FDIC report confirms banks' mortgage exodus
Reduced mortgage volumes driving down earnings
The Federal Deposit Insurance Corp. has released its quarterly banking profile for the first quarter of 2014, and the news isn’t great for FDIC-insured banks and savings institutions.
First-quarter income for FDIC banks was $37.2 billion, down 7.6% from $40.3 billion in 2013’s first quarter. According to the quarterly banking profile, the decrease in income was due to reduced mortgage activity and a drop in trading revenue.
According to the FDIC report, this marks only the second time in the last 19 quarters that the industry has reported a year-over-year decline in quarterly earnings. To make matters just a little bit worse, both declines have occurred in the last three quarters.
Total loan and lease balances rose by $37.8 billion (0.5%) in the first quarter to $7.9 trillion, but income from mortgage-related activity was well below last year’s first quarter totals.
Noninterest income from the sale, securitization and servicing of mortgages was $4 billion (53.6%) lower than a year ago. One- to four-family residential real estate loans originated and intended for sale were $323.6 billion (70.6%) lower than in the first quarter of 2013.
“Last year’s rise in interest rates resulted in a drying-up of demand for mortgage refinancings,” the report says. “Without this demand, mortgage originations have fallen sharply, and mortgage revenue has declined by almost one-half.”
In fact, a majority of banks, 55.6%, reported lower noninterest income than in first quarter 2013.
The FDIC reported that realized gains on available-for-sale securities also were lower than a year ago, as higher medium- and long-term interest rates reduced the market values of fixed-rate securities. FDIC banks reported $827 million in pretax income from realized gains in the first quarter, a decline of $1.2 billion (60.1%) from the first quarter of 2013.
Here are some other highlights from the FDIC report:
1. Charge-offs fall to pre-crisis level
Loan losses continued to decline. Net charge-offs fell year over year for a 15th consecutive quarter to $10.4 billion, $5.5 billion (34.8%) less than in first quarter 2013. This is the lowest quarterly NCO total since second quarter 2007. Charge-offs were lower across all major loan categories, with the largest declines occurring in residential mortgage loans (down $2 billion, 63.1%), home equity lines (down $1 billion, 53.3%), real estate loans secured by nonfarm nonresidential properties (down $734 million, 71.9%), and credit cards (down $709 million, 11.4%).
2. Noncurrent balances fall below $200 billion
The amount of loan and lease balances that were noncurrent (90 days or more past due or in nonaccrual status) declined for a 16th quarter in a row, as noncurrent levels improved in all major loan categories. Noncurrent balances totaled $195.1 billion at the end of the first quarter, down $12.1 billion (5.8%) from the total at year-end 2013. This is the first time since the end of third quarter 2008 that noncurrent balances have been below $200 billion. The improvement was led by residential mortgage loans, where noncurrent balances fell by $8.7 billion (6.5 %).
3. Pace of loan growth picks up, but not in mortgages
Total loans and leases increased by $37.8 billion (0.5%) during the quarter. Credit card balances and agricultural production loans posted seasonal declines of $33 billion (4.8%) and $5.7 billion (8%), respectively. Home equity lines of credit declined for a 20th consecutive quarter, falling by $7.2 billion (1.4%). Residential mortgage balances declined by $6.3 billion (0.3%), as banks reduced their inventories of mortgages held for sale. All other major loan categories increased during the quarter.
"We saw further improvement in the condition of the banking industry in the first quarter," said FDIC Chairman Martin J. Gruenberg. "Asset quality continues to improve, loan balances are trending up, fewer institutions are unprofitable, and the number of problem banks continues to decline. However, industry revenue has been affected by narrow margins, modest loan growth, and a decline in noninterest income as higher interest rates have reduced mortgage-related activity and trading income fell."
The American Bankers Association said that despite the "chill" in mortgage loan demand, it has hope for the future. “Banks are working hard to meet their customers’ needs despite challenges arising from persistently low interest rates, rising compliance costs and declining revenue from trading activities," said James Chessen, ABA chief economist. "The harsh winter weather put a chill on loan demand in the first quarter, particularly for mortgage loans. Springtime has brought renewed confidence for businesses and consumers, which should help to boost both credit demand and bank revenue. One-time events will continue to present challenges for some banks, but the underlying strength and capital across the industry will provide a bedrock for strong performance over the next year.”