Category Archives: FDIC

2012 proves strong year for bank earnings

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The FDIC reported numbers for the fourth quarter and the full year 2012 yesterday that paint an industry experiencing improving conditions. Earnings are up, deposit funds are flowing into banks at record rates, fewer banks are losing money, and fewer banks remain on the agency’s problem list.

The nation’s 7,083 banks and thrifts reported combined earnings of $141.3 billion for the year. That’s the second-highest ever in a single year behind 2006’s $145.2 billion and 19.3 percent ahead of 2011. The FDIC said the increase was attributable to lower expenses for loan-loss provisions and higher fee income. Most of the income was earned by the nation’s largest banks. The nation’s 2,205 banks with less than $100 million in assets reported combined net income for the year of $920 million.

Asset quality improved across the industry with noncurrent loans falling for the 11th consecutive quarter. Deposits continued to pour into banks, with an increase of $313.1 billion. At 3 percent, that’s the biggest quarterly gain ever. The FDIC’s problem list, which peaked first quarter of 2011 at 888, closed 2012 at 651, marketing the seventh consecutive quarterly decline.

Read the FDIC press release by clicking here.

Banks across the Upper Midwest generally reported earnings in line with the national averages. There is a general decline in the number of institutions, with most of the decline occurring among institutions with less than $100 million in assets.

In Illinois, for example, the number of banks in the state has declined to 560 from 607 in 2010, although the number of banks with less than $100 million in assets has declined by 33 in that time to 226, compared to banks with more than $100 million in assets which have declined by 14 to 334. Nonetheless, earnings at the smaller banks are improving. The smaller banks reported collective earnings of $68 million for 2012 compared to $26 million last year. That’s a 161 percent improvement in earnings despite a 7 percent drop in the number of institutions in that size category. Still, the return on assets and return on equity for smaller banks were below the national average: 0.54 percent for Illinois banks versus 0.72 percent for the country on ROA, and 4.73 percent versus 5.95 percent on ROE.

Banks in Iowa and the Dakota were among the nation’s leaders based on ROA and ROE. Iowa banks (of all sizes) averaged 1.16 percent ROA compared to the all-bank national average of 1.00, and 11.16 percent ROE compared to the national all-bank average of 8.92 percent. Larger banks did better in Iowa than smaller banks: 1.17 percent ROA for large banks versus 1.06 percent for smaller banks; and 11.47 percent ROE for large banks compared to 8.98 percent for smaller banks. All North Dakota banks averaged 15.32 percent ROE (11.72 percent for smaller banks and 15.62 for larger banks), and 1.61 percent ROA (1.16 percent for smaller banks and 1.65 percent for larger banks). South Dakota’s numbers came in at 9.98 percent ROE (10.03 percent for smaller banks and 9.98 percent for larger banks) and 1.11 percent ROA (1.14 percent for smaller banks 1.11 percent for larger banks).

Minnesota’s 379 banks earned $603 million for all of 2012. This total does not include earnings from Wells Fargo or U.S. Bank which have their charters in other states. There are 205 banks with less than $100 million in assets in the state; that’s down from 231 two years ago. The smaller banks collectively earned $87 million last year, compared to $43 million two years ago. All banks combined, returned 0.93 percent on assets (0.83 percent for small banks; 0.95 percent for larger banks), and returned 8.92 percent on equity (7.71 percent for small banks; 9.17 percent for larger banks). The percentage of unprofitable institutions in the state continues to decline. In 2012, 10 percent of the banks lost money, compared to 2010 when 23.27 percent of the banks lost money.

After $100 million, economies of scale hard to find at community banks

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The FDIC’s Community Banking Study published in December includes an interesting discussion on economies of scale in the community banking sector. Conventional wisdom generally says banks achieve greater economies of scale as they get larger. But the FDIC suggests that beyond a relatively low threshold, greater efficiencies really are not achieved at community banks.

The FDIC conducted research specifically designed to determine if economies of scale exist among community banks. (See chapter 5 of the study.) The FDIC looks at banks specializing in agricultural lending and banks that specialize in commercial real estate lending. It isolates the years 2006 and 2009 for the analysis.

The FDIC analysis found that CRE specialists, in fact, have a potential benefit from economies of scale according to 2006 data. Their average costs declined by about 400 basis points between asset sizes of $10 million and $10 billion.

However, the analysis showed almost no cost difference for CRE lenders ranging from $100 million to $1 billion. The benefits beyond $1 billion were very small, the FDIC said.

“In other words, the majority of efficiency gains are achieved by $100 million in total assets,” the FDIC said.

The average cost curve estimated for CRE specialists in 2009 looks somewhat different, although it still shows that average costs level off above $500 million, indicating that most cost advantages are realized by $500 million.

For the agricultural lending specialty group, there is less evidence of economies of scale, the FDIC said. There is very little difference in estimated costs between the smallest and largest banks, and there are no statistically significant cost advantages beyond $100 million in total assets, the FDIC says in the report.

The FDIC’s conclusion is striking: “These results show that while some small community banks may be able to reduce their average costs through growth, there is no indication of any significant benefits beyond $500 million in asset size. Much of the benefit from economies of scale appears to dissipate once community banks reach $100 million in total assets.

