Each depositor insured to at least $250,000 per insured bank

Quarterly Banking Profile

ALL INSTITUTIONS PERFORMANCE
FOURTH QUARTER 2007

Notes to Users

  • INDUSTRY EARNED $5.8 BILLION IN FOURTH QUARTER
  • EXPENSES FOR BAD LOANS, TRADING LOSSES WEIGH ON EARNINGS
  • NONCURRENT RATE ON MORTGAGE LOANS REACHES NEW HIGH
  • PACE OF RESERVE BUILDING PICKS UP
  • NET INCOME TOTALED $105.5 BILLION IN 2007

  • Quarterly Net Income Declines to a 16-Year Low

    Record-high loan-loss provisions, record losses in trading activities and goodwill impairment expenses combined to dramatically reduce earnings at a number of FDIC-insured institutions in the fourth quarter of 2007. Fourth-quarter net income of $5.8 billion was the lowest amount reported by the industry since the fourth quarter of 1991, when earnings totaled $3.2 billion. It was $29.4 billion (83.5 percent) less than insured institutions earned in the fourth quarter of 2006. The average return on assets (ROA) in the quarter was 0.18 percent, down from 1.20 percent a year earlier. This is the lowest quarterly ROA since the fourth quarter of 1990, when it was a negative 0.19 percent. Insured institutions set aside a record $31.3 billion in provisions for loan losses in the fourth quarter, more than three times the $9.9 billion they set aside in the fourth quarter of 2006. Trading losses totaled $10.6 billion, marking the first time that the industry has posted a quarterly net trading loss. In the fourth quarter of 2006, the industry had trading revenue of $4.0 billion. Expenses for goodwill and other intangibles totaled $7.4 billion, compared to $1.6 billion a year earlier. Against these negative factors, net interest income remained one of the few positive elements in industry performance. Net interest income for the fourth quarter totaled $92.0 billion, an 11.8-percent ($9.7-billion) year-over-year increase.

    One in Four Large Institutions Lost Money in the Fourth Quarter

    Earnings weakness was fairly widespread in the fourth quarter. More than half of all institutions (51.2 percent) reported lower net income than in the fourth quarter of 2006, and 57.1 percent reported lower quarterly ROAs. However, the magnitude of the decline in industry earnings was attributable to a relatively small number of large institutions. In contrast to the steep 102 basis-point drop in the industry’s ROA, the median ROA fell by only 14 basis points, from 0.93 percent to 0.79 percent. Seven large institutions accounted for more than half of the total year-over-year increase in loss provisions. Ten large institutions accounted for the entire decline in trading results. Five institutions accounted for three-quarters of the increase in goodwill and intangibles expenses, and sixteen institutions accounted for three-quarters of the year-over-year decline in quarterly net income. One out of every four institutions with assets greater than $10 billion reported a net loss for the fourth quarter. Institutions associated with subprime mortgage lending operations and institutions engaged in significant trading activity were among those reporting the largest earnings declines.

    Margin Erosion Persists

    As interest rates fell during the quarter, average asset yields declined more than average funding costs, and net interest margins (NIMs) narrowed slightly from third-quarter levels. The average NIM in the fourth quarter was 3.30 percent, compared to 3.36 percent in the third quarter. Except for the fourth quarter of 2006, when the accounting treatment of a few large corporate restructurings resulted in a reduction in reported net interest income, this is the lowest quarterly NIM for the industry since 1989. Almost 60 percent of all institutions had their margins decline from third-quarter levels. Margin erosion was especially pronounced at large mortgage lenders.

    Full-Year Earnings Fall to Five-Year Low

    For all of 2007, insured institutions earned $105.5 billion, a decline of $39.8 billion (27.4 percent) from 2006. This is the lowest annual net income for the industry since 2002 and is the first time since 1999-2000 that annual net income has declined. While much of the decline in industry earnings was concentrated among some of the largest institutions, evidence of broader weakness in earnings bespoke an operating environment that was less favorable than in previous years. Fewer than half of all insured institutions--49.2 percent--reported improved earnings in 2007, the first time in at least 23 years that a majority of insured institutions have not posted full-year earnings increases. The percentage of institutions that were unprofitable in 2007--11.6 percent--was the highest since 1991. The average ROA for the year was 0.86 percent, the lowest yearly average since 1991, when it was 0.42 percent, and the first time in 15 years that the industry’s annual ROA has been below 1 percent. More than half of all institutions--59.2 percent--reported lower ROAs in 2007 than in 2006. Sharply higher loss provisions and a very rare decline in annual noninterest income were primarily responsible for the lower industry profits. Insured institutions set aside $68.2 billion in provisions for loan losses in 2007, more than twice the $29.5 billion they set aside in 2006. Loss provisions represented 11.6 percent of net operating revenue (net interest income plus total noninterest income), the highest proportion for the industry since 1992. Total noninterest income of $233.4 billion was $7.0 billion (2.9 percent) less than in 2006, as trading revenue fell from $19.0 billion in 2006 to only $4.1 billion in 2007, and net gains on loan sales fell by $5.1 billion (68.5 percent). This is the first time since the mid-1970s that full-year noninterest income has declined1. Noninterest expenses were $30.2 billion (9.1 percent) higher than a year earlier. Net interest income increased by $22.7 billion (6.9 percent) in 2007, even though the industry’s full-year net interest margin declined to its lowest level since 1988, because interest-earning assets grew by 9.4 percent during the year.

