WASHINGTON, D.C. — Taking a deeper look into the Federal Deposit Insurance Corp.'s Quarterly Banking Profile, SubPrime Auto Finance News discovered details on auto loans.

Looking at maximum credit exposure for auto loans, SubPrime found that this figure is declining, coming in at $352 million for the second quarter, compared with $405 million in the first quarter and $555 million in the second quarter of last year.

As for securitized auto loans and leases 30-89 days past due, the FDIC reported that this reached 2.2 percent for the period, up from 1.9 percent in the prior quarter and up from 1.6 percent in the same time frame of 2007.

Continuing on, securitized auto loans and leases 90 days or more past due came in at 0.3 percent, which is flat compared with 0.3 percent in the first quarter, but up slightly from 0.2 percent from the second quarter of last year.

Meanwhile securitized auto loans and leases charged off reached 0.9 percent, compared with 0.4 percent in the first quarter of this year and 0.5 percent in the second quarter of 2007. This figure remained down from 1.3 percent of charge-offs posted in the fourth quarter of last year.

The FDIC noted that the details on auto loans only cover aggregate information for insured commercial banks and state-chartered savings banks that filed quarterly Call Reports.

Overall Trends

Commercial banks and savings institutions insured by the FDIC reported net income of $5 billion in the second quarter, down $31.8 billion (86.5 percent) from the $36.8 billion earned in the second quarter of last year.

With the exception of the fourth quarter of last year, the latest earnings were the lowest for the industry since the fourth quarter of 1991. In fact, two more banks failed in the second quarter.

"By any yardstick, it was another rough quarter for bank earnings, but the results were not unexpected as the industry coped with financial market disruptions, the housing slump, worsening economic conditions and the overall downturn in the credit cycle," explained FDIC Chairman Sheila Bair.

Additionally, the FDIC said its "problem list" grew to 117 institutions from 90 at the end of the first quarter. That is largest number on the list since the middle of 2003, officials noted.

Total assets of problem institutions increased from $26 billion to $78 billion, with $32 billion coming from IndyMac Bank, F.S.B., Pasadena, Calif., which failed in July.

"More banks will come on the list as credit problems worsen," Bair noted. "Assets of problem institutions also will continue to rise."

In releasing the latest results, the FDIC cited higher provisions for loan losses as the primary reason for the drop in industry profits. The size of the earnings decline was mainly attributable to a few large institutions, but more than half of all insured institutions (56.4 percent) reported lower net income in the second quarter.

Moreover, the industry reported lower non-interest income than a year earlier, reflecting continuing weakness in market-sensitive revenues, such as income from trading and securitization activities.

Additionally, expenses for goodwill impairment and other charges to intangible assets were significantly higher than a year earlier, the FDIC pointed out. Proceeds from sales of securities and other assets yielded a net loss in the second quarter, compared to a net gain a year ago.

Bair went on to announce that in early October the FDIC will consider a plan to replenish the agency's Deposit Insurance Fund, which experienced a large drop due to added loss reserves for IndyMac and other bank failures.

The DIF restoration plan "likely will include an increase in the premium rates that banks pay into the fund," she noted. "And we'll be proposing changes to the current assessment system that will shift a greater share of any assessment increase onto institutions that engage in high-risk behavior to encourage and reward safer behavior."

Among the major findings in FDIC's latest Quarterly Banking Profile:

Provisions for loan losses continue to be the main cause of falling earnings. Rising levels of troubled loans, particularly in real estate portfolios, led many institutions to increase their provisions for loan losses in the quarter. Loss provisions totaled $50.2 billion, which is more than four times the $11.4 billion the industry set aside in the second quarter of 2007.

Almost a third of the industry's net operating revenue (net interest income plus total noninterest income) went to building up loan-loss reserves.

Noncurrent loans are still rising sharply. The amount of noncurrent loans and leases (90 days or more past due or in nonaccrual status) increased by $26.7 billion (20 percent) during the second quarter, following a $26.2 billion increase in the first quarter and a $27.0 billion increase in the fourth quarter of 2007.

Almost 90 percent of the increase in noncurrent loans and leases in the last three quarters consisted of real estate loans, but noncurrent levels have been rising in all major loan categories. At the end of June, 2.04 percent of all loans and leases were noncurrent, the highest level for the industry since 1993.

Assets of insured institutions declined. Total assets of FDIC-insured institutions declined during the quarter for the first time since 2002.

The $68.6 billion (0.5 percent) decline was caused by a reduction in trading assets at a few large banks. Assets in trading accounts, which increased by $135.2 billion in the first quarter, declined by $118.9 billion (11.8 percent) in the second quarter.

In addition, the industry's holdings of one- to four-family residential mortgage loans fell by $61.4 billion (2.8 percent). Real estate construction and development loans declined for the first time since 1997, falling by $5.4 billion (0.9 percent).

The FDIC's Deposit Insurance Fund reserve ratio fell. Due to a significant increase in loss reserves, including reserves for failures that have occurred since June 30, the DIF balance fell to $45.2 billion at the end of the second quarter, down from $52.8 billion at the end of the first quarter.

While insured deposits rose only 0.5 percent during the quarter, the decline in the fund balance caused the reserve ratio to fall to 1.01 percent as of June 30 from 1.19 percent one quarter earlier.

Because the reserve ratio is now below 1.15 percent, the Federal Deposit Insurance Reform Act of 2005 requires the FDIC to develop a restoration plan that will raise the reserve ratio to no less than 1.15 percent within five years.

ABA Reacts to FDIC Report

James Chessen, the American Bankers Association's chief economist, strived to place a positive spin on the FDIC's Quarterly Banking Profile.

"As the economy has weakened, more businesses and individuals have had trouble repaying their loans, resulting in increased losses for banks," he explained. "The banking industry prepares diligently for such events and has more than enough resources to handle the current downturn. Banks are taking the necessary steps to put these losses behind them, and the industry as a whole remains well-positioned to meet the credit needs of local communities.

"In spite of elevated levels of loan losses, banks had $1.4 trillion in equity capital — the core financial support banks use to back loans. More than 98 percent of banks (holding 99.4 percent of the industry's assets) are ‘well capitalized,' which is the highest designation possible," he continued.

Moreover, he went on to say, "Banks also set aside reserves — which serve as a rainy day fund — to cover additional loan losses that may occur. Reserves now exceed $144 billion and when added with capital, make for a total buffer of $1.5 trillion against losses."

Basically, Chessen said that the FDIC fund is strong and the banking industry stands ready to assure its financial health. 

"The weak economy will continue to affect all businesses, including banks. Nonetheless, banks are actively looking for good loans to make. Lending is what banks do, and there is no shortage of interest in providing access to credit for individuals and businesses," he indicated.

"With $8.6 trillion in deposits, banks have plenty of resources to continue meeting the lending needs in their communities. Banks' loan portfolios grew by $28.2 billion in the quarter. Not surprisingly, real estate loans declined, but all other major loan categories were up, demonstrating that the local bank continues to be the best source of business and personal loans," Chessen explained.

"The vast majority of banks have been in existence for decades, and the industry is taking prudent steps to assure that banks will continue to serve their communities for many, many more decades to come," he concluded.