Greater Than One in Four FDIC Insured Institutions are Unprofitable; Bank Problem List at 15 Year High

The second quarter 2009 Quarterly Banking Profile has some interesting charts and facts that inquiring minds will be interested in.

Insured Institution Performance

• Higher Loss Provisions Lead to a $3.7 Billion Net Loss
• More Than One in Four Institutions Are Unprofitable
• Charge-Offs and Noncurrent Loans Continue to Rise
• Net Interest Margins Show Modest Improvement
• Industry Assets Decline by $238 Billion
• The Industry Posts a Net Loss for the Quarter

The Industry Posts a Net Loss for the Quarter

Burdened by costs associated with rising levels of troubled loans and falling asset values, FDIC-insured commercial banks and savings institutions reported an aggregate net loss of $3.7 billion in the second quarter of 2009. Increased expenses for bad loans were chiefly responsible for the industry’s loss. Insured institutions added $66.9 billion in loan-loss provisions to their reserves during the quarter, an increase of $16.5 billion (32.8 percent) compared to the second quarter of 2008. Quarterly earnings were also adversely affected by writedowns of asset-backed commercial paper, and by higher assessments for deposit insurance.

Almost two out of every three institutions (64.4 percent) reported lower quarterly earnings than a year ago, and more than one in four (28.3 percent) reported a net loss for the quarter. A year ago, the industry reported a quarterly profit of $4.7 billion, and fewer than one in five institutions (18 percent) were unprofitable. The average return on assets (ROA) was -0.11 percent, compared to 0.14 percent in the second quarter of 2008.

Net Charge-Off Rate Sets a Quarterly Record

Net charge-offs continued to rise, propelling the quarterly net charge-off rate to a record high. Insured institutions charged-off $48.9 billion in the second quarter, compared to $26.4 billion a year earlier. The annualized net charge-off rate in the second quarter was 2.55 percent, eclipsing the previous quarterly record of 1.95 percent reached in the fourth quarter of 2008.

The $22.5 billion (85.3 percent) year-over-year increase in net charge-offs was led by loans to commercial and industrial (C&I) borrowers, which increased by $5.3 billion (165.0 percent). Net charge-offs of credit card loans were $4.6 billion (84.5 percent) higher than a year earlier, and the annualized net charge-off rate on credit card loans reached a record 9.95 percent in the second quarter. Net charge-offs of real estate construction and development loans were up by $4.2 billion (117.0 percent), and charge-offs of loans secured by 1-4 family residential properties were $4.0 billion (41.1 percent) higher than a year ago.

Noncurrent Loan Rate Rises to Record Level

The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status)increased for a 13th consecutive quarter, and the percentage of total loans and leases that were noncurrent reached a new record.

Institutions Continue to Add to Reserves

The industry’s reserves for loan losses increased by $16.8 billion (8.6 percent) during the second quarter, as loss provisions of $66.9 billion exceeded net charge-offs of $48.9 billion. The ratio of reserves to total loans and leases set another new record, rising from 2.51 percent to 2.77 percent. However, the pace of reserve building fell short of the rise in noncurrent loans, and the industry’s ratio of reserves to noncurrent loans fell from 66.8 percent to 63.5 percent, the lowest level since the third quarter of 1991.

“Problem List” Expands to 15-Year High

The number of insured commercial banks and savings institutions reporting financial results fell to 8,195 in the quarter, down from 8,247 reporters in the first quarter. Thirty-nine institutions were merged into other institutions during the quarter, twenty-four institutions failed, and there were twelve new charters added.

During the quarter, the number of institutions on the FDIC’s “Problem List” increased from 305 to 416, and the combined assets of “problem” institutions rose from $220.0 billion to $299.8 billion. This is the largest number of “problem” institutions since June 30, 1994, and the largest amount of assets on the list since December 31, 1993.

FDIC Problem Institutions At 15 Year High


click on any chart for sharper image

Troubled Loans Still Growing But At Slower Pace



Provision Expenses As Percent Of Operating Revenue



Noncurrent Loan Growth Outpaces Reserve Growth


Fed Fails To Recapitalize Banks

In spite of mammoth injections of cash by the Fed, huge efforts by banks to raise capital, a Fed swap-o-rama of biblical proportions, monetary printing by the Fed, and capital injections from the Treasury, and a massive 50% stock market rally, noncurrent loan growth still outpaces reserve growth.

Excess Reserves Revisited

Let's review Creative Destruction

Reluctance to lend can easily be seen in a chart of bank reserves.

Excess Reserves of Depository Institutions



Conventional wisdom regarding money supply suggests there is massive pent up inflation in the works as a result of the buildup of excess reserves. The rationale is that 10 times those excess reserves (via fractional reserve lending) will soon be working its way into the economy causing huge price spikes, a collapse in the US dollar, and possibly even hyperinflation.

