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FDIC’s Sheila Bair Issues Summary Statement On Quarterly Banking Report

August 31, 2010 By Chuck Leave a Comment

FOR IMMEDIATE RELEASE

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. 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 (ROA), 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.”

She added, “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.

I have opined on this very issue in the past. The fact that banks and other financial institutions are taking money away from loss reserves and placing it back onto the ‘active’ balance sheet is simply a game with numbers. The banks are attempting to boost their numbers by sacrificing the funds set aside for future losses.

This places the banks and financial institutions in even greater peril by operating with lower loss reserves. This is hardly good news.

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.

We shall see just how long this ‘trend’ lasts, I do not expect it to last very long at all.

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).

Financial results for the first quarter are contained in the FDIC’s latest Quarterly Banking Profile, which was released today. Also among the findings:

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. The industry’s ratio of reserves to total loans and leases fell from 3.50 percent to 3.40 percent during the quarter, but this is still the second-highest ratio in the 63 years for which data are available. “Particularly given economic uncertainties, we believe all banks should continue to exercise caution and maintain strong reserves,” Chairman Bair said.

The industry’s “coverage ratio” of reserves to noncurrent loans improved for a second consecutive quarter, from 64.9 percent to 65.1 percent, as the decline in noncurrent loans outpaced the reduction in loss reserves.

The number of institutions on the FDIC’s “Problem List” rose from 775 to 829. However, the total assets of “problem” institutions declined from $431 billion to $403 billion. Also, while the number of “problem” institutions is the highest since March 31, 1993, when there were 928, it is the smallest net increase since the first quarter of 2009.

Forty-five insured institutions failed during the second quarter.

The Deposit Insurance Fund (DIF) balance improved for the second quarter in a row. The DIF balance – the net worth of the fund – improved from negative $20.7 billion to negative $15.2 billion during the second quarter. The improvement stemmed primarily from assessment revenues and from a reduction in the contingent loss reserve, which covers the costs of expected failures. The reserve declined from $40.7 billion to $27.5 billion during the quarter.

Negative $15.2 Billion insurance fund, still broke. Any questions?

The FDIC’s liquid resources – cash and marketable securities – remained strong. Liquid resources stood at $44 billion at the end of the second quarter, a decline from $63 billion at the end of the first quarter. The decline in cash balances reflects previously anticipated outlays, primarily related to three bank failures in Puerto Rico on April 30th.

“As we expected,” Chairman Bair said, “demands on cash have increased this year. But our projections indicate that our current resources are more than enough to resolve anticipated failures.”

Total insured deposits declined by 0.7 percent ($39 billion) during the quarter.

Not only are people withdrawing money from mutual funds of all types, they are even withdrawing funds from deposit accounts.

The complete Quarterly Banking Profile is available at http://www2.fdic.gov/qbp on the FDIC Web site.

Filed Under: Market Updates Tagged With: ,

One in Ten Banks Is a “Problem”

May 22, 2010 By Chuck

The recent FDIC’s latest banking health report now shows 775 banks, or one-tenth of all U.S. banks are classified as “problem institutions”.

The 775 problem banks is up from 702 in the previous banking report from the prior quarter. The cause indicated for the increase in problem banks is the rise in bad commercial real estate loans.

[…] Poor loan performance in other sectors also continued to hurt banks, with the total number of loans at least three months past due climbing for the 16th consecutive quarter, FDIC officials said in a briefing on Thursday. "The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility," FDIC Chairman Sheila Bair said.[…]

[…] FDIC officials said they expected the number of failed banks to peak this year after climbing steadily over the past three years. Regulators have shut 72 banks so far this year, more than double the number closed by this time last year. Ms. Bair said regulators were preparing for a steady pace of additional closures through the end of the year. A total of 237 banks have failed since the beginning of 2008.

The failures continue to strain the FDIC’s fund to protect consumer deposits, although officials signaled they were confident they had enough cash on hand to deal with the expected spate of failures, without having to assess new fees on the banking industry. The agency’s deposit insurance fund stood at negative-$20.7 billion at the end of the first quarter, a slight improvement from the end of 2009. (emphasis added) (WSJ)

A slight improvement? Looks like they are still broke to me.

Filed Under: Bank Failures, Market Updates Tagged With: , ,

Financial Reform – Another Shell Game Leaves Tax Payers on the Hook

May 4, 2010 By Chuck

The financial reform bill has a backdoor bailout clause that would have utilized $50 Billion of funds set aside to be used when another big bank needed a bailout or winding down. This backdoor bailout is a fact, even with some politicians, and the President, saying it was no such thing.

