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FDIC: Reduced Loan-Loss Provisions Push Bank Earnings to Three-Year High

August 31, 2010

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $21.6 billion in the second quarter of 2010, a $26 billion improvement from the $4.4 billion net loss the industry posted in the second quarter of 2009.

The FDIC said this is the highest quarterly earnings total since the third quarter of 2007. Despite the improvement, earnings remain below historical norms. On the positive side, one in five institutions reported a net loss for the quarter, compared to 29 percent a year earlier. And, the average return on assets, a basic yardstick of profitability, rose to 0.65 percent, from negative 0.13 percent a year ago.

"This is the best quarterly profit for the banking sector in almost three years," said FDIC Chairman Sheila C. Bair. "Nearly two out of every three banks are reporting better year-over-year earnings. As long as economic conditions remain supportive, most institutions should maintain profitability and increase their capacity to lend.

"Without question, the industry still faces challenges. Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high. But the banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction."

The primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. While quarterly provisions remained high, at $40.3 billion, they were $27.1 billion (40.2 percent) lower than a year earlier. Net interest income was $8.5 billion (8.6 percent) higher than a year ago, and noninterest expenses were $1.5 billion (1.5 percent) lower.

The FDIC noted signs of improvement in asset-quality trends as the amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) fell for the first time since the first quarter of 2006. Insured banks and thrifts charged off $49 billion in uncollectible loans during the quarter, down $214 million (0.4 percent) from a year earlier. This is the first time since the fourth quarter of 2006 that net charge-offs posted a year-over-year decline.

Total loans and leases declined by $107.5 billion (1.4 percent) during the quarter. Total assets fell by $136.2 billion (1.0 percent).

Loan-loss reserves declined for the first time since the fourth quarter of 2006. Although almost two out of every three banks (62.1 percent) increased their loan-loss reserves in the quarter, the industry's total reserves declined by $11.8 billion (4.5 percent), as a number of large banks reduced their loan-loss provisions.

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