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

Notes to Users

Higher Loss Provisions Lead to a $3.7 Billion Net Loss More Than One in Four Institutions Are Unprofitable Charge-Offs and Noncurrent Loans Continue to Rise Net Interest Margins Show Modest Improvement Industry Assets Decline by $238 Billion

The Industry Posts a Net Loss for the Quarter

Burdened by costs associated with rising levels of troubled loans and falling asset values, FDIC-insured commercial banks and savings institutions reported an aggregate net loss of $3.7 billion in the second quarter of 2009. Increased expenses for bad loans were chiefly responsible for the industry’s loss. Insured institutions added $66.9 billion in loan-loss provisions to their reserves during the quarter, an increase of $16.5 billion (32.8 percent) compared to the second quarter of 2008. Quarterly earnings were also adversely affected by writedowns of asset-backed commercial paper, and by higher assessments for deposit insurance. Almost two out of every three institutions (64.4 percent) reported lower quarterly earnings than a year ago, and more than one in four (28.3 percent) reported a net loss for the quarter. A year ago, the industry reported a quarterly profit of $4.7 billion, and fewer than one in five institutions (18 percent) were unprofitable. The average return on assets (ROA) was -0.11 percent, compared to 0.14 percent in the second quarter of 2008.

Noninterest Income Grows 10.6 Percent Year-Over-Year

In addition to the $16.5-billion increase in loss provisions, the industry reported a $3.3 billion increase in extraordinary losses and a $1.7 billion (1.7 percent) year-over-year increase in noninterest expenses. The extraordinary losses stemmed from asset-backed commercial paper writedowns, while the increased noninterest expenses primarily reflected higher deposit insurance assessments. These negative factors were partially offset by higher noninterest income (up $6.5 billion, or 10.6 percent), increased net interest income (up $3.4 billion, or 3.5 percent), and a $1.5-billion reduction in realized losses on securities and other assets. Gains on asset sales (up $4.5 billion), increased trading revenue (up $4.5 billion), and higher servicing fees (up $3.6 billion) were the largest contributors to the year-over-year improvement in noninterest income.

Margins Improve at a Majority of Institutions

Average net interest margins (NIMs) improved slightly from first quarter levels, as average funding costs fell more rapidly than average asset yields. The average margin increased to 3.48 percent from 3.39 percent in the first quarter and 3.37 percent in the second quarter of 2008. The consecutive-quarter improvement was relatively broad-based: more than half (56.5 percent) of all institutions reported higher NIMs than in the first quarter. However, the year-over-year improvement was concentrated among larger institutions. Only 45.3 percent of insured institutions reported year-over-year NIM improvement. Despite the widening in margins, net interest income growth has been limited by recent shrinkage in earning asset portfolios. Interest-earning assets declined by $149.6 billion during the second quarter, following a $163.7 billion decline in the first quarter. In the 12 months ended June 30, the industry’s earning assets increased by only $18.3 billion (0.2 percent).

Net Charge-Off Rate Sets a Quarterly Record

Net charge-offs continued to rise, propelling the quarterly net charge-off rate to a record high. Insured institutions charged-off $48.9 billion in the second quarter, compared to $26.4 billion a year earlier. The annualized net charge-off rate in the second quarter was 2.55 percent, eclipsing the previous quarterly record of 1.95 percent reached in the fourth quarter of 2008. The $22.5 billion (85.3 percent) year-over-year increase in net charge-offs was led by loans to commercial and industrial (C&I) borrowers, which increased by $5.3 billion (165.0 percent). Net charge-offs of credit card loans were $4.6 billion (84.5 percent) higher than a year earlier, and the annualized net charge-off rate on credit card loans reached a record 9.95 percent in the second quarter. Net charge-offs of real estate construction and development loans were up by $4.2 billion (117.0 percent), and charge-offs of loans secured by 1-4 family residential properties were $4.0 billion (41.1 percent) higher than a year ago.

Noncurrent Loan Rate Rises to Record Level

The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased for a 13th consecutive quarter, and the percentage of total loans and leases that were noncurrent reached a new record. Noncurrent loans and leases increased by $41.4 billion (14.3 percent) during the second quarter, led by 1-4 family residential mortgages (up $15.4 billion, or 12.7 percent), real estate construction and development loans (up $10.2 billion, or 16.6 percent), and loans secured by nonfarm nonresidential real estate properties (up $7.1 billion, or 29.2 percent). Noncurrent home equity loans and junior lien mortgages fell for the first time in three years, declining by $1.7 billion and $1.5 billion, respectively. Noncurrent levels rose in all other major loan categories. Although the increase in total noncurrent loans was almost one-third smaller than the $59.7 billion increase in the first quarter, the average noncurrent rate on all loans and leases rose from 3.76 percent to 4.35 percent. This is the highest level for the noncurrent rate in the 26 years that insured institutions have reported noncurrent loan data. On a more positive note, loans that were 30-89 days past due declined by $16.7 billion (10.6 percent). This is the largest quarterly decline in dollar terms in the 26 years that these data have been reported, and the largest percentage decline since the first quarter of 2004, when 30-89 day past due loans were one-third the current level. The decline in past due loans occurred across all major loan categories, but real estate loans accounted for 83.5 percent ($13.9 billion) of the total improvement. Restructured loans and leases that were in compliance with their modified terms increased by $13.7 billion (41.6 percent) at commercial and savings banks that file Call reports, as restructured 1-4 family residential real estate loans rose by $10.2 billion (55.4 percent).