Well now it gets worse. Tonight senate leaders agreed to scrap the $50 Billion fund and instead use a system by which the FDIC would provide the necessary funding to handle the failed institution. The source of this new funding would be accomplished by setting up a new line of credit with the treasury department, and it would be backed by the failed company’s assets.

Ok, so let us walk through this one. The first idea in the bill was to set aside $50 Billion, which Geithner claimed would have been funded by the big institutions themselves. The reason it has been referred to as a backdoor taxpayer bailout is that the increased levies on the big banks would simply be passed along to the tax payer.

So then if in the future a Citigroup, or Bank of America for example needed another bailout or needed to be ring fenced if the firm goes into core meltdown then the funds would be drawn from the $50 Billion reserve.

Now, the newest idea is even worse than the first one. Under this agreement the $50 Billion is scrapped altogether. In its place will be a new credit line established between the treasury department taxpayer and the FDIC. So if a Citigroup for example goes into a meltdown then the firm would be wound down and costs to perform the bailout / wind down would be provided by the FDIC / Treasury credit line. And when the nuclear dust settles the assets of the firm will be sold to reimburse the Treasury.

[…] Aides to the committee chairman, Christopher J. Dodd, Democrat of Connecticut, and the panel’s senior Republican, Richard C. Shelby of Alabama, said the two senators had agreed to scuttle a $50 billion fund proposed by Democrats.

The fund, which was opposed by the Obama administration, drew criticism from Republicans who had warned that it would promote rather than prevent taxpayer bailouts of failed financial companies.

Under the deal, the Federal Deposit Insurance Corporation would finance the liquidation of failed financial companies, using a new credit line with the Treasury Department backed by the failed company’s assets. The money would be recouped later through the sale of assets, with shareholders and creditors forced to take losses.[…] emphasis added (NYT)

The problem with this ridiculous plan is that the taxpayers only get reimbursed if the assets of the failed firm are enough to cover the original outlay of funds that were needed to wind them down. It puts the taxpayers on the hook yet again for Wall Street screw ups. Only this time it is disguised even better with the FDIC being front and center, and behind the FDIC is the treasury and taxpayers.

I don’t see things as optimistically as the NYT does. Take for example the bank failures of the past 18 months. When the FDIC moves in a seizes the bank they establish an estimate of what the costs will be to the insurance fund. In later months, the FDIC issues additional reports on the failed bank, and in many instances the true cost ends up being much higher than first estimated when it is discovered that the assets the institution was holding was worth much less than what was being reported. We have mark to myth accounting rules to thank for that.

So if the treasury taxpayer is going to be reimbursed by the assets held from the failed institution then I say this is just one more shell game being played on the American people.

Filed Under: Financial Reform, Market Updates Tagged With: , , ,

FDIC Insurance Fund is Broke to the Tune of Nearly $21 Billion

February 23, 2010 By Chuck

Today the Federal deposit Insurance Company released the latest quarterly banking profile. There is much information contained within this latest report and I will highlight the important parts for you here:

The most important revelation is that the Deposit Insurance Fund (DIF), the money available to pay back customers at failed banks, has dropped to a record low.

The Deposit Insurance Fund (DIF) decreased by $12.6 billion during the fourth2-23-2010 11-32-13 AM quarter to a negative $20.9 billion (unaudited) primarily because of $17.8 billion in additional provisions for bank failures. Also, unrealized losses on available-for-sale securities combined with operating expenses reduced the fund by $692 million. Accrued assessment income added $3.1 billion to the fund during the quarter, and interest earned, combined with termination fees on loss share guarantees and surcharges from the Temporary Liquidity Guarantee Program added $2.8 billion. For the year, the fund balance shrank by $38.1 billion, compared to a $35.1 billion decrease in 2008.

The DIF’s reserve ratio was negative 0.39 percent on December 31, 2009, down from negative 0.16 percent on September 30, 2009, and 0.36 percent a year ago. The December 31, 2009, reserve ratio is the lowest reserve ratio for a combined bank and thrift insurance fund on record.

DIF Reserve Ratio Graph

In layman’s terms, the FDIC is in the hole by nearly $21 Billion, and it is very likely that they are tapping their $500 Billion credit agreement with the US.Treasury taxpayers.

The number of banking institutions that the FDIC has identified as ‘problem institutions’ has risen once again and now stands at 702 with assets of $403 Billion. If there is $403 Billion in assets recognized as being contained in problem banks, and the insurance fund is negative $21 Billion then where will the money come from to pay our insurance claims when these banks fail? Taxpayers, that’s where.

