FDIC insured commercial banks and savings institutions reported net income of $36.0 billion for the third quarter of 2013 which was a $1.5 billion (3.9%) decline from the previous year. The FDIC attributed the lower quarterly earnings to a $4 billion increase in legal expenses at “one institution.”
Although the FDIC did not name the bank involved it is no secret that the bank in question was JPMorgan Chase & Co. which reported a third quarter loss of $380 million after taking a $7.2 billion charge to cover litigation and regulatory investigations. JPMorgan has been under relentless assault by regulators ever since the financial crisis of 2008 and a trading loss of $6.2 billion in 2012. Since 2010 JPMorgan has set aside a massive $20 billion for legal and regulatory costs and spent $8 billion on legal fees.
Quarterly banking profits were also adversely impacted by lower mortgage fees as refinancing activity declined due to the increase in interest rates and from lower gains on asset sales.
Of the 6,891 institutions insured by the FDIC, half had an increase in earnings over the prior year and half saw earnings decline. Five years after the banking crisis 8.6% of all banks are still unprofitable although the number declined from 10.7% from the prior year. Another sign of weakness during the quarter was shown by the decline in return on assets to 0.99% from 1.06% a year ago and a decline on average return on equity to 8.92% from 9.35% a year ago.
Another sign of a banking industry still struggling to recover was shown by a decline of 3.6% or $6.1 billion in third quarter net operating revenue to $163.3 billion. Also contributing to a slow banking industry recovery is the low average net interest margin of 3.26% which is at the lowest level since reaching 3.2% in the fourth quarter of 2006. The average net interest margin in the difference between a bank’s average yield earned on loans and the average cost of funding loans and investments.
Banks benefited in the third quarter from lower loan loss provisions of $5.8 billion which was down $8.8 billion or 60% from the previous year and the lowest since the third quarter of 1999. Noncurrent loans and leases 90 days or more past due declined by $18.3 billion or 7.7% from last year and delinquencies declined to 2.83%, the lowest level since the third quarter of 2008.
Total loan balances increased by $69.7 billion or 0.9% during the quarter but income from mortgage originations declined by 45% from the prior year as higher mortgage rates reduced the demand for mortgage refinances.
Summarizing the third quarter results, FDIC Chairman Martin J. Gruenberg noted that “Most of the positive trends we have been seeing in industry performance continued in the third quarter. Fewer institutions reported quarterly losses, lending grew at a modest pace, credit quality continued to improve, more banks came off the ‘Problem List,’ and fewer banks failed.”