105

Overview of the Industry 

During 2002, insured commercial

banks and savings institutions reported

record earnings, as a recovering

economy and favorable interest-rate

environment created conditions 

conducive to strong performance.

The 9,354●

commercial banks and

savings institutions insured by the

FDIC earned $105 billion in 2002, an

$18.1 billion (20.8 percent) improvement over 2001, and the first time

their annual earnings have surpassed

the $100 billion mark. Wider net

interest margins and strong growth

in consumer-related assets helped

boost net interest income. Growth 

in noninterest revenues and higher

gains on sales of securities also 

contributed to the improvement in

revenues. These positive developments helped offset higher expenses

for loan losses stemming from the

2001 recession.

Commercial banks reported recordhigh earnings for the second consecutive year. Net income at the 7,887

banks insured by the FDIC rose to

$90.1 billion, from $74.0 billion in

2001. The improvement in earnings

was widespread; almost three out 

of every four commercial banks –

73.3 percent – reported increased

earnings in 2002. The industry’s return

on assets (ROA), a basic yardstick 

of earnings performance, also set 

a new record. The average ROA of

1.33 percent surpassed the previous

record of 1.31 percent reached in

1999. Net interest income was 

$21.9 billion (10.2 percent) higher

than a year earlier, as the industry’s

net interest margin improved to its

highest level in five years, and its

portfolio of interest-earning assets

grew by 8.5 percent. Noninterest

income was up by $14.4 billion 

(9.2 percent) from 2001. Falling 

interest rates caused the values of

banks’ fixed-rate securities portfolios

to appreciate in 2002, and sales of

securities during the year yielded

gains totaling $6.5 billion, an increase

of $2.0 billion (45.5 percent) compared

to banks’ gains in 2001. Against

these positive developments, the

main factor limiting the improvement

in bank earnings was increased

expenses to cover loan losses.

Commercial banks charged off 

$44.5 billion in loans during 2002, 

an increase of $7.9 billion (21.7 percent) from 2001. To cover these 

and other expected losses, banks

set aside a total of $48.1 billion in

loan-loss provisions, an increase of

$4.6 billion (10.6 percent) compared

to the previous year. Most of the

increases in charge-offs and loan-loss

provisions occurred at large banks,

which have experienced rising losses

on loans to commercial and industrial

borrowers, and on credit-card loans.

In the latter part of the year, the

deteriorating trend in asset quality,

which has been underway for three

years, showed signs of tapering off,

as noncurrent loans declined in the

fourth quarter for the first time since

1999.

Strong demand for residential mortgage loans – both to finance home

purchases and to refinance existing

mortgages – helped lift earnings at

the nation’s 1,467 insured savings

institutions. The industry earned

$15.2 billion in 2002, surpassing 

the record level of the previous year

by $2.0 billion (14.8 percent). The

average ROA of 1.16 was the thirdhighest ever, and the best result 

for the thrift industry in 56 years 

(in 1945, the industry’s ROA was a

record 1.27 percent; in 1946, it was

1.20 percent). It easily surpassed 

the 1.07 percent ROA that thrifts

registered in 2001. As was the case

with commercial banks, earnings

improvements were widespread in

the thrift industry. Almost four out 

of every five savings institutions –

79.1 percent – reported higher net

income in 2002, compared to 2001.

Net interest income was up by 

$3.3 billion (9.1 percent) from 2001,

as the average net interest margin

increased from 3.20 percent to 

3.35 percent, its highest level since

1993. Gains on sales of securities

totaled $5.6 billion in 2002, an increase

of $1.4 billion (31.7 percent) from

the previous year. Noninterest

income fell for the first time in five

years, declining by $692 million 

(5.9 percent). This drop was caused

primarily by losses on servicing

income stemming from the large

wave of mortgage refinancings 

that occurred in 2002. Provisions 

for loan losses were $437 million

(15.3 percent) higher than in 2001,

as net loan charge-offs rose by 

$150 million (6.5 percent).

Does not include 18 U.S. branches 

of foreign banks.

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