The D & O Diary
FDIC: Improving Trend Gains Ground, "Problem Institutions" Persist
The improving trend that the banking industry has shown for the last three years accelerated in 2012, according the FDIC’s Quarterly Banking Profile for the final quarter of 2012, which was released on February 26, 2013. Overall, the industry reported 2012 earnings of $141.3 billion, which represents a 19.3 percent improvement over 2011 and the second-highest annual earnings ever reported for the industry (behind only the $153.billion earned in 2006, before the credit crisis emerged.). The FDIC”s latest Quarterly Banking Profile can be found here.
The agency’s February 26, 2013 press release about the report (here) quotes FDIC Chairman Martin Gruenberg as saying that “the improving trend that began more than three years ago gained further ground in the fourth quarter,” and that “balances of troubled loans declined, earnings rose from a year ago, and more institutions of all sizes showed improvement.
Sixty percent of all institutions reported improvements in their quarterly net income from a year ago. Asset quality indicators continued to improve as insured banks and thrifts charged off $18.6 billion in uncollectable loans during the quarter, down $7.0 billion (27.4 percent) from a year earlier.
In another positive sign, the number of failed institutions is also declining. Eight institutions failed in the fourth quarter of 2012, which is the lowest quarterly total since 2008, when two institutions failed. (So far during the first quarter of 2013, three banks have failed.) For all of 2012, there were a total of 51 bank failures, down from 92 in 2011 and 157 in 2010. The 2012 total of 51 bank failures represents the lowest annual number of bank failures since 2008, when 25 banks failed.
One thing that is clear is that the U.S. banking industry has been through a massive winnowing effect over the last several years. The FDIC’s quarterly reports shows that as of the end of 2012, there were only 7,083 reporting financial institutions, by comparison to the 8.534 reporting institutions at the end of the 2007. The 1,451 decline in the number of reporting institutions during that period represents a decline of 17%. The number of reporting institutions has declined steadily during that intervening five year period. Indeed, the number of reporting institutions decline from 7,357 at the end of 2011 to the 2012 year end number of 7,083, a decline of 274 institutions (3.72%).
During the fourth quarter 2012, the number of reporting institutions declined by 98 banks (1.31%), from 7,181 at the end of the third quarter of 2012 to the year end number of 7,083. The FDIC’s report states that most of this decline (88 out of 98 institutions) was attributable to the merger of institutions into other banks. The remainder is due to failures and closures. The unstated inference seems to be that the industry is improving as the weaker banks are merged out of existence.
Not all of the news in the FDIC’s quarterly report is positive. Among other things, the report notes that for the sixth quarter in a row, no new reporting institutions were added. The year 2012 is the first in FDIC history in which no new reporting institutions were added, and the second year in a row with no new start-up charters (the three new reporting institutions added in 2011 were all charters created to absorb failed banks).
And though the overall banking industry continues to improve, the number of “problem institutions” remains stubbornly high. (A “problem institution” is an insured depositary institution that is ranked either a “4” or a “5” on the agency’s 1-to-5 scale of risk and supervisory concern. The agency does not release the names of the banks on its “problem” list.) Though the number of institutions on the FDIC’s problem list declined for the seventh consecutive quarter in the fourth quarter of 2012, from 694 to 651 representing a decline of 6.2% in the number of problem institutions), the number of problem institutions remains high relative to the number of reporting institutions, which, as noted above, is also declining.
The 651 problem institutions at the end of 2012 represent a significant drop in the number of problem institutions from the end of 2011, when there were 813 problem institutions, and from the end of 2010, when there were 884 problem institutions. The 162 drop in the number of problem institutions between the end of 2011 and 2012 – a decline of nearly 20% in the number of problem institutions – represents a substantial drop in one year.
But the number of problem institutions as a percentage of reporting institutions remains stubbornly high. This is in part due to the fact that as the number of problem institutions declines, the number of reporting institutions is also declining. The 651 problem institutions as of the end of 2012 still represent 9.19% of all reporting institutions. Though this is down from the equivalent percentage as of the end of 2011 (when it was 11.01%), the 2012 year end percentage of problem institutions means that as of year end, nearly one out of every ten reporting institutions is a problem institution. By way of contrast, as of the end of 2007, the FDIC ranked only 76 institutions as problem institutions. Though subsequent events suggest that the 2007 year end number was artificially low, the 2007 number does show what the percentage of problem looks like when the industry is not under stress.
Though the industry as a whole remains on the road to recovery, the problems from the credit crisis continue to haunt the industry and the number of problem institutions persists at an elevated level.
As the numbers of failed banks have decline, the number of failed bank lawsuits has continued to grow, as I detailed in a recent post (here).
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