Overview of the Industry
Total net income for the 8,012 FDIC-insured commercial banks and savings institutions that reported financial results as of December 31, 2009, was $12.5 billion for the year, up from $4.5 billion in 2008, but well below the $100 billion that insured institutions earned in 2007. The average return on assets (ROA), a basic yardstick of earnings performance, was 0.09 percent, compared to 0.03 percent in 2008. These are the two lowest annual ROAs for the industry in the past 22 years. Most of the year-over-year improvement in industry profitability occurred at the largest institutions. Almost two out of every three insured institutions (63.2 percent) reported a lower ROA in 2009 than in 2008, and 29.5 percent of all institutions reported a net loss for the year. This is the highest percentage of unprofitable institutions in the 26 years for which data are available.
Historically high expenses for credit-quality problems were the principal cause of earnings weakness. Insured institutions set aside $247.7 billion in loan-loss provisions during 2009, compared to $177 billion a year earlier. Total loss provisions in 2009 represented 38 percent of the industry's net operating revenue (net interest income plus total noninterest income) for the year, the largest proportion in any year since the creation of the FDIC.
Despite the burden of increased loan loss expenses and the weakness of the U.S. economy, the industry was considerably resilient in generating revenue during the year. Net operating revenue totaled $656.3 billion, an increase of $90.9 billion (16.1 percent) over 2008. Net interest income was $38.1 billion (10.7 percent) higher than a year earlier, while noninterest income increased by $52.8 billion (25.4 percent).
The improvement in net interest income was attributable to higher net interest margins (NIMs), as the industry's total interest-earning assets declined by $477.2 billion (4.1 percent) in 2009. The average NIM rose to 3.47 percent in 2009, up from 3.16 percent a year earlier. This is the highest annual NIM for the industry since 2005 and the first time in seven years that it has increased. Much of the year-over-year improvement in NIMs occurred at larger institutions, which benefitted from a sharp decline in average funding costs. More than half of all institutions (53.8 percent) reported lower NIMs compared to 2008.
Growth in noninterest income was led by increased trading revenue, which totaled $24.8 billion, compared to trading losses of $1.8 billion a year earlier. Servicing fees also posted strong growth, rising to $30.8 billion in 2009 from $13.6 billion in 2008. Income from securitization activities was a notable area of noninterest income weakness in 2009. Securitization income totaled only $4.8 billion, down from $15.3 billion the previous year.
Higher asset values contributed to a $14 billion reduction in realized losses on securities and other assets in 2009. In 2008, insured institutions reported $15.4 billion in realized losses; in 2009, realized losses totaled only $1.4 billion. Improvement in asset values was also evident in a $12.6 billion (38.6 percent) decline in charges for goodwill impairment and other intangible asset expenses. These charges, which reached $32.7 billion in 2008, fell to $20.1 billion in 2009.
Despite lower goodwill impairment costs, total noninterest expenses increased by $16.2 billion (4.4 percent) in 2009. Deposit insurance premiums paid by insured institutions totaled $17.8 billion, an increase of $14.8 billion over 2008. Expenses for salaries and employee benefits were $11.4 billion (7.5 percent) higher than in 2008.
As was the case in 2008, failures significantly affected earnings reported for the full year because losses incurred by failed institutions were not included in the year-to-date income reported by surviving institutions as of December 31. During 2009, 119 failed institutions filed financial reports for one or more quarters prior to their failure. Together, these institutions reported more than $8.2 billion in net losses that are not included in full-year earnings for the industry. Similarly, for institutions that change ownership or are merged into other institutions, purchase accounting rules stipulate that the income and expenses that have been booked by acquired institutions are to be reset to zero as of the date of acquisition. Previously accrued income and expenses become adjustments to assets, equity capital, and reserves, and are not included in the subsequent reporting of year-to-date income and expense. If the 2009 losses reported by failed institutions had been included, the industry's net income for the year would have been less than $5 billion.
The industry's troubled loans continued to increase in 2009. At the end of December, the amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) was $391.3 billion, compared to $233.6 billion at the end of 2008. Noncurrent loans and leases represented 5.37 percent of all loans and leases, the highest percentage in the 26 years that insured institutions have reported noncurrent loan data. Residential mortgage loans accounted for more than half (51.2 percent) of the total increase in noncurrent loans in 2009, rising by $80.7 billion. Noncurrent real estate construction and development (C&D) loans rose by $20.3 billion, noncurrent loans to commercial and industrial (C&I) borrowers increased by $16.7 billion, and noncurrent real estate loans secured by nonfarm nonresidential properties increased by $24.3 billion.
Net charge-offs of loans and leases totaled $186.8 billion in 2009, compared to $100.4 billion in 2008. The full-year net charge-off rate of 2.49 percent was the highest annual rate since 1934. Net charge-offs of credit card loans totaled $37.5 billion for the year, net charge-offs of residential mortgage loans were $33.9 billion, C&I loan charge-offs totaled $31.8 billion, and net charge-offs of real estate C&D loans were $27.3 billion.
Total assets of insured institutions registered a historic decline in 2009, as weak loan demand, tighter loan underwriting standards, increased loan charge-offs, and deleveraging by institutions seeking to boost their regulatory capital ratios all contributed to a contraction in the industry's balance sheet. Assets fell by $731.7 billion (5.3 percent) during the year, the largest annual percentage decline since the inception of the FDIC. The reduction in assets was led by a $640.9 billion (8.3 percent) decline in net loans and leases. C&I loan balances declined by $273.2 billion (18.3 percent), residential mortgage loans fell by $128.5 billion (6.3 percent), and real estate C&D loans declined by $139.4 billion (23.6 percent). Real estate loans secured by nonfarm nonresidential properties (up $25.2 billion, or 2.4 percent) was the only major loan category that had meaningful growth in 2009.
In contrast to the reduction in industry assets, deposit balances increased by $191.1 billion (2.1 percent) during the year. Nondeposit liabilities fell by $1 trillion (31.3 percent). At year-end, deposits funded 70.4 percent of total industry assets, the highest proportion since March 31, 1996.
The number of insured institutions on the FDIC's "Problem List" rose from 252 institutions with assets of $159 billion to 702 institutions with assets of $402.8 billion in 2009. This is the largest number and asset total of "problem" institutions since the middle of 1993. At year-end, more than 95 percent of all insured institutions, representing more than 98 percent of total industry assets, met or exceeded the regulatory threshold defining "well-capitalized" for purposes of prompt corrective action.