Each depositor insured to at least $250,000 per insured bank

Notes to Users

Industry Net Income Improves to a Two-Year High of $18 Billion Loss Provisions Decline but Remain above $50 Billion Asset Quality Deterioration Continues to Moderate New Accounting Rules Cause Sharp Increase in Reported Loan Balances Number of Insured Institutions Falls below 8,000

Earnings Post Significant Increase

First quarter results for insured commercial banks and savings institutions contained positive signs of recovery for the industry. While new accounting rules had a major effect on several components of the industry’s balance sheet and income statement, there was clear improvement in certain performance indicators.¹ Lower provisions for loan losses and reduced expenses for goodwill impairment lifted the earnings of FDIC-insured commercial banks and savings institutions to $18.0 billion. While still low by historical standards, first quarter earnings represented a significant improvement from the $5.6 billion the industry earned in first quarter 2009 and are the highest quarterly total since first quarter 2008. The largest year-over-year increases occurred at the biggest banks, but a majority of institutions (52.2 percent) reported net income growth. This is the highest percentage of institutions reporting increased quarterly earnings in more than three years (since third quarter 2006).

New Accounting Rules Affect Reported Cash Flows

Implementation of FAS 166 and 167 caused a large amount of loans in securitized loan pools to be consolidated into the reported loan balances of a relatively small number of large insured institutions in the first quarter. As a result, the interest income, interest expense, and charge-offs associated with these balances also were included in first quarter financial reports, and the inclusion of the loan balances triggered changes to capital and reserves, as well. Net interest income totaled $109.1 billion in the first quarter, a $9.7 billion (9.7 percent) increase from first quarter 2009. Most of this increase reflected the application of the new accounting rules. It was somewhat offset by a $2.1 billion (99.4 percent) year-over-year decline in income from securitization activities and a $1.1 billion (18.5 percent) drop in servicing income that were also largely a result of the new rules. Application of the accounting changes had no significant effect on the year-over-year increase in the industry’s reported net income; lower provisions for loan losses and reduced expenses for goodwill impairment were the main sources of the improvement in industry earnings.

Reduced Loan-Loss Provisions Help Drive Earnings Improvement

Insured institutions set aside $51.3 billion in provisions for loan and lease losses in the first quarter, a $10.2 billion (16.6 percent) decline from a year earlier. However, only about one-third of insured institutions reported year-over-year declines in loss provisions, with much of the overall reduction concentrated among a few of the largest banks. Another positive factor in the earnings improvement at larger institutions was a $2.2 billion (2.3 percent) decline in noninterest expenses that was caused by lower goodwill impairment losses. Total noninterest income was $6.6 billion (9.7 percent) lower than a year earlier because of the declines in securitization and servicing income and a $1.5 billion (15.1 percent) reduction in trading revenue. The average return on assets (ROA) rose to 0.54 percent, compared to 0.16 percent in first quarter 2009. This is the highest quarterly ROA for the industry since first quarter 2008. Almost half of all institutions—48.1 percent—reported improved ROAs.

Rise in Average Margin Reflects Impact of New Rules

The sharp increase in net interest income caused by adoption of the new accounting rules significantly boosted the industry’s net interest margin (NIM). The average margin increased to a seven-year high of 3.83 percent, from 3.53 percent in fourth quarter 2009 and 3.41 percent in first quarter 2009. Most of the improvement occurred at a few large credit card lenders; only 40.7 percent of institutions reported higher NIMs compared to the fourth quarter, although 57.8 percent reported year-over-year improvement.

C&I Charge-Offs Decline for First Time in Four Years

Loan losses posted a year-over-year increase for a 13th consecutive quarter. Net charge-offs totaled $52.4 billion, an increase of $14.5 billion (38.4 percent) from a year earlier. Credit cards accounted for almost three-quarters ($10.4 billion) of the growth in charge-offs, reflecting the securitized receivables brought back onto balance sheets by the new accounting rules. Charge-offs were up from a year ago in most major loan categories, although the increases were smaller than in recent quarters. Most non-consumer loan categories were not affected by the new accounting rules. A notable exception to the rising trend was loans to commercial and industrial (C&I) borrowers, where charge-offs fell for the first time since first quarter 2006, declining by $675 million (10.2 percent). Net charge-offs of real estate loans secured by nonfarm nonresidential real estate properties increased by $1.6 billion (155.5 percent). Charge-offs of residential mortgage loans were $1.6 billion (22.9 percent) higher than a year earlier, while charged-off home equity loans rose by $1.2 billion (29.9 percent).

