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Falling Loan Loss Provisions Boost Bank Earnings To 6 Year Highs
of Federal Deposit Insurance Corporation (FDIC) insured institutions rose to
$37.6 billion in the third quarter of 2012, an increase of $2.3 billion or 6.6
percent from the third quarter of 2011 and the highest quarterly total since
the third quarter of 2006. The earnings
were driven primarily by falling loan loss expenses and rising noninterest
income. Increases were noted by 57.5
percent of the reporting institutions; only 10.5 percent reported negative net
income, the lowest share of unprofitable institutions since the second quarter
Quarterly Bank Profile All Institutions Performance report for the third
quarter shows net operating revenue (net interest income plus total noninterest
income) increased by $4.9 billion (3 percent) year-over-year with $4.2 billion
attributed to noninterest income. Asset
sales were $5 billion higher than a year earlier and gains from the sale of
loans were $3.9 billion (227.5 percent) higher.
At the same time banks dramatically cut losses on sales of other real
estate owned (ORE) to $932 million, a decrease of 81.8 percent.
for loan losses fell on an annual basis for the 12th consecutive
quarter. Banks set aside $14.8 billion
in the third quarter compared to $18.6 billion one year earlier, a 20.6 percent
reduction; loan loss provisions represented 8.7 percent of net operating income
compared to 11.3 percent a year earlier.
Loss provisions were reduced by 50.4 percent of all institutions.
Revenue and Loan Loss Provisions
Insured institutions reduced their reserves for loan losses by $9.6 billion
(5.4 percent) during the quarter, as net charge-offs of $22.3 billion exceeded
loss provisions of $14.8 billion. This is the tenth consecutive quarter that
the industry's reserves have declined. Much of the total reduction in reserves
was concentrated among larger institutions. The ten largest banks together
reduced their reserves by $7.3 billion (8.1 percent) during the quarter.
Overall, a majority of institutions (53.5 percent) added to their reserves
during the quarter. The combination of sizable reserve reductions with smaller
reductions in noncurrent loan balances meant that the industry's "coverage
ratio" of reserves to noncurrent loans declined from 60.4 percent to 57.2
percent during the quarter. More than half of all institutions (53.4 percent)
increased their coverage ratios, but their increases were outweighed by larger
declines at many of the biggest banks.
Net charge-offs (NCOs) declined by $4.4 billion or 16.5 percent from the
third quarter of 2011 to a net of $22.3 billion. NCOs declined in all major categories except
1-4 family residential loans where charge-offs were $1.3 billion or 15.5
percent higher than a year earlier. FDIC attributed the increase to new
accounting and reporting guidelines applicable.
The amount of loans and leases that were noncurrent (90 days or more past
due or in nonaccrual status) declined by only $100 million (0.03 percent)
during the third quarter. This marks the tenth consecutive quarter that
noncurrent loan balances have declined, but it is the smallest decline
registered during that time. The same
accounting guidance that produced the increase in 1-4 family residential real
estate loan NCOs also contributed to a $6.9 billion (3.6 percent) rise in
reported noncurrent loans of this type while most other categories experienced
Indicators of asset quality
Total assets increased by $192.1 billion (1.4 percent) between June 30 and
September 30, with loan balances rising for the fifth time in the last six
quarters. Residential mortgage loans increased by $14.5 billion (0.8 percent). Loans to individuals increased by $13.1
billion (1 percent), led by auto loans (up $7.4 billion, or 2.4 percent). The
largest net declines in loan balances occurred in home equity lines of credit
(down $12.9 billion, or 2.2 percent) and in real estate construction and development
loans (down $6.9 billion, or 3.2 percent).
FDIC also reported that 12 insured institutions failed in the third quarter,
the smallest number of failures since the fourth quarter of 2008 and the number
of banks on the regulator's "Problem List" fell from 732 to 694 and the assets
of listed banks declined from $282.4 billion to $262.2 billion.
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