| Quarterly Banking Profile |
ALL INSTITUTIONS PERFORMANCE More Institutions Report Declining Earnings, Quarterly Losses/> Troubled assets continued to mount at insured commercial banks and savings institutions in the third quarter of 2008, placing a growing burden on industry earnings. Expenses for credit losses topped $50 billion for a second consecutive quarter, absorbing one-third of the industry's net operating revenue (net interest income plus total noninterest income). Third quarter net income totaled $1.7 billion, a decline of $27.0 billion (94.0 percent) from the third quarter of 2007. The industry's quarterly return on assets (ROA) fell to 0.05 percent, compared to 0.92 percent a year earlier. This is the second-lowest quarterly ROA reported by the industry in the past 18 years. Evidence of a deteriorating operating environment was widespread. A majority of institutions (58.4 percent) reported year-over-year declines in quarterly net income, and an even larger proportion (64.0 percent) had lower quarterly ROAs. The erosion in profitability has thus far been greater for larger institutions. The median ROA at institutions with assets greater than $1 billion has fallen from 1.03 percent to 0.56 percent since the third quarter of 2007, while at community banks (institutions with assets less than $1 billion) the median ROA has declined from 0.97 percent to 0.72 percent. Almost one in every four institutions (24.1 percent) reported a net loss for the quarter, the highest percentage in any quarter since the fourth quarter of 1990, and the highest percentage in a third quarter in the 24 years that all insured institutions have reported quarterly earnings. Lower Asset Values Add to the Downward Pressure on Earnings Loan-loss provisions totaled $50.5 billion in the quarter, more than three times the $16.8 billion of a year earlier. Total noninterest income was $905 million (1.5 percent) lower than in the third quarter of 2007. Securitization income declined by $1.9 billion (33.0 percent), as reduced demand in secondary markets limited new securitization activity. Gains on sales of assets other than loans declined by $1.0 billion (78.7 percent) year-over-year, and losses on sales of real estate acquired through foreclosure rose by $518 million (588 percent). Among the few categories of noninterest income that showed improvement, loan sales produced net gains of $166 million in the third quarter, compared to $1.2 billion in net losses a year earlier, and trading revenue was up by $2.8 billion (129.2 percent). Sales of securities and other assets yielded net losses of $7.6 billion in the third quarter, compared to gains of $77 million in the third quarter of 2007. Expenses for impairment of goodwill and other intangible asset expenses were $1.8 billion (58.6 percent) higher than a year ago. Margin Improvement Provides a Boost to Net Interest Income One of the few relatively bright spots in third quarter results was net interest income, which was $4.4 billion (4.9 percent) higher than a year ago. The average net interest margin (NIM) in the third quarter was 3.37 percent, unchanged from the second quarter but up from 3.35 percent in the third quarter of 2007. Two out of every three institutions reported margin improvement over second-quarter levels, but more than half of all insured institutions (54 percent) reported lower NIMs than in the third quarter of 2007. The year-over-year improvement in the industry's NIM was concentrated among larger institutions. Higher margins helped offset sluggish growth in interest-earning assets. Earning assets increased by only $52.3 billion (0.5 percent) during the quarter, after shrinking by $33.6 billion (0.3 percent) in the second quarter. Over the 12 months ended September 30, the industry's interest-earning assets were up by only 4.2 percent, the lowest 12-month growth rate in more than six years. The industry reported year-over-year growth in net charge-offs for the seventh consecutive quarter. Net charge-offs totaled $27.9 billion in the quarter, an increase of $17.0 billion (156.4 percent) from a year earlier. Two-thirds of the increase in charge-offs consisted of loans secured by real estate. Charge-offs of closed-end first and second lien mortgage loans were $4.6 billion (423 percent) higher than in the third quarter of 2007, while charged-off real estate construction and development (C&D) loans were up by $3.9 billion (744 percent). Charge-offs of home equity lines of credit were $2.1 billion (306 percent) higher. Charge-offs of loans to commercial and industrial (C&I) borrowers