The FDIC released its first quarter 2013 profile of the banking industry on Wednesday. According to this AP news article, “U.S. banks earned more from January through March than during any quarter on record, buoyed by greater income from fees and fewer losses from bad loans.” Most of the growth is being driven by the largest banks, many of which have been helped by bailout money and by the record low interest rates. However, this low interest rate environment continues to put downward pressure on banks’ net interest margins.
This Forbes article provides a good explanation of why net interest margins have been declining. In addition to the low interest rates, loan growth continues to be slow as compared to deposit growth. If banks can’t use deposits for loans, they have to invest the deposits, and in today’s environment, there’s little return for safe investments. In fact, the FDIC Chairman warned about this in the FDIC press release: “tighter net interest margins and slow loan growth create an incentive for institutions to reach for yield, which is a matter of ongoing supervisory attention.”
Here are some of the noteworthy excerpts from the FDIC press release:
- Commercial banks and savings institutions insured by the [FDIC] reported aggregate net income of $40.3 billion in the first quarter of 2013, a $5.5 billion (15.8 percent) increase from the $34.8 billion in profits that the industry reported in the first quarter of 2012 (Fourth quarter’s profit was $34.7 billion).
- Total loan balances posted a seasonal decline. Loan balances fell by $36.8 billion (0.5 percent) in the first quarter, as credit card balances declined by $35.9 billion (5.2 percent).
- Total deposits increased by $1.8 billion (0.02 percent), as deposits in domestic offices fell by $20.5 billion (0.2 percent) and foreign office deposits rose by $22.3 billion (1.6 percent). Noninterest-bearing transaction deposits with balances greater than $250,000 fell by $74.9 billion (4.3 percent) during the quarter. Balances in these accounts that were over the $250,000 basic FDIC coverage limit declined by $70.3 billion (4.6 percent).
- First quarter net operating revenue (net interest income plus total noninterest income) totaled $170.6 billion, an increase of $2.7 billion (1.6 percent) from a year earlier, as noninterest income increased by $5.1 billion (8.3 percent) and net interest income declined by $2.4 billion (2.2 percent). The average net interest margin fell to its lowest level since 2006.
- The number of banks on the FDIC's "Problem List" declined from 651 to 612 during the quarter.
- Four FDIC-insured institutions failed in the first quarter, the smallest number since the second quarter of 2008 when two institutions were closed. Thus far in 2013, there have been 13 failures, compared to 24 during the same period in 2012.
- The Deposit Insurance Fund (DIF) balance continued to increase. The DIF balance — the net worth of the fund — rose to $35.7 billion as of March 31 from $33.0 billion at the end of 2012.
- 7,019 banks and savings associations deposits are insured by the FDIC (down from 7,083 in the last quarter)
For savers the two important trends are loan and deposit balance changes. The environment that’s most conducive for deposit rates is growing loan balances and shrinking deposit growth. The numbers from the first quarter are a little disappointing. First, loan balances declined. However, the FDIC blames this on seasonal factors. The decline was smaller than what was seen in the first quarter of 2012.
Deposit growth in this quarter was small, a growth of only 0.02%. However, this includes noninterest-bearing transaction accounts. Since the temporary unlimited deposit insurance for noninterest-bearing transaction accounts ended in January, it would have seemed likely that total deposit balances would have declined. Balances in these noninterest-bearing accounts that were over the $250,000 basic FDIC coverage limit declined 4.6 percent, but this wasn’t enough to cause the total deposit balance to decline.
With more deposits and fewer loans, banks will have more reasons to lower their deposit rates.
For bank failures, the trend of fewer failures continues. Only four banks failed in the first quarter. However, the number of bank failures went way up in April. For the year, the total number of bank failures is at 13. Even with the recent pace of bank failures, we’re still far behind last year. At this time last year there had been 24 bank failures for the year.
In addition to a decline in bank failures, the number of problem banks has gone down. The number of "problem" institutions is now 612, down from 651 in the fourth quarter.
The FDIC doesn't name any of these problem banks. Calculated Risk Blog has an unofficial list of 767 problem banks based on public enforcement actions. When I reported on the FDIC's Q4 report three months ago, the unofficial problem bank number was 809.
In addition to the quarterly report, the FDIC updated its database with the institutions' public financial reports that were filed by March 31, 2013. The NCUA should be updating its database soon. This is the data that we use to determine the health ratings of banks and credit unions.
We'll be importing the FDIC and NCUA data and updating the bank health scores over the next week.
You can view a table of banks and credit unions with the worst Texas Ratios in our Bank Health Ratings page. From here you can also search for your bank and credit union to view its Texas Ratio, health score and other financial data.
BauerFinancial typically takes a couple of weeks to update its ratings. Bankrate.com has been taking over a month before it updates its ratings.