Reports Continued Deterioration in Earnings Performance, Asset Quality
FDIC’s third quarter, 2008 Quarterly Banking Profile was released on November
25, 2008. The industry snapshot shows a continuation of negative trends, including
depressed earnings and deteriorating asset quality. The report also provides
detail on the proposed changes to the FDIC’s assessment system.
than 58 percent of member institutions reported year-over-year declines in
quarterly net income, while 64 percent generated a reduced quarterly return on
assets (ROA). Profitability issues appear to be magnified at the larger banks;
institutions with assets greater than $1 billion experienced a 47-basis point,
year-over-year ROA decline. Community banks fared somewhat better with a
25-basis point decline. Nearly one-quarter of member banks failed to earn a
profit in the quarter; this is the highest level for this metric since the
fourth quarter of 1990.
Income a mixed bag
banks reported declines in several categories of noninterest income, including
securitization income and gains on sales of assets other than loans. Losses on
sales of bank-owned real estate increased almost six-fold to $518 million. Loan
sales, however, showed a marked improvement with net gains of $166 million.
This compares to net losses of $1.2 billion in the third quarter of last year.
interest income also improved by 4.9 percent versus a year ago. The average net
interest margin (NIM) remained flat with last quarter, but rose 2 basis points
relative to the year-ago quarter. This trend was more pronounced among larger
Credit losses still
expected, expenses related to credit losses drove much of the earnings decline.
Industry-wide, credit loss-related expenses topped $50 billion, eating up about
one-third of the industry’s net operating revenue. Aggregate loan-loss
provisions tripled from the year-ago level, reaching $50.5 billion in the
quarter. Net charge-offs increased by 156.4 percent to $27.9 billion, with
two-thirds of the increase related to loans secured by real estate. Charge-offs
related to closed-end first and second lien mortgages, real estate construction
and development loans, and loans to commercial and industrial borrowers all
showed increases well in excess of 100 percent. The quarterly net charge-off
rate jumped 10 basis points sequentially to 1.42 percent; this is the highest quarterly
net charge-off rate since 1991.
loans and leases, defined as being 90 days or more past due or in nonaccrual
status, increased by $21.4 billion sequentially to $184.3 billion. Nearly half
of this growth came from closed-end first and second lien mortgages. The percentage
of loans and leases that are noncurrent rose to 2.31 percent, which is the
highest percentage recorded since 1993.
reserves ticked up by 8.1 percent, bringing the ratio of reserves to total
loans and leases to 1.95 percent. Reserves to noncurrent loans fell to $0.85, which
is the lowest level recorded since the first quarter of 1993.
Watch list grows 46
percent, number of new charters shrinks
banks collapsed during the third quarter, and another seventy-three were merged
into other institutions. While the number of failures marks a
new institutions were chartered during the quarter. This marks a decline from
the twenty-four new charters that were added last quarter.
deposits rise, DIF reserve ratio declines
total assets of all FDIC-insured member institutions rose 2.1 percent to $273.2
billion during the quarter. Most of the increase, some 57 percent, came from
noninterest-bearing deposits. Interest-bearing deposits on the other hand
showed a slight decrease of 0.3 percent.
deposits continued an upward trend, rising 1.8 percent on top of a second
quarter increase of 0.6 percent. Fifty-eight percent of member institutions
reported an increase in insured deposits, 42 percent reported a decrease and
the remainder reported no change.
Deposit Insurance Fund decreased by $10.6 billion, primarily due to an $11.9
billion increase in loss provisions for bank failures. As of September 30,
2008, the reserve ratio was 0.76 percent, down 25 basis points from three months
prior. Nine insured institutions failed during the quarter, bringing
year-to-date failures to thirteen; those thirteen failed institutions had
combined assets of $348 billion and are estimated to have cost the DIF $11
involves increases, changes to risk-based assessments
FDIC adopted a restoration plan on October 7 to increase the DIF’s reserve loss
ratio to 1.15 percent within five years, as required by Federal Deposit
Insurance Reform Act of 2005. In accordance with the plan, the FDIC Board
approved the publication of a notice of proposed rule making to increase the
assessment and shift a larger proportion of that increase to riskier
institutions. For the first quarter of 2009, the FDIC seeks to increase
assessment rates by 7 basis points across the board.
proposed assessment system, to be effective April 1, 2009, establishes base
assessment rates ranging from 10 to 45 basis points for Risk Categories I
through IV. Those base rates would then be adjusted for unsecured debt, secured
liabilities and brokered deposits. The adjusted assessment rates would range
from 8 to 77.5 basis points.