MADISON, Wis. (11/24/10)--Commercial banks and savings institutions insured by the Federal Deposit Insurance Corp. (FDIC) reported an aggregate profit of $14.5 billion in the third quarter of 2010, a $12.5 billion improvement from the $2 billion the industry earned in the third quarter of 2009. This could have good implications for credit unions, a Credit Union National Association (CUNA) economist said. This is the fifth consecutive quarter that bank earnings have registered a year-over-year increase, the FDIC said in Tuesday release. “In dollar terms, the profits are substantially higher than they were in the recent past,” Mike Schenk, CUNA vice president of economics and statistics, told News Now. “But total profits at banks have been severely depressed. For 2008 and 2009, banks essentially earned nothing. So the big increase in dollar terms was a big increase off a very small base. “And the earnings this year, while substantially a higher than 2008 and 2009 remain significantly lower than the earnings recorded before the start of the recession--and more importantly--substantially lower than the long-term norm,” he added. Bank return on investment, or ROA (net income as a percentage of average assets), was 0.81% in 2007, plummeted to 0.03% in 2008, and remained severely depressed at 0.07% in 2009, Schenk said. Annualized earnings in 2010 have rebounded to 0.56%. That level of earnings remains less than half the average earnings rate that banks recorded in the decade before the start of the recession, he added. Why are bank profits up? "Due to a marginally improving economy, the loss provisions are not as high as in the past,” Schenk explained. “Importantly, the decline in bank loan balances that have been obvious in the recent past look like they have largely abated; loan demand seems to be picking up. “So if that’s happening in the banking sector, that will likely happen in the credit union sector,” he continued. “We are expecting a release of National Credit Union Administration data within the next two weeks and would then be able to confirm whether this is actually happening.” The report does not say what percent of the new profits comes from new fees. Some banks have begun charging their customers new fees to counteract the costs of regulation, and have been criticized for doing so at a time consumers are struggling with the economy. “The industry continues making progress in recovering from the financial crisis. Credit performance has been improving, and we remain cautiously optimistic about the outlook,” said FDIC Chairman Sheila C. Bair. “Lower provisions for loan losses are driving bank earnings by allowing a larger share of revenues to reach the bottom line. “[However], 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,” Bair added. “When it comes to the adequacy of reserves, institutions should always err on the side of caution.” The FDIC said the number of institutions on its “Problem List” rose from 829 to 860. However, the total assets of “problem” institutions declined from $403 billion to $379 billion. The number of “problem” institutions is the highest since March 31, 1993, when there were 928. Forty-one insured institutions failed during the third quarter, bringing the total number of failures for the first three quarters of the year to 127. In 2010, there have been 149 bank failures to date. Bank’s Deposit Insurance Fund (DIF) balance also improved for the third consecutive quarter. The DIF balance--the net worth of the fund--improved from a negative $15.2 billion to a negative $8 billion during the third quarter. The improvement stemmed primarily from assessment revenues and from a reduction in the contingent loss reserve. This reserve, which covers the costs of expected failures, declined from $27.5 billion to $21.3 billion during the quarter. While part of the decline reflects the removal of amounts reserved for banks that failed, a part also reflects lower costs for future failures. The FDIC said its liquid resources--cash and marketable securities--remained strong. Liquid resources stood at $43.7 billion at the end of the third quarter, essentially unchanged from the second quarter. “While we expect demands on cash to continue, our projections indicate that our current resources are more than enough to resolve anticipated failures and meet outstanding obligations for banks that have already failed,” Bair said. Total insured deposits declined by 0.3% ($15 billion) during the quarter. “The industry has come a long way in cleaning up balance sheets, building capital, and adjusting to changes in financial markets and the economy. But the adjustments are not over, and this is no time for complacency,” Bair concluded. To read the FDIC release, use the link.