U.S. Banks Set Another Earnings Record: FDIC

NEW YORK ( TheStreet) -- U.S. banks continued their upward path during the second quarter, setting another industry record with earnings of $42.2 billion, the Federal Deposit Insurance Corp. reported Thursday.

Industry earnings increased from $40.3 billion in the first quarter and $34.4 billion during the second quarter of 2012. The second quarter was the 16th straight quarter of year-over-year earnings growth for the banking industry.

"The trends we have seen in recent quarters continued in the second quarter," said FDIC chairman Martin Gruenberg in the regulator's press release. "Asset quality continues to recover, loan balances are trending up, fewer institutions are unprofitable, the number of problem banks is down, and the number of failures is significantly below levels of a year ago."

But Gruenberg added that "industry revenue growth remains weak, reflecting narrow margins and modest loan growth. And the current interest rate environment creates an incentive for institutions to reach for yield, which is a matter of ongoing supervisory attention."

The regulator reported that year-over-year earnings improved for nearly 54% of reporting institutions and that the proportion of unprofitable banks and thrifts declined to 8.2%, from 8.4% the previous quarter and 11.3% a year earlier.

The combined U.S. banking industry's second-quarter return on average assets (ROA) was 1.17%, increasing from 1.08% in the first quarter and 0.99% during the second quarter of 2012.

Reserve Releases Keep Feeding Earnings

With asset quality continuing to improve, the industry's combined second-quarter provision for loan losses dropped to $8.6 billion, from $11 billion the previous quarter and $14.2 billion a year earlier. The FDIC said that provisions for reserves were at their lowest point since the third quarter of 2006.

The industry's combined loan loss reserves declined by $6.4 billion during the second quarter. While most banks continue to set aside reserves each quarter, if the provision for reserves is outweighed by net loan charge-offs, a bank "releases" loan loss reserves, which provides a boost to pretax earnings. The industry's annualized ratio of net charge-offs to average loans for the second quarter was a low 0.78%, while reserves covered 1.93% of total loans, setting the stage for a continued release of loan loss reserves, although many analysts have recently said that for large banks, the reserve releases must soon be curtailed.

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