Increase in Noncurrent Loans Is Smallest in Three Years

The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased for a 16th consecutive quarter, rising by $17.4 billion (4.4 percent) from the level at the end of 2009. This is the smallest quarterly increase in noncurrent loans since third quarter 2007, and all of the increase consisted of loans and leases 90 days or more past due. Loans and leases in nonaccrual status fell for the first time in four years, declining by $65 million. Noncurrent credit card loans increased during the quarter by $7.6 billion (51.9 percent), reflecting the inclusion of securitized credit card receivables. Noncurrent residential mortgage loans rose by $12.9 billion (7.2 percent), and noncurrent nonfarm nonresidential real estate loans increased by $3.7 billion (8.8 percent). In contrast, noncurrent C&I loans declined by $5.1 billion (12.2 percent), and noncurrent real estate construction and development loans fell by $1.8 billion (2.5 percent). It was the second consecutive quarterly decline in noncurrent levels for both loan categories.

New Accounting Rules Require Higher Reserves at Some Institutions

Total reserves for loan losses of insured institutions increased by $34.5 billion (15.1 percent) during the first quarter, even though net charge-offs exceeded loss provisions by $1.2 billion. The large jump in reported reserves was associated with the requirements of FASB 166 and 167, as affected institutions converted equity capital directly into reserves. The increased reserves caused the industry’s “coverage ratio” of reserves to noncurrent loans and leases to increase for the first time in 16 quarters, from 58.3 percent to 64.2 percent, even though slightly fewer than half of all insured institutions (49.2 percent) improved their coverage ratios during the quarter.

Internal Capital Generation Turns Positive for First Time in Two Years

Total equity capital increased by $15.1 billion (1.0 percent) in the first quarter. The increase would have been larger, but institutions reported almost $22 billion in reductions in equity capital stemming from the application of FAS 167. More than three-quarters of all institutions (76.6 percent) increased their equity capital by a combined total of $30 billion during the quarter, but these increases were partially offset by the accounting-related equity declines noted above. Retained earnings were positive for the first time since first quarter 2008, as net income exceeded dividends by $13.6 billion. Insured institutions paid $4.4 billion in dividends in the first quarter, down $2.9 billion (39.4 percent) from a year earlier.

Accounting Change Lifts Reported Total Assets

Industry assets increased for the first time since fourth quarter 2008, and total loan and lease balances rose for the first time since second quarter 2008, but only because of the new accounting rules. Total assets reported by insured institutions were $248.6 billion (1.9 percent) higher than at the end of 2009, but this was entirely due to a $294.9 billion (69.9 percent) increase in credit card loans caused by the consolidation of more than $300 billion in securitized credit card receivables into reported loan balances at the end of the first quarter. Other consumer loan balances increased by $28.0 billion, also reflecting similar consolidations of securitized loan pools into reported loan balances, but all other major loan categories registered net declines during the quarter. C&I loan balances fell by $33.1 billion (2.7 percent), real estate construction and development loans declined by $33.1 billion (7.3 percent), and residential mortgage loans declined by $28.9 billion (1.5 percent). Real estate loans secured by nonfarm nonresidential real estate properties declined for the first time since third quarter 1992, falling by $891 million (0.1 percent). In addition to the declines in most major loan categories, banks reduced their holdings of mortgage-backed securities by $8.9 billion (0.6 percent). Institutions increased their portfolios of U.S. Treasury securities by $54.4 billion (53.0 percent) and their balances with Federal Reserve banks by $23.6 billion (4.1 percent).

Securitized Consumer Loans Return to Balance Sheets

The increase in loan balances was mirrored by declines in loans securitized and sold. Securitized credit card receivables declined by $347.4 billion (95.6 percent) during the quarter, while securitized other consumer loans fell by $25.7 billion (80.5 percent), and securitized home equity lines of credit dropped by $5.8 billion (97.2 percent). In all, securitized assets posted a $403.1 billion (22.2 percent) decline in the first quarter.

Secured Borrowings Register Sharp Increase

A substantial amount of short-term secured borrowings accompanied securitized loans onto bank balance sheets in the first quarter. Total deposits fell for the first time in a year, declining by $28.6 billion (0.3 percent). Nondeposit liabilities increased by $262.9 billion (10.9 percent). Federal Home Loan Bank advances fell for a sixth consecutive quarter, declining by $52.9 billion (9.9 percent), while other nondeposit borrowings increased by $294.3 billion (52.8 percent).

“Problem List” Continues to Grow

The number of institutions reporting quarterly financial results declined by 80 in the first quarter, from 8,012 to 7,932. Forty-one FDIC-insured institutions failed during the quarter, while 37 institutions were merged into other charters. Only three new charters were added during the quarter, and all three were charters formed to acquire failed banks. The number of insured commercial banks and savings institutions on the FDIC’s “Problem List” increased from 702 to 775 during the quarter, and total assets of “problem” institutions increased from $403 billion to $431 billion.

Footnotes

¹FASB Statements 166 and 167. See Notes to Users.