As the overall economy in the US continues to recover from the 2007 recession, we are also seeing signs of recovery in the debt and equity capital markets in both 2011 and Q1'12. Banks are beginning to generate more profit, decrease loan losses, and increase loan balances. The Small Business Administration ("SBA") is reporting an increase in the number of SBA loans and the dollar value of those loans. The Venture Capital market is growing in terms of the number of deals and the dollar value of those deals. Although we are not out of the woods yet, we are seeing some positive signs for small business financing.
Banks posted operating revenues in 2011 of $640 billion, this was a 14% increase from the $560 billion posted in 2006 (pre-recession), however, it was slightly lower than 2010. Net interest income posted its first full-year decline since 1971, falling by $7.5 billion (1.7%) from 2010. Non-interest income fell for a second consecutive year and the fourth time in the last five years, declining by $5.3 billion (2.3%).
Net income totaled $119.5 billion in 2011, an increase of $34 billion (39.8%) from 2010. This is the highest annual net income total since the industry earned $145.2 billion in 2006. More than two out of every three banks (66.9 %) reported improved earnings in 2011, and only 15.5% reported a net loss for the year. In 2010, 22.1% of all banks reported full-year net losses. The improvement in net income was made possible by an $81.1 billion reduction in loan loss provisions.
Loan losses fell to their lowest level in 15 quarters. Net charge-offs totaled $25.4 billion in Q4'11, a decline of $17.1 billion (40.2%) from a year ago. The fourth-quarter total represents the lowest level for quarterly charge-offs since first quarter 2008. This is the sixth consecutive quarter in which charge-offs have posted a year-over-year decline. Improvements occurred across all major loan types. The largest declines were in credit cards (down $5.4 billion, 42.2%), real estate construction and land development loans (down $3.3 billion, or 62.4%); residential mortgage loans (down $2.4 billion, or 31.8%) and loans to commercial and industrial (C&I) borrowers (down $2 billion, or 43.5%).
Loan balances post their largest real growth in four years as loan balances increased by $130.1 billion (1.8%) to $7.3 trillion in Q4'11 up from $7.2 trillion in Q3'11. This is the third consecutive quarter in which total loan balances have increased and, apart from first quarter 2010 when accounting rule changes caused a $221 billion increase in reported balances, it represents the largest quarterly increase since fourth quarter 2007. As in the prior two quarters, overall loan growth was led by C&I loans, which rose by $62.8 billion (4.9%), accounting for almost half of the total increase in loans and leases during the quarter. C&I loans have increased in each of the last six quarters. Additionally, C&I loans to small businesses ($1 million or less) increased by $2.8 billion (1%). This is the first time in the seven quarters that small C&I loan balances have increased.
Credit card balances posted a seasonal increase of $21.3 billion (3.2%). Real estate construction and development loans declined for a 15th consecutive quarter, falling by $14.7 billion (5.8%).
Small Business Administration
The Small Business Administration ("SBA") has been increasing its loan guaranteed program over the last several years.
The number of small business loans guaranteed by the SBA has increased from 10,454 loans totaling $2.8 trillion in 2009 to 16,637 loans in 2010 totaling $5.0 trillion an 80% increase. It increased again in 2011 to 21,918 loans totaling $10.4 trillion a 108% increase. Furthermore, Q1'12 loans totaled 20,854 and $6.7 trillion. Startup loans accounted for $0.9 trillion (34%) while existing businesses accounted for $1.8 trillion (66%) in 2009. In 2010, the value of startup loans increased to $1.2 trillion (24%) while existing business loans increased to $3.8 trillion (76%). In 2011, the value of startup loans increased to $2.2 trillion (22%) while existing business loans increased to $8.1 trillion (78%). Loans of $150,000 and under accounted for 11% of the loans in 2009, 9% of the loans in 2010 and 5% of the loans in 2011.
There were 40 banking institutions in Arizona in 2010 with a total asset value $13.8B. This number declined in 2011 to 32 institutions and $12.2B in asset value, a 20% and 11.6% decline, respectively. However, Arizona SBA Loan activity has increased in the last year. The total number of loans guaranteed by the SBA in 2011 was 1306; this was up 2.8% from 1271 in 2010. The dollar value of these loans also increased in 2011, increasing 46% from $368 million in 2010 to $540 million in 2011. The top three SBA lenders in the state were: JP Morgan Chase with 327 loans valued at $59M, Wells Fargo Bank with 208 loans at $84M and BBVA Compass with 132 loans at $35M.
Venture capitalists invested $5.8 billion in 758 deals in the first quarter of 2012. Quarterly venture capital (VC) investment activity fell 19 percent in terms of dollars and 15 percent in the number of deals compared to the fourth quarter of 2011 when $7.1 billion was invested in 889 deals. However, if we look at annual comparisons 2011 activity increased significantly from 2010, increasing 5% (3564 to 3762) in terms of the number of deals and 25% ($23.3B to $29B) in terms of dollars invested.
There were double-digit percentage increases in dollars invested in the Consumer Products and Services, Medical Device, and Telecommunications industries. However, the Life Sciences (biotechnology and medical device industries combined) and Clean Technology sectors saw marked decreases in both dollars and number of deals in the first quarter. Additionally, investments into companies in the later stage of development experienced an increase, rising 11% and accounting for 40% of total dollars invested during the first quarter of 2012.
Moving forward, bank earnings growth could be hard to generate, balance sheets could take time to recover, uncertainty with the US and European economies and continued bank failures could present challenges in 2012. However, banks are beginning to generate more profit, decrease loan losses, and increase loan balances. Furthermore, the SBA is reporting an increase in the number of SBA loans and the dollar value of those loans. The Venture Capital industry continues to contract and consolidate resulting in fewer dollars being invested in fewer deals. Yet, industry experts believe the overall impact will be positive for the asset class as only the best entrepreneurs and technologies will be funded at rational valuations.
Additionally, with the exit market improving, industry experts see venture capitalists in a position to focus more on first time deals in the coming months and less on sustaining mature companies that have been held back over the last few years. Although we are not out of the woods yet, we are seeing some positive signs for small business debt and equity financing.