    Net Charge-Off Rate Rises to Five-Year High

    Net charge-offs registered a sharp increase in the fourth quarter, rising to $16.2 billion, compared to $8.5 billion in the fourth quarter of 2006. The annualized net charge-off rate in the fourth quarter was 0.83 percent, the highest since the fourth quarter of 2002. Net charge-offs were up year-over-year in all major loan categories except loans to the farm sector (agricultural production loans and real estate loans secured by farmland). Net charge-offs of loans to commercial and industrial (C&I) borrowers were $1.6 billion (104.5 percent) higher than in the fourth quarter of 2006. Net charge-offs of residential mortgage loans were up by $1.3 billion (144.2 percent), and charge-offs of home equity lines of credit were $1.0 billion (378.4 percent) higher. Credit card charge-offs were up by $1.0 billion (33.0 percent), and charge-offs of other loans to individuals increased by $1.1 billion (58.4 percent).

    Growth in Noncurrent Loans Accelerates

    Despite the heightened level of charge-offs, the rising trend in noncurrent loans that began in mid-2006 continued to gain momentum in the fourth quarter. Total noncurrent loans -- loans 90 days or more past due or in nonaccrual status -- rose by $26.9 billion (32.5 percent) in the last three months of 2007. This is the largest percentage increase in a single quarter in the 24 years for which noncurrent loan data are available. Eight institutions accounted for half of the total increase in noncurrent loans in the fourth quarter, but noncurrent loans were up at half of all insured institutions. The percentage of loans that were noncurrent at year-end was 1.39 percent, the highest level since the third quarter of 2002. The fourth-quarter increase in noncurrent loans was led by noncurrent residential mortgage loans, which grew by $11.1 billion (31.7 percent). The percentage of residential mortgage loans that were noncurrent rose from 1.57 percent to 2.06 percent during the quarter and is now at the highest level in the 17 years that noncurrent mortgage data have been reported. Noncurrent real estate construction and development loans increased by $8.4 billion (73.2 percent), noncurrent credit card loans rose by $1.9 billion (26.0 percent), noncurrent home equity loans were up by $1.6 billion (43.1 percent), and noncurrent other loans to individuals increased by $1.2 billion (26.7 percent). Only the farm loan categories registered declines in noncurrent amounts.

    Large Boost to Loss Reserves Fails to Stem Decline in Coverage Ratio

    Insured institutions’ loss reserves posted their largest increase in 20 years in the fourth quarter, but this growth did not keep pace with the growth in noncurrent loans. The industry’s $31.3-billion loss provision exceeded the $16.2 billion in net charge-offs by a considerable margin, and reserves grew by $14.8 billion (17.0 percent). The ratio of reserves to total loans and leases rose from 1.13 percent to 1.29 percent during the quarter, its highest level since the first quarter of 2005. But the “coverage ratio” of reserves to noncurrent loans fell from $1.05 in reserves for every $1.00 of noncurrent loans to 93 cents at the end of 2007. This is the first time since 1993 that the industry’s noncurrent loans have exceeded its reserves. At year end, one in three institutions had noncurrent loans that exceeded reserves, compared to fewer than one in four institutions a year earlier.

    Capital Ratios Exhibit Mixed Results

    Total equity capital increased by $25.1 billion (1.9 percent) during the fourth quarter. This increase lagged behind the 2.6-percent increase in assets during the quarter, and the industry’s equity-to-assets ratio declined from 10.44 percent to 10.37 percent. Goodwill accounted for almost one-third ($7.9 billion) of the increase in equity, despite large write-downs of goodwill at several institutions. The industry’s leverage capital ratio registered a larger decline during the quarter, because leverage capital does not include goodwill. The leverage ratio fell from 8.14 percent to 7.98 percent, a four-year low. In contrast, the industry’s total risk-based capital ratio, which includes loss reserves, increased from 12.74 percent to 12.79 percent. At the end of 2007, 99 percent of all insured institutions, representing more than 99 percent of total industry assets, met or exceeded the highest regulatory capital standards.

