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Bank Earnings Sink, Delinquency Soars

FDIC, FHLB release yearend data

February 26, 2008


As quarterly bank earnings tumbled to the lowest level in more than 15 years, an increase in delinquency was the highest on record. The deteriorating activity was attributed to current housing and credit conditions which are expected to continue.

The Federal Deposit Insurance Corporation reported today that commercial banks and savings institutions, excluding thrifts, originated $253.5 billion in residential mortgages during the fourth quarter. Volume was down from $274.5 billion in the third quarter.

The latest production figures included $91.5 billion in retail originations and $161.9 billion in wholesale activity. Among the 679 institutions reporting, Wells Fargo Bank N.A. was the biggest retail originator, with $24.0 billion in fundings, followed by JPMorgan Chase Bank N.A., with $16.8 billion and Bank of America N.A., at $10.4 billion. Wells was also the biggest wholesale originator, at $39.4 billion, followed by Citibank N.A. with $20.7 billion and WF NB South Central, at $18.9 billion.

The sector earned $5.8 billion in the fourth quarter -- down from $35.2 billion a year earlier and the lowest level since 1991, FDIC said.

In the report, FDIC Chairman Sheila C. Bair called the results "no surprise."

The sector earned $105.5 billion for all of last year, off from a record $145.2 billion during 2006, according to FDIC. Last year's decline ended a string of six consecutive years of record earnings.

The turn was attributed primarily to a weak residential lending sector, problems with construction loans, and sharply lower trading revenue, the report said. A few large institutions accounted for the bulk of the earnings decline -- with more than 25 percent of insured institutions with assets over $10 billion reporting a fourth quarter loss. But nearly half of all FDIC-insured institutions still saw an increase in earnings.

"Weakness in the housing sector and the credit squeeze in financial markets made it a very challenging time for many institutions," Bair stated. "And we can expect these problems to continue in 2008."

Driven by the highest 90-day delinquency level in five years, 1.39 percent, last year's loan loss provisions were $68.2 billion, more than double the $29.5 set aside by bankers in 2006, the report indicated. The increase in delinquent 90-day loans was higher than at any other time since FDIC started tracking delinquency 24 years ago.

Net interest margins reportedly declined 2 basis points from 2006 to 3.29 percent.

FDIC noted 99 percent of insured institutions were well-capitalized at the end of 2007. But while banks are managing to cope with market turmoil, they were forced to raise $29 billion in capital to cushion fourth quarter losses.

"A key issue that we'll be focusing on in the months ahead is asset quality," Bair continued. "The rising trend in noncurrent loans indicates that write-offs and loss provisions will likely remain high for the near future."

The American Bankers Association issued a statement today indicating that with $1.35 trillion in capital, the nation's 8,500 banks "are well-positioned to handle this downturn." The group noted real estate loan originations were $80 billion in the fourth quarter.

The Federal Home Loan Banks reported today net earnings of $2.8 billion last year, up from $2.6 billion in 2006.

Advances made by the FHLBanks, which are owned by their member institutions, stood at $875 billion on Dec. 31, rising 37 percent from a year earlier, according to the report.

FHLB said the weighted average FICO score on its Mortgage Partnership Finance Program portfolio loans at yearend was 738, while the weighted average loan-to-value was 67 percent. On its Mortgage Purchase Program portfolio loans, FHLB reported the weighted average credit score at 749 and the weighted average LTV at 71 percent.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: [email protected]

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