The 8,743 FDIC-insured commercial banks and savings institutions that filed financial results for the first three quarters of 2006 reported year-to-date net income of $112.4 billion (excludes 12 U.S. branches of foreign banks). This was $10.6 billion (10.4 percent) more than the industry reported for the first three quarters of 2005, and represented the largest three-quarter earnings total ever reported by the industry. The improvement in earnings reflected strong growth in loans and other interest-bearing investments, very good asset quality, and higher noninterest income at larger institutions. More than half of all insured institutions – 56.8 percent – reported earnings increases for the first three quarters of 2006, but the percentage of institutions that were unprofitable increased to 6.9 percent, from 5.8 percent in the first three quarters of 2005.
Profitability, as measured by return on assets (ROA), remained very high by historic standards. For the first three quarters of 2006, the industry ROA was 1.33 percent, the same as in the first three quarters of 2005, and the third-highest ever registered for a nine-month period. Earnings growth was led by increased noninterest income. Total noninterest income grew by $17.6 billion (10.5 percent) compared to the same period in 2005. Income from trading was $3.9 billion (34.6 percent) higher than a year earlier, securitization income was $2.5 billion (14.1 percent) higher, and income from investment banking increased by $1.6 billion (20.8 percent). Net interest income was $16.0 billion higher than in the same period of 2005, but this represented only a 6.7 percent increase, while interest-earning assets grew by 9.7 percent. The relatively sluggish growth in net interest income reflected narrower net interest margins caused by rising short-term interest rates and a flattening yield curve. Improvements in asset quality also provided a boost to earnings in 2006. Provisions for loan and lease losses were $1.8 billion (8.1 percent) lower than in 2005, as net charge-offs declined by $3.6 billion (16.0 percent). Lower gains on sales of securities and other assets (down $2.5 billion, or 58.3 percent), and higher noninterest expenses (up $18.0 billion, or 7.6 percent) limited the improvement in earnings.
Asset growth at insured institutions remained very robust in 2006. For the 12 months ended September 30, 2006, total assets of FDIC-insured institutions grew by $1.1 trillion (9.9 percent). Loans and leases accounted for more than half of the growth in assets (56.2 percent), while growth in securities accounted for almost one-tenth of the increase in total assets (9.6 percent). Loans to commercial borrowers accounted for two-thirds of the growth in total loans, with loans to commercial and industrial (C&I) borrowers, real estate construction and development loans, and loans secured by nonfarm nonresidential properties registering the biggest increases. Residential mortgage loans had the largest increase of any single loan category, growing by $158 billion (7.8 percent).
Deposit growth was also strong in 2006, but it did not keep pace with the rapid growth in assets. Total deposits increased by $609.5 billion (8.7 percent) between September 30, 2005, and September 30, 2006, but this growth represented only 57.7 percent of insured institutions' funding needs. Nondeposit liabilities increased by $315 billion (12.0 percent) during this period, and equity capital grew by $132.5 billion (12.1 percent). Merger-related goodwill accounted for almost one-third ($43.1 billion, or 32.6 percent) of the total increase in equity capital. More than 99 percent of all insured institutions met or exceeded the highest regulatory capital requirements as of September 30.
Asset quality indicators remained very positive in 2006. At mid-year, the percentage of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) reached the lowest level in the 23 years that all insured institutions have reported noncurrent loan data. The industry's net charge-off rate was also at a historical low level in 2006. At the end of the third quarter, the number of institutions on the FDIC's "Problem List" stood at 47, the lowest level in the 36 years for which data are available.