FDIC First Quarter Data Show Improving Banking System but with Concerns
The Federal Deposit Insurance Corporation released its Quarterly Banking Profile for the first quarter of 2017 without fanfare, but investors in bank stocks need to be aware of key warning signs. While the FDIC touts continued positive financial, that they are also concerned about developing warning signs. This is extremely important as the quarterly banking profile should be considered the balance sheet for the U.S. economy.
Chairman Martin J. Gruenberg opening comments indicated that the first quarter was “largely positive” as quarterly revenue and net income was strong year over year. At issue is that loan growth slowed during the last two quarters. The FDIC Chair indicates that the banking system continues to face the challenge of a difficult interest-rate environment and competitive lending environment. Net interest margins have been difficult to manage as some banks continue to “reach for yield” buying higher-risk assets with extended maturities. Interest-rate risk, liquidity risk and credit risk needs to be monitored and will remain a focus of supervisory attention.
First quarter FDIC data shows a slight rise in Quarterly Net Income to $44 billion up from $43.7 billion in the fourth quarter, and up from $39 billion in the first quarter of 2016. Community banks had a net income of $5.6 billion up 10.4% year over year.
Here’s a portion of the FDIC Quarterly Banking Profile for the first quarter of 2017.
While the numbers of problem banks continue to decline, the number of FDIC-insured financial institutions fell to 5,856 in the first quarter down from 5,913 in the fourth quarter. Back at the end of 2007, there were 8,533 banks with only 76 on the problem list versus 112 today. The number of employees in the banking system increased to 2.08 million in the first quarter but is down 6% from 2.21 million at the end of 2007.
Total Assets rose to $16.97 trillion in the first quarter, up 30.1% since the end of end of 2007. The four “too big to fail” money center banks, JP Morgan JPM, Wells Fargo WFC, Bank of America BAC and Citigroup (C) now hold 42.1% of all assets, which remains a regulatory headache.
Residential Mortgages (1 to 4 family structures) represent the mortgage loans on the books of our nation’s banks. Production declined by $10.23 billion in the first quarter to $1.985 trillion, now 11.6% below the pace at the end of 2007.
Nonfarm / Nonresidential Real Estate Loans represent lending to construction companies to build office buildings, strip malls, apartment buildings and condos, a major focus for community banks. This category of real estate lending expanded to a record $1.347 trillion, up 39.1% from the end of 2007. This is a potential problem as on-line shopping reduces traffic at America’s malls. There are 1,584 community and regional banks overexposed to CRE lending, including 528 publicly-traded banks. This is up from 1,526 and 517, respectively, from the fourth quarter. The FDIC seems to be ignoring the guidelines that banks should not have 300% or more of risk-based capital exposed to commercial real estate loans, which includes C&D loans.
Construction & Development Loans represent loans to community developers and homebuilders to finance planned communities. This was the Achilles Heel for community banks and the reason why 523 banks were seized by the FDIC bank failure process since the end of 2007. There has been 6 such failures so far in 2017 versus just 4 for all of 2016. C&D loans were up 2% in the first quarter to $319 billion. This is still 49.2% below the level at end of 2007. There are 397 community banks overexposed to C&D lending, including 85 publicly-traded banks. This is up from 362 and 79, respectively, from the fourth quarter. The FDIC seems to be ignoring the guidelines that banks should not have 100% or more of risk-based capital exposed to risky community development loans.
Home Equity Loans represents second lien loans to homeowners who borrow against the equity of their homes. Regional banks typically offer HELOCs, but these loans continue to decline quarter over quarter, despite the dramatic rise in home prices. HELOC lending declined another 1% in the first quarter to $430 billion and is down 29.2% since the end of 2007. The Dodd-Frank law makes HELOC lending a paperwork nightmare.
Total Real Estate Loans slowed to a growth rate of just 0.4% in the first quarter to $4.08 trillion, down 8.3% since the end of 2007.
Other Real Estate Owned declined a 5.2% in the first quarter to $10.37 billion as formerly foreclosed properties return to the market. This asset category peaked at $53.2 billion in the third quarter of 2010.
Notional Amount of Derivatives remain a financial stress among the seven largest banks. This exposure grew by 8.2% in the first quarter to $180.5 trillion after plunging by 7.3% in the fourth quarter to $166.8 trillion. This exposure is up 8.7% since the end of 2007. It seems like the banking system may ignoring the Volcker Rule on proprietary trading.
Deposit Insurance Fund represents the dollars available to protect insured deposits. These monies are funded by all FDIC-insured institutions via annual assessments, with the largest banks paying the largest amounts. The first quarter sequential gain was 2% to $84.9 billion as the FDIC is well on its way to satisfy the regulatory guideline. By the end of September 2020 this fund is mandated to have the fund at 1.35% of insured deposits. The current level is unchanged at 1.20%, as the size of insured deposits rises.
Insured Deposits grew by 2.3% in the first quarter to $7.078 trillion up 64.9% since the end of 2007. This growth can be attributed to the rise in deposit insurance guarantees to $250,000 from $100,000.
Reserves for Losses up-ticked by 0.1% in the first quarter to $121.8 billion, but is still 19.7% above the level shown at the end of 2007, which is a sign of residual stress in the banking system.
Noncurrent Loans declined by a solid 5.3% in the first quarter to $125.0 billion but is still 13.7% above the level at the end of 2007. Much of this is legacy loans still in the banking system since the Great Recession.