Institutions Continue to Add to Reserves

The industry’s reserves for loan losses increased by $16.8 billion (8.6 percent) during the second quarter, as loss provisions of $66.9 billion exceeded net charge-offs of $48.9 billion. The ratio of reserves to total loans and leases set another new record, rising from 2.51 percent to 2.77 percent. However, the pace of reserve building fell short of the rise in noncurrent loans, and the industry’s ratio of reserves to noncurrent loans fell from 66.8 percent to 63.5 percent, the lowest level since the third quarter of 1991.

Overall Capital Levels Register Improvement

Equity capital increased by $32.5 billion (2.4 percent), raising the industry’s equity-to-assets ratio from 10.13 percent to 10.56 percent, the highest level since March 31, 2007. Average regulatory capital ratios increased as well. The leverage capital ratio increased from 8.02 percent to 8.25 percent, while the total risk-based capital ratio rose from 13.42 percent to 13.76 percent. However, fewer than half of all institutions reported increases in their regulatory capital ratios. Only 43.2 percent reported increased leverage capital ratios, and 47.0 percent had increased total risk-based capital ratios. Insured institutions paid $6.2 billion in dividends in the quarter, about two-thirds less than the $17.7 billion in dividends paid in the second quarter of 2008.

Industry Assets Decline for a Second Consecutive Quarter

Total assets declined by $238.1 billion (1.8 percent), following a $303.2-billion decline in the first quarter. Loans and leases accounted for more than half of the decline ($125.5 billion, or 52.7 percent of the total), while the industry’s balances at Federal Reserve banks fell by $99.4 billion (a 20.4 percent decline). As was the case in the first quarter, much of the decline in industry assets was concentrated at a few large institutions. More than 57 percent of institutions increased their assets during the second quarter, and a similar majority increased their loan balances. Among the loan categories registering the largest declines during the quarter were C&I loans (down $67.7 billion, or 4.7 percent), 1-4 family residential mortgage loans (down $33.2 billion, or 1.6 percent), and real estate construction and development loans (down $31.0 billion, or 5.5 percent). Assets in trading accounts declined by $65.5 billion (7.9 percent). The industry’s total securities holdings increased by $130.6 billion (5.9 percent).

Small Business Loan Balances Declined Over the Past 12 Months

Annual data on loans to small businesses and farms indicate that the industry’s balances of these loans experienced shrinkage during the twelve months ended June 30 while loans to larger borrowers had a slight increase. Small C&I, agricultural, and nonresidential real estate loans¹ declined by $14.8 billion (1.9 percent) between June 30, 2008 and June 30, 2009, compared to an increase of $2.2 billion (0.1 percent) in larger business and farm loans.

Institutions Reduce Their Reliance on Nondeposit Funding Sources

In contrast to the decline in industry assets, total deposits of insured institutions increased by $66.7 billion (0.7 percent). Deposits in foreign offices accounted for more than three quarters ($51.0 billion, or 76.5 percent) of the increase in deposits. Domestic office deposits increased by only $15.7 billion (0.2 percent), as deposits in large denomination (> $250,000) noninterest-bearing transaction accounts increased by $42.0 billion (4.9 percent), and deposits in interest-bearing accounts fell by $16.9 billion. Nondeposit liabilities declined by $337.3 billion (10.6 percent), as trading liabilities fell by $85.0 billion (23.7 percent), and FHLB advances dropped by $62.2 billion (8.9 percent). At the end of June, deposits funded 67.8 percent of the industry’s assets, the highest proportion since March 1998.

“Problem List” Expands to 15-Year High

The number of insured commercial banks and savings institutions reporting financial results fell to 8,195 in the quarter, down from 8,247 reporters in the first quarter. Thirty-nine institutions were merged into other institutions during the quarter, twenty-four institutions failed, and there were twelve new charters added. During the quarter, the number of institutions on the FDIC’s “Problem List” increased from 305 to 416, and the combined assets of “problem” institutions rose from $220.0 billion to $299.8 billion. This is the largest number of “problem” institutions since June 30, 1994, and the largest amount of assets on the list since December 31, 1993.

Footnotes

¹ C&I loans with original amounts of $1 million or less, loans secured by nonfarm nonresidential real estate with original amounts of $1 million or less, real estate loans secured by farmland with original amounts of $500 thousand or less, and agricultural production loans with original amounts of $500 thousand or less.