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Federal Deposit Insurance Corporation (:FDIC)-insured commercial banks and savings institutions reported fourth-quarter 2012 earnings of $34.7 billion, outpacing the prior-year quarter’s earnings of $25.3 billion by 36.9%. This marks the 14th consecutive quarter in which earnings have soared on a year-over-year basis.

For full year 2012, earnings stood at $141.3 billion, up 19.3% as compared with 2011. Moreover, earnings reported for the year reflects second-highest level after $145.2 billion earned in 2006.

Overall, the banking industry is gradually improving as evident from the fourth quarter results. The number of troubled assets and institutions declined and are striving to show improvements. Moreover, loan balances increased in the quarter and loss provisions declined.

Banks with assets worth more than $10 billion contributed to the overall earnings growth during the fourth quarter. Though these form 1.5% of U.S. banks, the banks accounted for approximately 82% of the industry earnings.

Such major banks include Wells Fargo & Company (WFC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Bank of America Corporation (BAC).

Performance in Detail

Institutions are striving hard to be profitable and are bolstering their productivity.
Around 60% of all institutions insured by FDIC reported enhanced quarterly net income compared to the prior year. Moreover, shares of institutions reporting net losses for the quarter slumped to 14.0% from 20.2% in the last year.

The profitability measure – average return on assets (:ROA) surged to 0.97% from 0.73% in the prior-year quarter.

Net operating revenue stood at $169 billion, up 4.5% year over year. The increase was due to rise in gains from loan sales by $2.4 billion. Additionally, trading income augmented by $1.9 billion compared with the prior year.

Net interest income was recorded at $104.4 billion, down 2.5% year over year, reflecting five-year low average net interest margin. The average net interest margin declined to 3.32%, from 3.57% in the prior-year quarter, as average asset yields reduced more than average funding costs.

However, non-interest income rose to $64.6 billion from $54.6 billion recorded in the prior-year quarter.

Total non-interest expenses for the institutions were $108.1 billion in the quarter, slightly up on a year-over-year basis. The upsurge was aided by higher salaries and employee benefits expenses and elevated other non-interest expenses, though partly offset by lower premises and equipment expenses.

Credit Quality

Overall, credit quality marked an improvement in the fourth quarter of 2012. Net charge-offs plummeted to $18.6 billion from $25.6 million in the fourth quarter of 2011.

Loss provisions for the institutions in the fourth quarter were recorded at $15.1 billion, down 25% from $20.1 billion kept for losses in the prior-year quarter.

For the 11th consecutive quarter, the level of non-current loans and leases (those 90 days or more past due or in non-accrual status) declined. Moreover, the percentage of non-current loans and leases reached the lowest level in 4 years.

Balance Sheet

Total loans and leases were $7.7 trillion, up 2.7% year over year. This marked the 6th quarterly increase in loans in the last 7 quarters. Total deposits also continued to rise and were recorded at $10.8 trillion, up 5.9% year over year.

As of Dec 31, 2012, the net worth of Deposit Insurance Fund (:DIF) increased to $33.0 billion, up from $25.2 billion as of Sep 30, 2012. The rise in funds included $1.8 billion kept for debt guarantees under the FDIC's Temporary Liquidity Guarantee Program.

Moreover, assessment revenues and lower expectation of losses related to bank failures continued to impel growth in the fund balance.

Bank Failures and Problem Institutions

During the fourth quarter of 2012, 8 insured institutions failed, marking the smallest number of failures in a quarter since the second quarter of 2008, when it had recorded 2 failures. Moreover, in 2012, 51 failures were recorded, as compared with 92 failures in 2011 and 157 in 2010.

As of Dec 31, 2012, the number of "problem" institutions declined from 694 to 651. Total assets of "problem" institutions also plummeted to $233 billion from $262 billion.

Our Viewpoint

Besides the heartening decline in the list of problem institutions, the 14th straight quarter of consolidated profit from FDIC-insured banks is significantly impressive. While the financials of a few large banks continue to stabilize on the back of an economic recovery, the industry still remains on shaky grounds.

The sector presents a slightly improved picture as compared with 2011, with nagging issues like depressed home prices along with loan defaults and unemployment levels subsidizing. Further, the lingering economic uncertainty and its effects weigh on many banks. The need to absorb bad loans offered during the credit explosion has made these banks susceptible to several problems.

Banks are actively responding to every legal and regulatory pressure. In fact, this efficiency has positioned the banks well to encounter impending challenges. As the sector is undergoing a radical structural change, it is expected to witness headwinds in the near to mid term. But entering the new capital regime will significantly improve the industry’s long-term stability and security.

However, it would be unfair to say that there has been no improvement. At least, the data from FDIC speaks otherwise. The industry is gradually moving towards regaining investor confidence.