Overview of the Industry
The 8,560 FDIC-insured commercial banks and savings institutions that filed financial results for the first nine months of 2007 reported net income of $100.7 billion, a decline of 10.7 percent compared to the first nine months of 2006. This is the first year-over-year decline in industry earnings in seven years. The decline in earnings was caused by sharply higher expenses for bad loans, weakness in market-sensitive noninterest revenues, and narrower net interest margins. Fewer than half of all institutions -- 49.5 percent -- reported year-over-year increases in net income, and the percentage of institutions with negative net income for the first nine months of the year rose to 10.2 percent, up from 7.0 percent a year earlier.
The average return on assets (ROA) for the first nine months was 1.11 percent, down from 1.33 percent for the same period of 2006. This is the lowest nine-month industry ROA since 1996. More than 60 percent of insured institutions had lower ROAs in 2007 than in 2006. Insured institutions set aside $37.1 billion in provisions for loan and lease losses during the first nine months of 2007, an increase of $17.2 billion (86.8 percent) compared to the same period in 2006. The industry's total noninterest income increased by only $1.3 billion (0.7 percent), as income from securitization activities fell by $3.6 billion (18.4 percent), and gains on sales of loans declined by $1.8 billion (32.5 percent). Total noninterest expenses were $11.2 billion (4.4 percent) higher, led by a $5.7-billion (5.0-percent) increase in salary and benefit expenses.
One of the positive trends in income and expenses was the $10.3-billion (4.0-percent) year-over-year increase in net interest income. A difficult interest-rate environment characterized by a flat yield curve contributed to a decline in the industry's net interest margin. The average margin fell from 3.43 percent in the first three quarters of 2006 to 3.32 percent for the first three quarters of 2007. However, the industry's interest-earning assets grew by 7.5 percent from the end of September 2006 through the end of September 2007, helping to boost net interest income.
Signs of asset quality deterioration were clearly evident in 2007. For the 12 months ended September 30, total noncurrent loans and leases those that were 90 days or more past due or in nonaccrual status increased by $30.4 billion (57.9 percent). Loans secured by real estate properties accounted for 92 percent ($28.0 billion) of the increase in noncurrent loans. Residential mortgage loans accounted for more than half ($15.4 billion) of the increase in noncurrent loans, while noncurrent real estate construction and development loans increased by $8.4 billion (283 percent). Net charge-offs of loans and leases totaled $27.9 billion in the first three quarters of 2007, an increase of $9.3 billion (49.7 percent) over the same period in 2006. Loans to individuals other than credit cards had the largest year-over-year increase, rising by $2.2 billion (53.8 percent). Net charge-offs of loans to commercial and industrial (C&I) borrowers were $1.8 billion (84.6 percent) higher, and net charge-offs of credit card loans increased by $1.5 billion (15.5 percent). Net charge-offs of residential mortgage loans increased by $1.4 billion (137.5 percent). At the end of September 2007, 65 institutions were on the FDIC's "Problem List," up from a 36-year low of 47 "problem" institutions a year earlier.
Asset growth slowed in 2007, but remained strong by historic standards. During the 12 months ended September 30, total assets of insured institutions increased by $954 billion (8.1 percent). Loans and leases accounted for more than half of the increase in total assets, rising by $527 billion (7.4 percent). Loans to C&I borrowers increased by $208.8 billion (17.7 percent), real estate construction and development loans rose by $71.4 billion (13.1 percent), and real estate loans secured by nonfarm nonresidential properties grew by $53.6 billion (6.1 percent).
Growth in deposits did not keep pace with the increase in total assets. In the 12 months ended September 30, total deposits of insured institutions increased by $603.6 billion (8.0 percent). During that period, growth in foreign office deposits (up $336.6 billion, or 30.5 percent) surpassed growth in domestic office deposits (up $267.0 billion, or 4.1 percent). Nondeposit liabilities increased by $246.5 billion (8.4 percent), and equity capital rose by $103.5 billion (8.5 percent). Merger-related goodwill accounted for almost two-thirds (63 percent) of the increase in equity. At the end of September 2007, more than 99 percent of all FDIC-insured institutions met or exceeded the highest regulatory capital standards4.
4 For purposes of Prompt Corrective Action, FDIC-insured institutions are generally considered "well capitalized," the highest category, if they have a total risk-based capital ratio of 10.0 percent or greater, a Tier 1 risk-based capital ratio of 6.0 percent or greater, and a leverage ratio of 5.0 percent or greater.