Banks’ yields improve by 6.6%

Quarterly gains best in six years

— U.S. banks earned more from July through September than in any other quarter over the past six years.

The Federal Deposit Insurance Corp. said Tuesday that the banking industry earned $37.6 billion in the third quarter, up 6.6 percent from $35.3 billion in the third quarter of 2011.

About 57 percent of the banks reported improved earnings, which allowed them to set aside less for losses on loans. And the number of troubled banks fell to the lowest level in three years.

“Banks had set aside a lot of money to cover loan losses that never occurred,” American Bankers Association Chief Economist James Chessen said. “They don’t see loan losses so great in the future that they need those large balances.” The cuts will level off at some point, Chessen said.

In Arkansas, banks earned about $185 million in the third quarter, up more than 13 percent from the third quarter of 2011.

The third quarter net income in Arkansas is the highest since before the turn of the century.

“I think banks in Arkansas are reflective of how banks are doing on a national basis,” said Garland Binns, a Little Rock banking attorney.

For the second straight quarter nationally, loans to consumers increased in most categories, including home mortgages and auto loans. That suggests banks are becoming less cautious, which could help the broader economy. More lending leads to more consumer spending, which drives roughly 70 percent of economic activity.

Still, the increase in consumer lending was “relatively modest” and regulators would like to see more of it, FDIC Chairman Martin Gruenberg said.

“This was another quarter of gradual but steady recovery,” he said. “Overall the news is encouraging, but continuing downside economic risks remain.”

Gruenberg said banks are worried about what will happen with the “fiscal cliff.” That’s the name for automatic tax increases and spending cuts that will kick in next month unless President Barack Obama and congressional lawmakers reach a deal by then to avert them.

For the first time since 2009, the biggest contributor to the earnings was increased revenue rather than reductions in what banks set aside for loan losses, the FDIC said.

Revenue increased 3 percent in the third quarter from the same quarter a year ago, after showing sluggish growth in previous quarters. A large part of the increase came from sales of loans to other institutions. That shows continued weakness in other sources of revenue, such as interest on loans, Gruenberg said.

Banks with assets exceeding $10 billion drove the bulk of the earnings growth in the July-September period. While they make up just 1.5 percent of U.S. banks, they accounted for about 82 percent of the earnings.

Those banks include Bank of America Corp., Citigroup Inc., JPMorgan and Wells Fargo & Co. Most of them have recovered with help from federal bailout money and record-low borrowing rates.

The number of banks on the FDIC’s confidential “problem” list fell in the third quarter to 694, or around 9.6 percent of all federally insured banks. That compares with 732 troubled banks in the second quarter.

The list of problem banks was at its highest just two years ago at 860 banks, Binns said.

So far this year, 50 banks have failed. That’s far below the 92 banks that shuttered last year and the 157 that closed in 2010 — the most for one year since the height of the savings and loan crisis in 1992.

In the third quarter, the decline in bank failures allowed the insurance fund to strengthen. The fund turned from deficit to positive in the second quarter of 2011 and had a $25.2 billion balance as of Sept. 30, according to the FDIC. That compares with $22.7 billion at the end of June.

The FDIC is backed by the government, and its deposits are guaranteed up to $250,000 per account. Apart from its deposit insurance fund, the agency also has tens of billions in loss reserves.

Information for this article was contributed by David Smith of the Arkansas Democrat-Gazette and Jesse Hamilton of Bloomberg News.

Business, Pages 25 on 12/05/2012

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