    Asset Growth Remains Strong in the Fourth Quarter

    Assets continued to grow strongly in the fourth quarter, but the focus of growth shifted away from residential mortgage loans. Total assets increased by $331.8 billion (2.6 percent) during the quarter. Fed funds sold and securities purchased under resale agreements increased by $71.5 billion (11.5 percent), assets in trading accounts grew by $64.6 billion (8.0 percent), C&I loans increased by $51.5 billion (3.7 percent), and credit card loans grew by $38.0 billion (9.9 percent). The industry’s portfolio of mortgage-backed securities rose by $36.9 billion (3.1 percent). Real estate loans secured by nonfarm nonresidential properties increased by $29.0 billion (3.1 percent). Residential mortgage loans rose by only $7.1 billion (0.3 percent), compared to a $30.8-billion increase in the third quarter. Real estate construction and development loans increased by only $12.5 billion (2.0 percent) during the fourth quarter. This is the smallest quarterly increase since the fourth quarter of 2003. Despite the slowdown in growth of construction lending, the number of institutions with concentrations of exposure to construction lending continued to rise. During the fourth quarter, the number of institutions whose construction loans exceeded their total capital increased from 2,348 to 2,368.

    Domestic Deposits Post Record Growth

    Deposits in domestic offices of insured institutions increased by $170.6 billion (2.5 percent), the largest quarterly dollar increase ever reported by the industry. Deposits in noninterest-bearing accounts rose by $64.9 billion (5.8 percent), time deposits grew by $53.5 billion (2.1 percent), and deposits in other interest-bearing accounts increased by $49.1 billion (1.6 percent). Brokered deposits increased by $63.3 billion (12.4 percent). Nondeposit liabilities rose by $74.0 billion (2.3 percent), led by advances from Federal Home Loan Banks (up $38.4 billion, or 5.0 percent). Deposits in foreign offices grew by $62.2 billion (4.3 percent). The industry’s ratio of deposits to total assets, which hit an all-time low of 64.4 percent at the end of the third quarter, rose slightly to 64.5 percent at year end.

    Trust Income Rose in 2007

    Both trust assets and income from trust activities registered strong growth in 2007. Total assets in trust accounts increased by $2.6 trillion (13.4 percent) during the year, with assets in managed accounts increasing by $68.6 billion (1.6 percent) and assets in non-managed accounts rising by $2.5 trillion (16.9 percent). Assets in custodial and safekeeping accounts increased by $9.8 trillion (20.3 percent) in 2007. Net income from trust activities totaled $12.8 billion in 2007, an increase of $2.8 billion (28.6 percent) over 2006. Five institutions accounted for 53 percent of the industry’s net trust income in 2007.

    Three Failures in 2007 Is Most Since 2004

    The number of FDIC-insured institutions reporting financial results declined from 8,559 to 8,533 during the fourth quarter2. Fifty newly chartered institutions were added during the quarter, while 74 institutions were absorbed by mergers. One insured commercial bank failed in the fourth quarter. For the full year, 181 new insured institutions were chartered, 321 charters were absorbed in mergers, and three insured institutions failed. In the previous two years, there were no failures of FDIC-insured institutions, an interval unprecedented since the inception of the FDIC. In 2004, four insured institutions failed. Five mutually owned savings institutions, with combined assets of $4.8 billion, converted to stock ownership in the fourth quarter. For the entire year, ten insured savings institutions with total assets of $10.1 billion converted from mutual ownership to stock ownership. At the end of 2007, there were 76 FDIC-insured commercial banks and savings institutions on the “Problem List,” with combined assets of $22.2 billion, up from 65 institutions with $18.5 billion at the end of the third quarter.

    Chart 1. Fourth Quarter Earnings Are Lowest Since 1991

    Chart 2. Loss Provisions Set a New Quarterly Record

    Chart 3. Margins Remain Near 19-Year Lows

    Chart 4. Annual ROA Fell to Its Lowest Level Since 1991

    Chart 5. Asset Quality Continues to Weaken

    Chart 6. A Growing Number of Institutions Have Concentrations of Exposure to Construction Lending

    Chart 7. Commercial Lending Is Leading Overall Loan Growth

    Chart 8. Chartering and Merger Activity Slowed in 2007

    TABLE I-A. Selected Indicators, All FDIC-Insured Institutions

    TABLE II-A. Aggregate Condition and Income Data, All FDIC-Insured Institutions

    TABLE III-A. Full Year 2007, All FDIC-Insured Institutions

  • Asset Concentration Groups
  • Asset Size Distribution & Geographic Regions
  • TABLE IV-A. Fourth Quarter 2007, All FDIC-Insured Institutions

  • Asset Concentration Groups
  • Asset Size Distribution & Geographic Regions
  • TABLE V-A. Loan Performance, All FDIC-Insured Institutions

  • Asset Concentration Groups
  • Asset Size Distribution & Geographic Regions
  • TABLE VI-A. Derivatives, All FDIC-Insured Commercial Banks and State-Chartered Savings Banks

    TABLE VII-A. Servicing, Securitization, and Asset Sales Activities

    TABLE VIII-A. Trust Services

    Footnotes

    1 Total noninterest income of FDIC-insured commercial banks declined by $1.0 billion (11.7 percent) between 1975 and 1976. Noninterest income data for insured savings institutions are not available for those years.

    2 At the time this issue of the Quarterly Banking Profile went to press, one insured commercial bank with assets of $1.2 billion had not yet submitted a year end 2007 Call Report.

    Last Updated 02/26/2008 Questions, Suggestions & Requests