Overview of the Industry
The 8,305 FDIC-insured commercial banks and savings institutions that reported financial results at the end of 2008 had total net income of $10.2 billion, a decline of $89.8 billion (89.8 percent) from the $100 billion that the industry earned in 2007. This is the smallest annual net income total for the industry since 1989. The primary cause of the decline in earnings was increased provisions for loan losses, which were $105.2 billion (152 percent) higher than in 2007. Insured institutions set aside $174.4 billion for losses in 2008, up from $69.2 billion a year earlier. Loss provisions absorbed 30.9 percent of the industry’s net operating revenue (net interest income plus total noninterest income) in 2008, compared to only 11.8 percent in 2007. Almost three out of every four insured institutions (73.9 percent) reported increased loss provisions in 2008.
Failures and merger transactions had a significant effect on the industry’s income and expense totals for 2008. Sizable losses incurred by a number of large institutions that failed or were acquired before the end of 2008 were not carried forward to full-year results. If these losses had been included in
the industry’s results for the year, the industry would have reported a net loss in 2008.
The average return on assets (ROA) for 2008 was 0.08 percent, considerably below the 0.81 percent average of a year earlier. More than two-thirds of all institutions (68 percent) reported year-over-year ROA declines. Only 37 percent of institutions reported higher net income, and 23.6 percent reported net losses for the year. During 2007, only 12.1 percent were unprofitable.
In addition to the higher expenses for loan-loss provisions, industry earnings in 2008 were held down by reduced noninterest income, which was $25.6 billion (11 percent) lower than in 2007. The largest contributors to the decline in noninterest income were a negative $5.8-billion swing in trading revenues, from a positive $4.1 billion in 2007 to a negative $1.8 billion in 2008, and a $5.8-billion (27.4-percent) decline in securitization income. Most of the decline in trading revenue and securitization occurred at a few large institutions. A majority of insured institutions (59 percent) reported increased noninterest income in 2008. Net income was also negatively affected by realized losses on securities and other assets, which totaled $15.0 billion, compared to net losses of $1.4 billion a year ago. Finally, expenses for goodwill impairment and other intangible asset charges were $12.6 billion (67.8 percent) greater than a year earlier.
One of the few positive trends in industry earnings was net interest income, which increased by $5 billion (1.4 percent). The average net interest margin (NIM) in 2008 was 3.18 percent, below the 3.29
percent average of a year earlier; this is the lowest full-year NIM for the industry since 1984. A majority of institutions – 57.4 percent – reported lower NIMs in 2008. The improvement in net interest income was attributable to a 4.1-percent increase in the industry’s interest-bearing assets during 2008.
Asset quality indicators worsened in 2008. The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased by $120.1 billion (108.5 percent); at the end of the year, the percent of the industry’s total loans and leases that were noncurrent stood at 2.93 percent, the highest level since 1992. Noncurrent 1-4 family residential mortgage loans increased by $48.4 billion in 2008, while noncurrent real estate construction and development loans rose by $30.2 billion. Noncurrent levels increased in all other major loan categories as well.
Net charge-offs of loans and leases totaled $99.5 billion, more than double the $44.1 billion that insured institutions charged off during 2007. Residential real estate loans and construction and development loans led the rise in charge-offs. Net charge-offs of home equity lines of credit were $6.9 billion higher than in 2007, while charge-offs of other loans secured by 1-4 family residential properties increased by $12 billion. Net charge-offs of real estate construction and development loans were up by $13.7 billion. While loans secured by real estate led the rise in charge-off activity, all of the other major loan categories had higher charge-offs as well. The net charge-off rate for the industry in 2008 was 1.28 percent, the highest annual rate since 1991.
Asset growth slowed in 2008. Total assets of insured institutions increased by $813.2 billion (6.2 percent), led by a $499.3-billion increase in balances due from Federal Reserve banks. The total amount of loan and lease balances declined by $31.3 billion in 2008, the first time since 1993 that reported balances have had a 12-month decline. Closed-end real estate loans secured by 1-4 family resi dential properties declined by $196.6 billion (8.8 percent) during the 12-month period, while real estate construction and development loans fell by $39.3 billion (6.2 percent). Most other loan categories posted moderate increases. Only 57.1 percent of the increase in industry assets ($464.0 billion) consisted of interest-earning assets.
Total deposits increased by $620.3 billion (7.4 percent), with interest-bearing deposits in domestic offices rising by $351.9 billion (6.2 percent), and domestic noninterest-bearing deposits growing by $231.6 billion (19.4 percent). Deposits in foreign offices increased by $36.7 billion (2.4 percent) during this period. Nondeposit liabilities were up by $244.1 billion (7.5 percent).
The number of insured commercial banks and savings institutions on the FDIC’s “Problem List” rose from 76 institutions with $22 billion in assets to 252 institutions with $159 billion in assets in 2008. This is the largest number of “problem” institutions since the middle of 1995, and the largest amount of assets since the end of 1993. At the end of 2008, more than 97 percent of all FDIC-insured institutions, representing more than 98 percent of all insured institution assets, met or exceeded the highest federal regulatory capital standards.