Federal Deposit Insurance Corporation (FDIC)-insured commercial
banks and savings institutions reported second-quarter 2014
earnings of $40.2 billion, above the year-ago earnings of $38.2
billion by 5.3%. Notably, community banks constituting 93% of all
FDIC-insured institutions, reported net income of $4.9 billion, up
3.5% year over year.
Overall, during the second quarter, the banking industry witnessed
a gradual improvement. The number of troubled assets and
institutions significantly dipped, which is encouraging.
Further, lower loan loss provisions and improved loan growth was
recorded. Moreover, banks' revenues benefited from lower
non-interest expenses and higher net interest income. However, a
decline in non-interest income was experienced as trading income
subdued and reduced mortgage-related activity was recorded.
Banks with assets worth more than $10 billion contributed a major
part of the earnings in the said quarter. Though such banks
constitute merely 1.6% of the total number of U.S. banks, these
accounted for approximately 82% of industry earnings.
Such major banks include Wells Fargo & Co. (
), Citigroup Inc. (
), JPMorgan Chase & Co. (
) and Bank of America Corp. (
Performance in Detail
Banks are striving to reap profits and are consequently bolstering
their productivity. Around 57.5% of all institutions insured by the
FDIC reported improvement in their quarterly net income, while the
remaining recorded a decline in comparison to the prior-year
quarter. Moreover, the percentage of institutions reporting net
losses for the quarter slumped to 6.8% from 8.4% in the last-year
The measure for profitability or average return on assets (ROA)
rose to 1.07% from 1.06% in the prior-year quarter. The average
return on equity (ROE) increased to 9.54% from 9.46%.
Net operating revenue was $169 billion, down 0.9% year over year.
The decrease was due to a fall in non-interest income, mostly
offset by an increase in net interest income.
Net interest income was recorded at $105.5 billion, up 1.9% year
over year. The average net interest margin declined to 3.15%, from
3.25% in the prior-year quarter, depicting the lowest quarterly
margin for the industry since the third quarter of 1989. Notably, 9
of the 10 largest banks recorded reduced margins as compared with
the prior-year quarter.
Non-interest income declined 5.3% year over year to $63.5 billion
for the banks. Notably, income from sale, securitization and
servicing of 1-to-4-family home mortgages suffered a fall. Further,
trading revenue decreased 10.1% year over year and represented the
fourth consecutive quarter of decline.
Total non-interest expenses for the institutions were $104.9
billion in the quarter, down 1.4% on a year-over-year basis.
Reduced expenses for goodwill impairment and lower salaries and
employee benefits led to the decline. However, litigation expenses
were on the downside.
Overall, credit quality considerably improved in the reported
quarter. Net charge-offs fell to $9.9 billion from $14.1 billion in
the second quarter of 2013. Notably, all major loan groups recorded
a year-over-year decline in charge-offs, except auto loans.
In the quarter, provisions for loan losses for the institutions
came in at $6.6 billion, down 22.4% year over year. The reported
figure represents the lowest quarterly loan loss provisions since
the second quarter of 2006.
The level of non-current loans and leases (those 90 days or more
past due or in non-accrual status) declined 24% year over year to
$181.8 billion. Moreover, the percentage of non-current loans and
leases fell to 2.24%, which was the lowest since the second quarter
of 2008 (2.09%).
The capital position of the banks was strong. Total deposits
continued to rise and were recorded at $11.9 trillion, up 10.2%
year over year. Further, total loans and leases came in at $8.1
trillion, up 4.9% year over year.
As of Jun 30, 2014, the Deposit Insurance Fund (DIF) balance
increased to $51.1 billion from $48.9 billion as of Mar 31, 2014.
Moreover, assessment revenues primarily drove the growth in fund
Bank Failures and Problem Institutions
During the second quarter of 2014, seven insured institutions
failed compared with 12 failures in the prior-year quarter. As of
Jun 30, 2014, the number of "problem" banks declined from 411 to
354, reflecting the 13th consecutive quarter of decrease. Total
assets of the "problem" institutions also fell to $110.2 billion
from $126.1 billion.
Though decline in the number of problem institutions is
encouraging, the quarter remained challenging with soft trading
volumes, sluggish mortgage banking activities and high legal costs.
Moreover, top-line growth remains uncertain as pressure on net
interest margins from a nagging low rate environment prevails.
However, banks have been gradually easing their lending standards
and trending toward higher fees to dodge the pressure on the top
line. Then again, continued expense control and stable balance
sheets should act as tailwinds in the upcoming quarters. Further, a
favorable equity and asset market backdrop, and favorable
macroeconomic factors - such as falling unemployment, a progressive
housing sector and flexible monetary policy - should pave the way
With lingering uncertainty in the economy, we do not see this
issue-ridden sector returning to its pre-recession peak anytime
soon. What encourages us though is that the U.S. banks are getting
accustomed to increased legal and regulatory pressure and resorting
to safer alternatives for higher earnings. This indicates their
ability to better encounter challenges and grow at a moderate
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