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PR-112-2003 (12-3-2003)
Media Contact:
David Barr (202-898-6992)

Lower expenses for bad loans and a rise in noninterest income contributed to the increase

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) earned a record $30.4 billion in the third quarter of 2003, marking the third time in a row that earnings set a new high. The earnings boost is primarily attributable to lower expenses for bad loans and a rise in noninterest income. These gains were slightly offset by higher long-term interest rates, which slowed mortgage activity and overall asset growth. The numbers are contained in the latest FDIC Quarterly Banking Profile, which was released today.

"The results of the last year demonstrate that banks are positioned to perform well in both a slow-growth economy, as we've had in the recent past, and in the faster-growth economy that we are now seeing," said FDIC Chairman Don Powell.

Industry earnings were $147 million (0.5 percent) higher than the previous quarter and $3.1 billion (11.3 percent) higher than the third quarter of last year. Return on assets (ROA) -- a basic yardstick of profitability -- was 1.36 percent, just two basis points below the record high registered in the two previous quarters.

Specifically, the improvement in asset quality that began in the fourth quarter of last year continued through the third quarter of 2003. Provisions for loan losses were $1.7 billion (17.1 percent) lower than in the second quarter, and were $5.3 billion (38.9 percent) below the level of a year ago. Most of the improvement came from lower losses on commercial loans to corporate borrowers.

Noninterest income was boosted by a rise in servicing fees, which rose by $3.2 billion in the quarter. However, net interest income fell by $390 million. The industry's net interest margin (the difference between earnings on interest-bearing assets and the cost of funding those assets) also fell to a 12-year low of 3.65 percent. Higher long-term interest rates also contributed to a $2.2 billion decline in gains on sales of securities and other assets. "While these headwinds are slowing the growth of earnings, they are not yet strong enough to offset the factors that are boosting bank profits," added Richard Brown, FDIC Chief Economist.

Continued strength in the housing market, as well as some carryover of mortgage refinancing activity, caused a sizable increase in the industry's portfolio of residential mortgage loans during the third quarter. Mortgage loans increased by $40.6 billion (2.5 percent) and home equity loans rose by $19.5 billion (6.6 percent). Commercial and industrial (C&I) loans continued to shrink, led by declines at large commercial banks. The $2.7-billion decline during the third quarter marked the 11th consecutive quarter that the industry's holdings of C&I loans have fallen.

ROA fell to 1.36 percent, which is only slightly below the record 1.38 percent in both the first and second quarters of this year. In the third quarter of last year, insured banks and thrifts had an ROA of 1.34 percent. More than half of all FDIC-insured institutions -- 51 percent -- reported higher earnings compared to the third quarter of last year.

"The outlook for bank earnings remains solid," Brown concluded. The FDIC's Bank Insurance Fund (BIF) ended the quarter with a reserve ratio of 1.31 percent, up from 1.29 percent at midyear. The reserve ratio of the Savings Association Insurance Fund (SAIF) rose from 1.39 percent to 1.40 percent.

  • Talking Points: FDIC Quarterly Banking Profile: Third Quarter 2003 Results for FDIC-Insured Institutions

  • FDIC Quarterly Banking Profile
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    Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation's banking system. The FDIC insures deposits at the nation's 9,237 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars - insured financial institutions fund its operations.

    FDIC press releases and other information are available on the Internet at or through the FDIC's Public Information Center (877-275-3342 or (703) 562-2200).

    Last Updated 12/03/2003

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