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2010 Annual Report

IV. Financial Statements and Notes

Overview of the Industry

The 7,657 FDIC-insured commercial banks and savings institutions that filed financial reports as of December 31 reported $87.5 billion in net income for the full year 2010. This represented a considerable improvement over the $10.6 billion aggregate net loss posted in 2009.1 But it is well below the record annual earnings of $145.2 billion registered in 2006. The average return on assets (ROA) was 0.66 percent, up compared to a negative 0.08 percent in 2009. The year-over-year improvement in earnings was broad-based. More than two out of every three institutions (67.5 percent) reported higher net income in 2010 compared to a year earlier. More than one in five institutions (21 percent) reported a net loss for the year, but this was a significantly smaller percentage than in 2009, when 30.8 percent were unprofitable.

Lower expenses for asset-quality problems and reduced charges for goodwill impairment were the principal sources of the improvement in industry net income. Provisions for loan and lease losses totaled $156.9 billion, which was $92.6 billion (37.1 percent) less than insured institutions set aside in 2009. Slightly more than half of all institutions (51 percent) reported reduced loss provisions in 2010. Charges for goodwill impairment totaled $1.7 billion in 2010, a decline of $28.7 billion compared to 2009. Additional support for the improvement in industry net income was limited by a $32.2 billion increase in income taxes.

Year-over-year comparisons of revenues are complicated by the application of new accounting rules to financial reporting in 2010.2 Implementation of the new rules led to the consolidation of a significant amount of securitized assets (primarily credit card balances) back onto the originating banks’ balance sheets in 2010. Along with the resulting increase in reported loan balances, there was also an impact from the cash flows associated with these balances. At institutions affected by the reporting changes, reported levels of interest income and expense, net interest income, and net charge-offs were elevated, while noninterest income items such as income from securitization activities, servicing fees, and trading revenues were reduced. The effects were evident in industry totals. Net interest income was $34.4 billion (8.7 percent) higher than in 2009, while noninterest income was $23.6 billion (9.1 percent) lower. The change in reporting rules had little or no effect on net revenues. Net operating revenue (the sum of net interest income and total noninterest income) was only $10.8 billion (1.6 percent) higher than in 2009.

The average net interest margin (NIM) improved to 3.76 percent from 3.47 percent in 2009, as average funding costs fell more rapidly than average asset yields. This is the highest annual NIM since 2002, when it reached 3.96 percent. A majority of institutions (57.1 percent) reported higher NIMs in 2010, with the largest increases occurring at institutions that had securitized credit card receivables and were affected by the new accounting rules.

The decline in noninterest income reflected reduced servicing fees (down $13.2 billion, or 44 percent), lower securitization income (down $4.3 billion, or 89.9 percent), and lower trading revenue (down $1.4 billion, or 5.6 percent). The application of new reporting rules contributed to these declines. Among the noninterest income categories that were not affected by the new rules, service charges on deposit accounts were $5.5 billion (13.1 percent) lower than in 2009, gain on sales of loans and other assets was $3.2 billion (29.4 percent) lower, and investment banking income was $2.1 billion (17.8 percent) lower.

Noninterest expenses fell by $12.6 billion in 2010, as a result of the $28.7 billion reduction in charges for goodwill impairment. Salaries and employee benefits expenses increased by $5.8 billion (3.5 percent), as the number of employees at insured institutions rose by 23,407 (1.1 percent). Expenses for premises and fixed assets were $1.0 billion (2.3 percent) lower than in 2009.

Insured institutions charged-off $187.1 billion (net) in troubled loans in 2010, a $1.7 billion (0.9 percent) decline from 2009. This is the first year-over-year decline in charge-offs in four years, and it occurred despite a $26.6 billion (69.8 percent) increase in reported credit card charge-offs caused by the new reporting rules that took effect in 2010. Most major loan categories had lower charge-offs in 2010. Charge-offs of loans to commercial and industrial (C&I) borrowers were $11.2 billion (35.1 percent) lower, charge-offs of real estate construction and development loans fell by $6.8 billion (24.8 percent), and charge-offs of non-credit card consumer loans declined by $6.1 billion (31.9 percent). Apart from credit cards, the only other major loan category that had increased charge-offs was real estate loans secured by nonfarm nonresidential properties. Net charge-offs of these loans were $4.6 billion (54.5 percent) higher than in 2009.

In the twelve months ended December 31, the amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) declined by $36.4 billion (9.2 percent). This is the first 12-month decline in noncurrent loans and leases since 2005. As was the case with charge-offs, most major loan categories registered improvement in noncurrent levels. Noncurrent real estate construction and development loans declined by $20.4 billion (28.4 percent) in 2010, while noncurrent C&I loans fell by $12.5 billion (30.2 percent). Noncurrent residential mortgage loans declined by $3.4 billion (1.9 percent). The two major loan categories where noncurrent balances increased in 2010 were real estate loans secured by nonfarm nonresidential properties (where noncurrent balances were up by $3.9 billion, or 9.2 percent) and credit cards (where noncurrent balances rose by $968 million, or 6.7 percent). The latter increase reflected the application of new reporting rules in 2010.

Total assets of insured institutions increased by $234.2 billion (1.8 percent), in 2010. The increase was attributable to new reporting rules that caused more than $300 billion in securitized loan balances to be consolidated into banks’ balance sheets at the beginning of the year. Credit card balances at year end 2010 were $280.5 billion (66.6 percent) higher than a year earlier. In contrast, balances in all other major loan categories declined during 2010. The largest decline occurred in real estate construction and development loans, where balances fell by $129.2 billion (28.7 percent). Other large declines occurred in C&I loans (down $36.0 billion, or 2.9 percent), home equity lines of credit (down $24.7 billion, or 3.7 percent), real estate loans secured by nonfarm nonresidential properties (down $20.5 billion, or 1.9 percent), and 1-4 family residential mortgages (down $18.2 billion, or 1 percent). Insured institutions’ securities holdings increased by $167.3 billion (6.7 percent) during the year, as their U.S. Treasury securities rose by $85.1 billion (83.0 percent) and their mortgage-backed securities increased by $87.4 billion (6.3 percent).

Total deposits increased by $196.2 billion (2.1 percent), as deposits in domestic offices rose by $176.3 billion (2.3 percent). Most of the increase in domestic deposits occurred in noninterest-bearing accounts, which grew by $136.9 billion (8.8 percent). Nondeposit liabilities declined by $30.7 billion (1.3 percent) during the year, as advances from Federal Home Loan Banks fell by $146.7 billion (27.5 percent). Other secured borrowings increased by $205.6 billion, as part of the consolidation of securitized loan balances back into balance sheets at the beginning of 2010. Total equity capital, including minority interests in consolidated subsidiaries, increased by $68.8 billion (4.8 percent) in 2010.

The number of institutions on the FDIC’s “Problem List” increased from 702 to 884 during 2010. This is the largest number of “Problem” institutions since March 31, 1993, when there were 928. Total assets of “Problem” institutions declined from $402.8 billion to $390.0 billion. During 2010, 157 insured institutions with $92.1 billion in assets failed and were resolved by the FDIC.

1 Amendments to prior financial reports produced a $23.1 billion net reduction in industry earnings for 2009, from an originally reported $12.5 billion aggregate profit to a $10.6 billion net loss. Most of the revision resulted from a $20.3 billion increase in charges for goodwill impairment at one large institution.

2 FASB Statements 166 and 167.

Last Updated 5/5/2011 communications@fdic.gov