the quarterly results, FDIC Chairman Martin J. Gruenberg said, “We saw further improvement in the banking industry during the second quarter. Net income was up, asset quality improved, loan balances grew at their fastest pace since 2007, and loan growth was broad-based across institutions and loan types. We also saw a large decline in the number of problem banks. However, challenges remain. Industry revenue has been under pressure from narrow net interest margins and lower mortgage-related income. Institutions have been extending asset maturities, which is raising concerns about interest-rate risk. And banks have been increasing higher-risk loans to leveraged commercial borrowers. These issues are matters of ongoing supervisory attention. Nonetheless, on balance, results from the second quarter reflect a stronger banking industry and stronger community banks.”

James Chessen, chief economist for the American Bankers Association, stated, “We continue to see a strong, steady improvement for America’s banking industry, headlined by a sharp increase in business loans and a dramatic improvement in the quality of bank portfolios. Banks are well positioned to continue their role as critical economic drivers, supporting job growth and business expansion.” He added, “While total lending is up $377 billion year-over-year, residential mortgage lending remains weak. New regulatory requirements on mortgage lending are not helping, and will continue to dampen a key economic driver.” Chessen concluded that “a surge in compliance and regulatory costs” has contributed to “a sharp impact on the bottom line.”

Companies: American Bankers Association

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