WASHINGTON — A pullback in reserves helped drive another solid profit for banks and thrifts last quarter, but the Federal Deposit Insurance Corp.'s assessment of the industry's health Tuesday was tempered by mortgage fallout concerns.
Officials said the robo-signing scandal could leave banks with a financial hit, including the extreme case of judges forcing them to recoup loans. That combined with residual losses and a slow recovery means banks should not rest on their laurels, they said.
"The adjustments are not over, and this is no time for complacency," FDIC Chairman Sheila Bair said at the release of the Quarterly Banking Profile.
Institutions earned $14.5 billion in the quarter, well above their $2 billion profit a year earlier. The FDIC said earnings would have been higher — the profit was 3% less than in the previous quarter — were it not for a huge goodwill impairment charge at one institution.
The FDIC said the smallest industry loss provision in three years, of $34.9 billion, drove the earnings, as well as higher interest income resulting from recent accounting changes. The set-aside was 44% less than a year earlier. Total loss reserves fell for the second straight quarter, by 3.8%, to $242 billion. Industry assets grew 1.2% to $13.4 trillion — the first genuine growth in almost two years — but that was attributed to trading and other investment activities, and not lending.
While Bair said a decline in reserves allows more "revenues to reach the bottom line," she warned against hastily removing buffers.
"Many institutions came into the recent crisis with inadequate reserve levels, and they need to exercise restraint in drawing them down now," she said. "At this point in the credit cycle it is too early for institutions to be reducing reserves without strong evidence of sustainable, improving loan performance and reduced loss rates."
Amid more housing uncertainty, Bair said capital remains paramount. She cited "new questions about contingent liabilities" banks could face from discrepancies in loan documentation.
Some have feared risk from banks potentially having to take back loans which had been securitized. Regulators are considering guidance on the risks of poor documentation while they assess the extent of the problem at large servicers. A number of government-sponsored enterprises have already sued big banks.
"We've already seen significant public commentary about investor unhappiness and put-back risk. Obviously these securitized, serviced loans are subject to reps and warranties that could be impacted by the situation," Bair said. "We don't have all the facts yet, but I think it's something to be aware of."
The report said the industry showed its first meaningful asset growth since the fourth quarter of 2008. Still, loans declined for the eighth time in nine quarters, falling 0.1% to $7.4 trillion. Construction and credit card loans both decreased. But loans to other institutions grew strongly. The growth was slighter in other categories. The industry had its first quarterly growth in commercial and industrial loans — 0.4%, to $1.17 trillion — in eight quarters and its first increase for mortgages — 0.3%, to $1.88 trillion — in six quarters.
FDIC officials said while institutions are ready to lend, borrowers appear slow to come in the door.
"You've seen institutions cleaning up their balance sheet. You've seen through regulatory surveys that lending standards have stopped tightening. … I do think that loan demand has lagged behind somewhat," said Richard Brown, the agency's chief economist.
"History shows that cycles of contraction are sustained. They run their course. And cycles of expansion are sustained and they run their course as well. We're poised to see a cycle of expansion in the next couple of quarters."
The growth in assets was largely due to other investments made by banks, including a 4.5% rise in securities portfolios to $2.6 trillion, and a 12.8% rise in assets kept in trading accounts to $766 billion.
The agency said net interest income rose by 8% from a year earlier, to $323 billion. Earnings also received a boost from realized sales on securities, which totaled $3.2 billion, rebounding from the $4 billion in realized losses from a year earlier. Nearly two out of three institutions were profitable.
The report also said several factors kept earnings at bay, including noninterest expenses that were 16% than a year earlier. Income taxes also proved a drain, rising by $11 billion from a year earlier.
Meanwhile, both net chargeoffs and noncurrent loans declined. The $42.9 billion in net charge-offs were almost 12% lower than in the previous quarter. Year over year, net charge-offs for C&I loans fell 41.8%, to $5 billion, as did those for construction and development loans (32.4%, to $5.2 billion).
After the second quarter saw a drop in noncurrent loans for the first time in four years, the industry lowered its bad loans again in the third quarter. Noncurrents fell 2.1% to $378 billion. The largest numerical decline was for noncurrent C&D loans, which decreased by $5.7 billion to $58.8 billion.
The industry showed a strong capital performance in the quarter. The industry's Tier 1 leverage capital rose 2.1% from the prior quarter to $1.16 trillion, while overall equity capital rose 1.2% to $1.52 trillion. The FDIC said nearly three out of four institutions grew both their leverage capital and their total risk-based capital.
The QBP said institutions on the "Problem" list rose by 31 to 860, while assets of institutions on the list declined for the second straight quarter, by 6% to $379 billion. Meanwhile, the agency's insurance reserves to insured deposits rose by 13 basis points to negative-0.15%.