“Therefore, while economies of scale may create incentives for banks to grow toward $100 million in total assets, depending on lending specialty, scale considerations are probably not the most important factors driving consolidation above that size threshold.”

Minnesota bank closed

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Andover, Minn.-based 1st Regents Bank was closed by the Minnesota Department of Commerce on Jan. 18. Minnetonka, Minn.-based First Minnesota Bank will purchase the failed bank from the FDIC.

The FDIC press release can be found here.

The country’s second bank failure in 2013, the closed bank opened in 2001 and grew to $90 million in assets by the end of 2009. However, at that point it began to lose money. With $142,000 in earnings in second quarter 2008, that quarter was the last in which the company earned a profit. By the fourth quarter 2010 the bank’s equity capital had declined below 4 percent and the bank had lost $8.9 million.

As of third quarter 2012, 1st Regents had gone without profit for 12 consecutive quarters, it had shed one of its two branches and had lost $14.5 million, with $908,000 in losses in the first three quarters of 2012. The bank’s equity capital also had shrunk to 1.84 percent and its assets had declined to $50.2 million.

For a quarter by quarter breakdown of 1st Regents performance since 2008, click here.

First Minnesota Bank will purchase 1st Regent’s $49.1 million in deposits, in addition to nearly all of its assets. The purchasing bank will pay the FDIC a premium of 2 percent to assume the deposits of the failed bank. The FDIC estimates that the cost to the Deposit Insurance Fund will be $10.5 million. The last FDIC-insured institution closed in Minnesota was First Commercial Bank in Bloomington in September, 2012.

First Minnesota Bank has $392 million in assets with 10 locations throughout the Twin Cities area.

Questionable CBO analysis really hurt TAG extension effort

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Community bankers who supported extension of the Transaction Account Guarantee for another two years have a right to be upset about the results of Thursday’s Senate vote on S.3637. The procedural 50-42 vote effectively killed the bill in the Senate.

The Congressional Budget Office’s analysis of the bill provided cover for most of the Republicans in the Senate to vote no. I have to say that the CBO analysis is highly questionable. Why, for example, is the CBO making a 10-year cost impact projection when the bill only seeks a two-year extension of TAG?

CBO says the FDIC would likely under-estimate the cost of future bank failures, and therefore charge a premium that is too low, presumably leaving taxpayers with the remainder of the cost. CBO puts that cost at $110 million in the next decade. It is amazing to me that CBO thinks it knows how to project the cost of future bank failures better than the FDIC.

Whenever a bank fails, the FDIC projects the cost to the Deposit Insurance Fund. The true cost often is not known for years, but history tells us the FDIC typically estimates conservatively, meaning they almost always project worst-case scenarios that result in estimated costs that exceed the actual costs. To the extent that bank failures are predictable, the FDIC does a pretty good job, so I don’t understand why the CBO builds its analysis on the idea that the FDIC will underestimate the cost.

I also wonder whether Sen. Reid was a true friend on this one. He was the author of S. 3637, which made him a hero in the eyes of TAG supporters, but by adopting procedure that prohibited amendments, there was no way to address the CBO analysis, accurate or not. If amendments had been allowed, certainly some amendment could have been offered to placate those really worried that the FDIC wouldn’t charge enough for the extra deposit insurance coverage.

The other disappointing character in this debate was the Wall Street Journal. The newspaper viciously editorialized against the extension of TAG. The newspaper always portrayed TAG as a taxpayer liability. It refused to acknowledge that the industry pays for the extra coverage. The WSJ, which I normally respect, got this one completely wrong.

There are still a couple of weeks to go before the end of the year. TAG advocates should continue to make their case until Dec. 31. Perhaps something will happen making it possible to insert a TAG extension into some other piece of must-pass legislation.

Another look at third quarter earnings

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Third quarter numbers from the FDIC show that Iowa continues to be the state with the strongest bank earnings picture in the Midwest. Return on assets for the 340 banks in Iowa was 1.2 percent through three quarters; return on equity was 11.62 percent.

Michigan reported better overall numbers, with 1.62 percent ROA and 15.85 ROE, but that was skewed toward the largest banks. In Michigan, banks with more than $100 million in assets reported 1.65 percent ROA and 16.56 percent ROE, while banks with less than $100 million in assets reported 0.76 percent ROA and 4.65 percent ROE.

In Iowa, the numbers are far more evenly distributed with banks over $100 million reporting ROA of 1.21 percent and ROE of 11.91 percent, while smaller banks reported 1.16 percent ROA and 9.83 percent ROE.

While the key ratios look strong at Iowa banks, net income figures show larger banks making big gains while smaller banks basically stayed the same. Banks with more than $100 million in assets reported net income of $553 million through three quarters this year, compared to $435 million last year and $315 million two years ago. Smaller banks reported $74 million in earnings this year, compared to $78 million last year and $75 million two years ago.

In Minnesota earnings at both large banks and small banks increased, although they increased more at the larger banks. Minnesota’s 209 banks with fewer than $100 million in assets reported $72 million in net income, compared to $67 million last year and $45 million two years ago. Minnesota 171 banks with more than $100 million in assets reported $322 million in net income this year, compared with $236 last year and $105 million two years ago.