The FDIC also reported that loan losses rose for the 12th consecutive quarter.

Asset quality indicators worsened in the fourth quarter. Net charge-offs (NCOs) totaled $53.0 billion, an increase of $14.4 billion (37.2 percent) over the same period in 2008. The annualized net charge-off rate rose to 2.89 percent, up from 1.95 percent a year earlier and 2.72 percent in the third quarter of 2009. This is the highest quarterly NCO rate reported by the industry in the 26 years for which quarterly NCO data are available. […]

Noncurrent loans still growing

Noncurrent loans and leases continued to rise through the end of the year, with a few notable exceptions. The total amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased by $24.3 billion (6.6 percent) in the fourth quarter, to $391.3 billion, or 5.37 percent of all loans and leases at yearend. This is the highest level for the industry’s noncurrent rate in the 26 years that all insured institutions have reported noncurrent loan data. The increase in noncurrent loans in the quarter was largely driven by noncurrent residential mortgage loans, which rose by $23.2 billion (14.9 percent).[…]

All in all the FDIC looks to be in sad shape. Expect to see FDIC Chairwoman Shelia Bair to be before Congress again this year trying to explain why it is that the insurance fund is broke and what she is going to do about it.

 

 

Filed Under: Market Updates Tagged With: , , ,

The FDIC Reserve Is Gone

November 24, 2009 By Chuck

The cash reserves needed for the FDIC to keep paying depositors at failed banks has all been used up. Don’t panic (yet anyways), the FDIC has an open credit line to the Treasury Department (uh, that means us tax payers) that will keep the FDIC floating in cash to keep paying out money to Grandma and Grandpa at the failed banks.

You see, the FDIC is supposed to be self maintaining, it charges banks a fee to have their deposits insured. Think of it as the banks paying an insurance premium. That money goes into the FDIC kitty and is used to pay depositors when a bank fails. That is all well and good except when the financial system blows up like it has over the past 2 years.

As of today’s quarterly report issued by the FDIC they are now broke, and I mean that in the literal sense.

FDIC deposit insurance fund now -$8.2B v $10.4B last quarter

Yep, they are broke, no money left in the cash drawer. So what now? As long as the FDIC has an open credit line with the Treasury then any bank that fails it will be the taxpayers who reimburse Grandma and Grandpa.

Think of it this way: you have a checking account at (let’s pick a name out of the air) ShittyBank and they get closed by the FDIC. Your very own money will be reimbursed to you via the FDIC insurance fund, but you will actually be paying yourself back in part because taxpayers will be on the hook to keep the FDIC floating in funds. So in the end you still lose some money.

The FDIC has recently asked member banks to pre-pay insurance premiums for the next 3 years in an attempt to fund the reserve pool as quickly as possible. But many smaller banks are objecting to this as it will further cut into their balance sheets. Besides, will prepayment of 3 years of insurance premiums be enough to cover the increase in bank failures that still lie ahead? I think not. In which case it will eventually end up in the tax payers lap.

Not only has the FDIC announced that their cash drawer is empty, but the number of banks on their hit list has grown yet again. That number now stands at 552 compared to 416 just in the previous quarter.

Recall that just a couple months ago the FDIC opened a satellite office in Florida with a staff of roughly 500 to deal with the bank issues (aka future bank failure) in the Southeast region. Expect more bank failures from Florida and surrounding states in the future.


More on this topic (What's this?)
The FDIC goes Bankrupt (Stock Market and Economic Analysis, 11/27/09)
Are Bank Stocks Such a Good Buy? (naked capitalism, 8/17/10)
FDIC hopes that the oldies are still golden (naked capitalism, 7/24/10)
Read more on Federal Deposit Insurance Corporation (FDIC), Banking, Insurance at Wikinvest
Filed Under: Market Updates Tagged With: ,

FDIC Report: Insured Banks Lost 3.7 Bn USD in Q2 2009

August 27, 2009 By Chuck

The FDIC again publishes terrible news for the banking industry. The institutions insured by the FDIC lost about 3.7 Bn for Q2 alone. This comes as Meredith Whitney, the analyst reputed for predicting failure for Citigroup and success for GS, predicted that about 300 banks to fail by the end of 2009.

FOR IMMEDIATE RELEASE
August 27, 2009

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate net loss of $3.7 billion in the second quarter of 2009, a decline of $8.5 billion from the $4.8 billion in profits the industry reported in the second quarter of 2008. Insured institutions earned $424 million in net operating income during this latest quarter even after a special assessment of $5.5 billion to bolster the FDIC’s insurance fund. However, one-time losses and other items totaling $4.1 billion pulled the industry results into negative territory.