The reality is excessive debt and falling asset prices have rendered the best efforts of the Fed impotent.

Banks are not well capitalized, they are insolvent, unwilling and unable to lend.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Barney Frank Says Ron Paul's Audit The Fed Bill Will Pass In October

Occasionally, even the most hopeless of politicians get something right. Here is stunning proof:



Barney Frank:

I have been pushing for more openness from the Fed. I want to restrict the powers of the Federal Reserve. First of all, the Fed will be the major losers of power if we are successful, as I believe we will be, setting up a financial product protection commission.

The Federal Reserve is now charged with protecting consumers. They were supposed to do subprime mortgage restrictions.

Congress in 1994 gave the Fed powers to ban subprime mortgages. Alan Greenspan refused to do it. They had the power to ban credit card abuses. Under Greenspan they did nothing. Under Bernanke they started but only after Congress acted.

That's one of the reasons why in the new consumer protection agency, we will take away from the Federal reserve the power to go consumer protection.

Secondly, they have has since 1932 a right under Herbert Hoover to intervene in the economy whenever they could. Last September, the Federal Reserve they were going to advance $82 billion to AIG.

I was kind of surprised and said Mr Bernanke do you have $82 billion? Mr. Bernanke replied I have $800 billion and under section 13.3 of the Federal Reserve Act they can lend anything they want.

We are going to curtail that lending power. We are going to put some restrictions on it.

Finally we will subject them to a complete audit. I have been working with Ron Paul, who is the main sponsor of that bill. He agrees that we don't want to have the audit appear as if influences monetary policy as that would be inflationary.

One of the things the audit will show you is what the Federal Reserve buys itself. And that will be made public, but not instantly because if it was made instantly people would be trading off it, so the data would be released after a time period of several months, enough time so it will not be market sensitive.

This will probably pass in October.

This is clearly not perfect. However, it is a step in the right direction. The only reason it it may happen is people are overwhelmingly in support of it. Change is possible, over time, at least occasionally, if public opinion is solidly behind something.

If you have not yet done so, or even if you have (please do it again) Speak Out - Audit the Fed, Then End It!

Important Addendum:

Barney Frank did not quite say that "HR 1207 Will Pass In October". A key sentence was missing.

Please see What Barney Frank Really Said About Ron Paul's HR1207 for complete details.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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California State Income Taxes Rise Because Of Deflation; Federal Status In Question

California state income taxes are indexed to the CPI. As a result of the the recent unprecedented drop in the CPI, taxes are going up.

Please consider State taxes going up because of deflation.

California taxpayers just got hit with another increase in state income taxes, and it didn't require a vote from a single legislator.

The culprit: deflation.

In 1982, California voters approved a proposition that indexed state income tax rates to inflation. So each year, the California Franchise Tax Board adjusts tax brackets and certain deductions and credits for inflation. The annual adjustment is tied to the California Consumer Price Index, and it usually goes up. Indexing is designed to prevent people from paying higher taxes as their incomes rise proportionately with inflation. But when inflation turns negative, indexing works in reverse. Tax brackets and credits are adjusted downward. If your income remains the same, the result is a tax increase.

The Franchise Tax Board has just released adjustments for 2009, and for the first time since 1983 they are down, reflecting a 1.5 percent drop in the California Consumer Price Index between June 2008 and June 2009.

Proposition 13 limited the annual increase to 2 percent but didn't say exactly what would happen if there was deflation. The California Board of Equalization expects to announce next week whether property taxes will go down next year if the CPI is negative.

Some seniors are complaining because they probably won't get an increase in Social Security benefits next year because of deflation. Benefits are indexed each year to inflation, but by law can never go down.

Federal taxes also are indexed to inflation. Adjustments for 2009 were announced in October and were based on the change in U.S. CPI for the 12 months that ended Aug. 31, 2008. Inflation during that period was positive, so adjustments were up. It's not clear what will happen in 2010 if inflation for the 12 months ending in August is negative.

"It's likely it would be down about 1.7 percent," says Mark Luscombe, principal tax analyst with publishing company CCH. Technically, the IRS could adjust brackets down, "but there is speculation the IRS might have enough wiggle room to leave it the same," thus preventing a tax increase.

"The IRS is aware of the issue, but we are not speculating at this time," says IRS spokesman Jesse Weller.

I have the CPI at negative 6.2%, but the official CPI is -2.1%. Please see What's the Real CPI? for details.

Given that -2.1% is the largest drop since the 1950's, I do no see what "wiggle room" Mark Luscombe is talking about. Nonetheless, the IRS "refuses to speculate".

Technically there is nothing to speculate about. With a month to go, it is a certainty the CPI will be negative year over year.

Politically is another matter. Obama will not want to raise taxes on the lower and middle classes, even by a slight amount. It will be interesting to see what magic the Administration comes up with.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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