Minnesota banks reported ROA of 0.80 percent (0.89 percent for smaller banks and 0.78 percent for larger banks) and ROE of 7.75 percent (8.22 percent for smaller banks and 7.65 percent for larger banks).

Earnings look good through three quarters

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Banks across the country are reporting much healthier earnings than they were last year and two years ago. The FDIC reported today that the nation’s banks recorded $37.6 billion in income during the third quarter, the 13th quarter in a row when earnings have exceeded those reported a year prior. This press release provides many of the details.

Smaller banks are participating in the industry-wide success, although the number of banks with fewer than $100 million in assets continues to decline. At the end of the third quarter, 2,287 banks with less than $100 million in assets reported $720 million in year-to-date earnings. That compares with $570 million reported by 2,491 banks at the end of the third quarter in 2011, and $454 million earned by 2,682 banks at the end of the third quarter in 2010. Two years ago, those banks had assets of $151 billion ($92 billion were loans) but today they have assets of $132 billion and just $75 billion are loans.

The average return on assets for all banks is 1.02 percent, the first time it’s been over 1.0 percent since the financial crisis of 2008. Smaller banks, however, tend to lag. Banks with fewer than $100 million in assets now have an aggregate return on assets of 0.73 percent, compared to 0.54 percent a year ago, and 0.40 percent two years ago.

Return on equity for all banks is 9.02 percent, compared to 8.18 percent in 2011 and 5.83 percent in 2010. For banks with fewer than $100 million in assets, the aggregate ROE is 6.12 percent, compared to 4.6 percent a year ago and 3.35 percent two years ago.

Bair points to middle-ground on TAG

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Congress should end TAG, but they should phase it out, former FDIC Chairman Sheila Bair told the American Banker in an interview.

“Releasing these deposits at once will send even more money into a system that is already washed with liquidity,” Bair said. “We don’t really know what the impact would be.”

Instead of turning the switch off entirely, Bair suggests Congress place a $1 million cap on the insurance in 2013. In 2014, the cap could be reduced to $500,000 and finally to $250,000 in 2015.

Bair recognizes the force of the arguments made by small banks. “Legitimate issues have been raised about going full stop,” she said. “[But TAG] was always meant to be a temporary emergency program. We have too much government involvement in the markets. We are supposed to be a market based economy; the financial sector has almost everything guaranteed these days.”

While Bair believes TAG should end, she recognizes the inequity of removing a government guarantee for small banks while an expressed or implied guarantee remains for money market companies and big-big banks. “The community banks are small enough to fail and everybody knows it. This program helps them stabilize their liquidity,” Bair said. “Money market funds are not fixed yet and they are still out there with their implied government guarantee. We have made progress removing too big to fail, but we are not there yet. If deposits move, they will go to one of [these] two places, both of which are enjoying implied government backstops. I don’t like that either,” she said.

To even the playing field, Bair suggests Congress continue to reform big banks and money market providers, and ultimately remove their government guarantee.

Bair on Pandit

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The board of directors at Citigroup has forced out their CEO, Vikram Pandit. The Wall Street Journal describes the ouster in this morning’s edition. The key question is, why now? The company has been struggling since the financial crisis, and its stock has been trading in the $30-$45 range since mid-2009. What is it that pushed the directors to take action?

I wonder how many of the directors have read Sheila Bair’s book, “Bull by the Horns.” The former chairman of the FDIC has some pretty harsh criticism of Pandit in her account of the financial crisis. Bair writes this on page 2:

“Pandit looked nervous, and no wonder. More than any other institution represented in that room, his bank was in trouble. Frankly, I doubted that he was up to the job. He had been brought in to clean up the mess at Citi. He had gotten the job with the support of Robert Rubin, the former secretary of the Treasury who now served as Citi’s titular head. I thought Pandit had been a poor choice. He was a hedge fund manager by occupation and one with a mixed record at that. He had no experience as a commercial banker; yet now he was heading one of the biggest commercial banks in the country.

In chapter 15 of her book, Bair describes the downgrade of Citi to a CAMELS 4, and then the process of the bank regaining a 3-rating. While describing how the bank got its upgrade, she writes:

Citi also agreed to hire an independent consultant to review its management from top down and benchmark their qualifications and performance against other banks’.

 

I had no doubt that Pandit would compare unfavorably to deeply experienced bank CEOs such as Jamie Dimon at JPMorgan Chase, John Stumpf at Wells Fargo, Richard Davis at U.S. Bancorp, and James Rohr at PNC. These gentlemen were not perfect, but they did have decades of experience running commercial banks. They had all done a good job steering their institutions through the 2008 crisis and avoiding much of the high-risk activity in the years leading up to the crisis that got Citi and others into trouble. What astounded me was why the Citigroup board hadn’t gone higher for a respected, experienced commercial banker. It could have done so much better than Pandit…

Clearly, if any of the board members were wondering about Pandit, and perhaps giving him the benefit of the doubt, they probably gave up on that after reading Bair’s book.