“While challenges remain, evidence is building that the U.S. economy is starting to grow again,” said FDIC Chairman Sheila Bair. “Banking industry performance is — as always — a lagging indicator. The banking industry, too, can look forward to better times ahead. But, for now, the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry’s bottom line.”

Chairman Bair went on to say, “The FDIC was created specifically for times such as these. No matter how challenging the environment, the FDIC has ample resources to continue protecting depositors as we have for the last 75 years. No insured depositor has ever lost a penny of insured deposits…and no one ever will.”

Provisions for loan losses totaled $66.9 billion in the quarter, an increase of $16.5 billion (32.8 percent) over the second quarter of 2008. Extraordinary losses stemming from writedowns of asset-backed commercial paper totaled $3.6 billion, compared to extraordinary losses of $366 million a year earlier. Noninterest expenses were $1.7 billion (1.7 percent) higher, primarily due to increased FDIC deposit insurance premiums.

Indicators of asset quality continued to worsen during the second quarter. Both the quarterly net charge-off rate and the percentage of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) reached the highest levels registered in the 26 years that insured institutions have reported these data. Insured institutions charged off $48.9 billion in uncollectible loans during the quarter, up from $26.4 billion a year earlier, and noncurrent loans and leases increased by $40.4 billion during the second quarter. At the end of June, noncurrent loans and leases totaled $332 billion, or 4.35 percent of the industry’s total loans and leases.

“Deteriorating loan quality is having the greatest impact on industry earnings as insured institutions continue to set aside reserves to cover loan losses,” Chairman Bair noted. “Of all the major earnings components, the amount that insured institutions added to their reserves for loan losses was, by far, the largest drag on industry earnings compared to a year ago.”

All told, more than 28 percent of all insured institutions reported a net loss in the second quarter, compared with 18 percent a year earlier.

Financial results for the second quarter and first half of 2009 are contained in the FDIC’s latest Quarterly Banking Profile, which was released today. Also among the major findings:

Net interest margins improved in the quarter. The average margin (the difference between the average yield on interest-earning assets and the average interest expense of funding those assets) rose to 3.48 percent from 3.39 percent in the first quarter and 3.37 percent in the second quarter of 2008. More than half of all institutions reported higher margins than in the first quarter. Net interest income totaled $100 billion in the quarter, up from $96.6 billion a year earlier.

Net interest margins improved from the previous quarter at community banks and at larger institutions. “This is good news for community banks, since three-fourths of their revenues come from net interest income,” Chairman Bair said.

Total assets of insured institutions declined by $238 billion. A $125.5 billion decline in loan and lease balances accounted for more than half of the decline in total assets of insured institutions during the second quarter. The 1.8 percent decline in industry assets followed a $303.2 billion decline in the first quarter of 2009. Banks’ balances with Federal Reserve banks fell by $99.4 billion (20.4 percent) during the quarter, and assets in trading accounts declined by $65.5 billion (7.9 percent). The industry’s investment securities portfolio increased by $130.6 billion (5.9 percent).

The number of institutions on the FDIC’s “Problem List” rose. At the end of June, there were 416 insured institutions on the “Problem List,” up from 305 on March 31. This is the largest number of institutions on the list since June 30, 1994, when there were 434 institutions on the list. Total assets of “problem” institutions increased during the quarter from $220.0 billion to $299.8 billion, the highest level since December 31, 1993.

Total reserves of the Deposit Insurance Fund (DIF) stood at $42 billion. Just as insured institutions reserve for loan losses, the FDIC has to provide for a contingent loss reserve for future failures. To the extent that the FDIC has already reserved for an anticipated closing, the failure of an institution does not reduce the DIF balance. The contingent loss reserve, which totaled $28.5 billion on March 31, rose to $32.0 billion as of June 30, reflecting higher actual and anticipated losses from failed institutions. Additions to the contingent loss reserve during the second quarter caused the fund balance to decline from $13.0 billion to $10.4 billion. Combined, the total reserves of the DIF equaled $42.4 billion at the end of the quarter.

Chairman Bair distinguished the DIF’s reserves from the FDIC’s cash resources, which included $22 billion of cash and U.S. Treasury securities held as of June 30, as well as the ability to borrow up to $500 billion from the Treasury. “A decline in the fund balance does not diminish our ability to protect insured depositors,” Chairman Bair concluded.

Filed Under: General Economics, Market Updates Tagged With: , , , ,