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U.S. Banks Continue Recovery (Update 1)

The FDIC reported that the industry continued to see pressure on net interest margins, which was no surprise, as the Federal Reserve has kept its short-term federal funds rate in a target range of zero to 0.25% since late 2008, while purchasing long-term securities in an effort to keep long-term rates at their historically low levels. Most banks have already seen most of the benefit from a decline in funding costs, while loans continue to reprice at lower rates and new securities investments also carry lower rates.

The industry's aggregate net interest margin -- the average yield on loans and investments, less the average cost for deposits and wholesale borrowings -- narrowed to 3.43% during the third quarter, from 3.46% the previous quarter, and 3.56% a year earlier.

Despite the margin pressure, with nearly 68% of banks and thrifts reporting narrower margins, the banking industry saw its net interest income increase by $746 million year-over-year, which was "made possible by a 4.6 percent increase in interest-earning assets." Total loans and leases grew by 0.9% during the third quarter.

The FDIC also reported that the industry's third-quarter net operating revenue was up by $4.9 billion, or 3% year-over-year, and that "Almost half of all institutions (47.8 percent) reported year-over-year improvement in income from asset sales," reflecting not only profits on the sale of securities, but gains on the quick sale of newly originated residential mortgages, amid a wave of refinancing.

The number of institutions on the FDIC's "problem" list declined to 694 as of Sept. 30 from 732 the previous quarter, with 12 banks and thrifts failing. This was the lowest quarterly number of bank failures since the fourth quarter of 2008.

Once again, not a single banking charter was granted during the third quarter, making it five straight quarters since a new institution has been organized.

American Bankers Association chief Economist James Chessen said that although the third quarter was "another strong one for the banking industry... continuing uncertainty surrounding the fiscal cliff is already slowing economic activity and businesses are hesitant to borrow."

While the FDIC obviously can't do anything to influence the negotiations between President Obama and the Republican leadership in the house of Representatives over the Fiscal Cliff, Chessen said that his organization was "urging Congress to pass a temporary two-year extension of the FDIC's Temporary Account Guarantee program."

Amendments to the Federal Deposit Insurance Act extended unlimited deposit insurance coverage for noninterest-bearing transaction accounts through the end of this year, and no extension is planned by the FDIC. Chessen said that "In today's uncertain environment, security of deposits is trumping yield for businesses. A temporary extension will take at least one piece of uncertainty off the table for businesses at year-end."

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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