increased by $2.3 billion (139 percent), credit card loan charge-offs rose by $1.5 billion (37.4 percent), and charge-offs of other loans to individuals were $1.7 billion (76.4 percent) higher. The quarterly net charge-off rate in the third quarter was 1.42 percent, up from 1.32 percent in the second quarter and 0.57 percent in the third quarter of 2007. This is the highest quarterly net charge-off rate for the industry since 1991. The failure of Washington Mutual on September 25 meant that a significant amount of charge-off activity was not reflected in the reported industry totals for the quarter.1 Growth in Reported Noncurrent Loans Remains High The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased to $184.3 billion at the end of September. This is $21.4 billion (13.1 percent) more than insured institutions reported as of June 30 and is up by $101.2 billion (122 percent) over the past 12 months. The percentage of total loans and leases that were noncurrent rose from 2.04 percent to 2.31 percent during the quarter and is now at the highest level since the third quarter of 1993. The growth in noncurrent loans during the quarter was led by closed-end first and second lien mortgage loans, where noncurrents rose by $9.6 billion (14.3 percent). Noncurrent real estate C&D loans increased by $6.9 billion (18.1 percent), while noncurrent loans secured by nonfarm nonresidential properties rose by $2.2 billion (18.1 percent). Noncurrent C&I loans were up by $1.8 billion (13.7 percent) during the quarter. Reserve Coverage of Noncurrent Declines Loan-loss reserves increased by $11.7 billion (8.1 percent) during the quarter, the smallest quarterly growth in reserves since the third quarter of 2007. The industry's ratio of reserves to total loans and leases increased from 1.81 percent to 1.95 percent, its highest level since the first quarter of 1995. However, reserve growth did not keep pace with the growth in noncurrent loans, and the "coverage ratio" of reserves to noncurrent loans fell from 89 cents in reserves for every $1.00 of noncurrent loans to 85 cents. This is the tenth consecutive quarter that the industry's coverage ratio has fallen; it is now at its lowest level since the first quarter of 1993. Failure-Related Restructuring Contributes to a Decline in Reported Capital Total equity capital fell by $44.2 billion (3.3 percent) during the third quarter. A $14.6-billion decline in other comprehensive income, driven primarily by unrealized losses on securities held for sale, was a significant factor in the reduction in equity, but most of the decline stemmed from the accounting effect of the failure of Washington Mutual Bank (WaMu)2. The WaMu failure had a similar effect on the reported industry totals for tier 1 capital and total risk-based capital, which declined by $33.6 billion and $35.3 billion, respectively. Unlike equity capital, these regulatory capital amounts are not affected by changes in unrealized gains or losses on available-for-sale securities. Almost half of all institutions (48.5 percent) reported declines in their leverage capital ratios during the quarter, and slightly more than half (51.2 percent) reported declines in their total risk-based capital ratios. Many institutions reduced their dividends to preserve capital; of the 3,761 institutions that paid dividends in the third quarter of 2007, more than half (57.4 percent) paid lower dividends in the third quarter of 2008, including 20.7 percent that paid no dividends. Third quarter dividends totaled $11.0 billion, a $16.9-billion (60.7-percent) decline from a year ago. Liquidity Program Provides a Boost to Asset Growth Total assets of insured institutions increased by $273.2 billion (2.1 percent) in the third quarter, led by growth in balances at Federal Reserve banks (up $146.8 billion, or 505 percent) and a $74.6-billion increase in asset-backed commercial paper holdings. A number of large banks experienced sizable deposit inflows during the quarter and elected to place a large share of these funds with Federal Reserve banks. The increase in holdings of commercial paper was attributable to the creation of a special lending facility-the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)-by the Federal Reserve aimed at providing liquidity to money market mutual funds (MMFs) by funding bank purchases of asset-backed commercial paper from the MMFs3. Loans in categories experiencing the greatest credit-quality problems shrank in the third quarter. Residential mortgage loans declined by $52.1 billion (2.4 percent), while real estate C&D loans fell