FDIC Data Shows Improving Banking System -- but New Warnings Too

The banking system continues to recover from the financial crisis of 2008, but banks have new loan problems in the oil and gas industry, are saddled with reduced trading income and suffer from low net interest margins.

On the positive side of the ledger, the Federal Deposit Insurance Corporation Quarterly Banking Profile for the first quarter shows rising loan balances and fewer problem banks.

On the negative side, the FDIC shows increasing noncurrent loans and a rise in reserves for losses for the first time since the credit crisis began.

FDIC Chairman Martin J. Gruenberg summed it up: "The banking industry reported mixed results for the first quarter. By many measures, the industry had a positive quarter. However, noncurrent loans to the oil and gas industry rose sharply and net interest margins remained low by historical standards."

The number of FDIC-insured institutions continues to decline, with 60 fewer in the quarter vs. the end of 2015, and down 28.3% since the end of 2007, to 6,122. Despite fewer banks, employment in the banking industry rose for the first time since the end of 2007, with a gain of 0.3% in the quarter, but still down 7.9% since the end of 2007. The FDIC list of problem banks continues to decline, but 165 troubled banks is still 117% above the number at the end of 2007.

Here's a portion of the FDIC QBP.

 

Total assets continue to rise; they're now up 25% since the end of 2007 to $16.29 trillion, with 42.2% controlled by the four "too big to fail" money-center banks. Wells Fargo (WFC) is now the second-largest bank, pushing Bank of America (BAC) down to third place. Wells Fargo is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio.

Residential Mortgages (one- to four-family structures) represent the mortgage loans on the books of our nation's banks. Banks continue to slowly increase mortgage issuance, but production is down 14.6% since the end of 2007, which is a sign that regional banks remain reluctant to lend.

Nonfarm and nonresidential real estate loans represent lending to construction companies and homebuilders to build office buildings, strip malls, apartment buildings and condos, which have been a major focus for community banks. This category of real estate lending continues to expand and is up 29.2% since the end of 2007.

Construction and development loans represent loans to community developers and homebuilders to finance planned communities. This was the Achilles heel for community banks and the major reason why more than 500 banks were seized by the FDIC since the end of 2007. The recovery in this real estate loan category has been solid in recent quarters. C&D loans were up 3.4% in the first quarter, but are down 54.8% since the end of 2007. C&D loans now total $284.2 billion, up from a bottom of roughly $200 billion, which includes legacy non-current loans.

Home equity loans represent second lien loans to homeowners who borrow against the equity of their homes. Many of these loans failed as homeowners became underwater on their original mortgages. According to the S&P/Case-Shiller Home Price Indices released on May 31, the price of an average single-family home is up 37% since the March 2012 low, yet home equity loans continue to slide. Regional banks typically offer HELOCs, but these loans declined 1.7% in the first quarter and are down 24.7% since the end of 2007. This is another clear sign that banks are reluctant to lend.

Total real estate loans sums it all up. The total of these loans increased by just 0.9% in the first quarter, down from an increase of 1.3% in the fourth quarter. Total real estate loans are down 12.1% since the end of 2007.

Other real estate owned declined 4.4% in the first quarter, down from a decline of 8.8% in the fourth quarter, as banks slowed the pace of selling foreclosed homes and properties on their books. The banks are still taking advantage of the increased prices of homes. Even so, OREO remains 15.7% above the level at the end of 2007, and peaked at $53.2 billion in the third quarter of 2010, which was a peak for foreclosure activities.

Notional amount of derivatives has been a financial stress among the seven largest banks. The overall exposure ballooned by 7.4% in the first quarter after declining by 6.5% in the fourth quarter. At $195.5 trillion, this potential hidden risk is 17.7% above the level at the end of 2007.

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 gain of 3.4% to $75.1 billion has the FDIC well on its way to satisfy the regulatory guidelines, which is to have the fund at 1.35% of insured deposits by Sept. 20, 2020. At the current level of insured deposits, the DIF would have $90.45 billion, so there is still work to do.

Insured deposits grew by 2.5% in the first quarter to an estimated $6.7 trillion, up 56.1% since the end of 2007. This growth can be attributed to the rise in deposit insurance guarantees to $250,000 from $100,000, which occurred during the height of the credit crisis.

Reserves for losses had been declining during the healing process of the banking system, but rose by 1.8% in the first quarter. This is a sign of renewed stress, with reserves now up 18.6% since the end of 2007.

Noncurrent loans have also been declining, but that trend ended in the first quarter with an increase of 2.4%. Noncurrent loans are now 28.4% above the level at the end of 2007.

Here's the bottom line from Gruenberg: "Revenue increased from a year earlier and loan balances expanded at the highest 12-month rate since 2008. However, a prolonged period of low interest rates has narrowed margins and caused some institutions to reach for yield. More recently, low energy prices have led to a sharp increase in noncurrent loans to oil and gas producers. We will continue to monitor closely the evolving environment in which the U.S. banking industry is operating. And we will remain vigilant in our supervisory activities."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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