by $10.2 billion (1.6 percent). One of the few loan categories showing significant growth was real estate loans secured by nonfarm nonresidential properties, which increased by $24.4 billion (2.4 percent). Unused loan commitments declined by $298.1 billion (3.7 percent) during the quarter. The decline was led by a reduction in unused credit card lines, which fell by $122.8 billion (2.6 percent). Discount Window Borrowings Fuel a Surge in Nondeposit Liabilities Nondeposit liabilities increased by $162.5 billion (4.8 percent) in the third quarter, as insured institutions increased their borrowings from the Federal Reserve's Discount Window (which was used to fund the AMLF), as well as their advances from Federal Home Loan Banks. Securities sold under repurchase agreements registered strong growth, rising by $64.2 billion (11.2 percent). Total deposits increased by $154.8 billion (1.8 percent), as noninterest-bearing deposits in domestic offices rose by $175.7 billion (14.4 percent). The growth in deposits was concentrated in a few large banks. Deposits in foreign offices declined by $38 billion (2.5 percent). Nine Failures in Third Quarter Include Washington Mutual Bank The number of insured commercial banks and savings institutions fell to 8,384 in the third quarter, down from 8,451 at midyear. During the quarter, 73 institutions were absorbed in mergers, and 9 institutions failed. This is the largest number of failures in a quarter since the third quarter of 1993, when 16 insured institutions failed. Among the failures was Washington Mutual Bank, an insured savings institution with $307 billion in assets and the largest insured institution to fail in the FDIC's 75-year history. There were 21 new institutions chartered in the third quarter, the smallest number of new charters in a quarter since 17 new charters were added in the first quarter of 2002. Four insured savings institutions, with combined assets of $1.0 billion, converted from mutual ownership to stock ownership in the third quarter. The number of insured institutions on the FDIC's "Problem List" increased from 117 to 171, and the assets of "problem" institutions rose from $78.3 billion to $115.6 billion during the quarter. This is the first time since the middle of 1994 that assets of "problem" institutions have exceeded $100 billion. Chart 1. Earnings Weakness Persisted in the Third Quarter Chart 2. Almost One in Four Institutions Was Unprofitable in the Third Quarter Chart 3. Rising Loss Provisions Remain the Most Significant Factor Affecting Industry Earnings Chart 4. Community Bank Margins Improved in the Third Quarter Chart 5. Growth in Troubled Loans Remains High Chart 6. Consumer Loans Account for Two-Thirds of Quarterly Charge-Offs Chart 7. Earning Asset Growth Has Slowed Substantially Chart 8. 2008 Is a Record Year for Failed Bank Assets TABLE I-A. Selected Indicators, All FDIC-Insured Institutions TABLE II-A. Aggregate Condition and Income Data, All FDIC-Insured Institutions TABLE III-A. Third Quarter 2008, All FDIC-Insured Institutions
TABLE IV-A. First Three Quarters 2008, All FDIC-Insured Institutions
TABLE V-A. Loan Performance, All FDIC-Insured Institutions
TABLE VI-A. Derivatives, All FDIC-Insured Commercial Banks and State-Chartered Savings Banks TABLE VII-A. Servicing, Securitization, and Asset Sales Activities Footnotes 1 Under purchase accounting rules that apply to bank mergers, income and expenses that have been booked by an acquired institution are reset to zero as of the date when a change in ownership occurs. Income and expense that have been incurred prior to that date are reflected in adjustments to the assets, equity capital, and reserves of the acquired institution. 2 Prior to September 25, 2008, Washington Mutual FSB of Park City, Utah, an insured institution with $46 billion in assets and $29 billion in equity capital, was directly owned by Washington Mutual Bank of Henderson, Nevada. Under accounting rules, the subsidiary institution's assets and liabilities were included in the consolidated financial data reported by the parent institution, resulting in double-reporting of some of the subsidiary's financial data. The direct ownership relationship ended with the failure of the parent institution during the third quarter, at which point the subsidiary institution's financial data were no longer double-reported. 3 On September 19, the Federal Reserve instituted the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) to restore liquidity to the market for commercial paper, and help money market mutual funds meet redemptions. |
