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Overview of the Industry 

The 8,856 FDIC-insured commercial

banks and savings institutions filing

financial reports for September 30

reported total net income of $102

billion for the first three quarters 

of 2005, an increase of $10.2 billion

(11.1 percent) over the same period

of 2004. The three highest quarterly

earnings totals for the industry 

have all come in 2005, as strong 

loan demand, favorable asset quality,

and improvements in market-related

revenue have all supported growth 

in earnings. The improving trend has

been broadly based; almost two out

of every three insured institutions

(64 percent) reported higher earnings

for the first three quarters of 2005

than in the same period of 2004.

The average return on assets 

(ROA), a basic yardstick of earnings

performance, was 1.31 percent, 

up from 1.29 percent in the same

period of 2004. Merger accounting

caused more than $3 billion to be

excluded from 2004 earnings,

so the year-over-year increase in 

earnings is somewhat overstated, 

but there was still substantial growth 

in profits. One important source of

improvement was higher noninterest

income, especially market-sensitive

revenues such as trading income.

Total noninterest revenue was 

$19.1 billion (12.8 percent) higher

than in the first three quarters 

of 2004, as income from trading 

rose by $3.5 billion (46.3 percent).

Transaction-based noninterest

income registered strong growth, 

as service charges on deposit

accounts increased by $1.4 billion

(5.7 percent). Net interest income

also helped boost earnings, rising 

by $20.3 billion (9.3 percent). Banks

and thrifts were able to limit declines

in their net interest margins despite

a flattening yield curve, so that

growth in interest-bearing assets

was reflected in higher revenue. 

There were few negatives contained

in the first three quarters of the 

2005 results. Unlike the previous two

years, industry earnings received no

benefit from lower credit expenses.

Provisions for loan losses were 

$3 million higher than a year earlier

(0.01 percent). Higher interest rates

reduced the values of institutions’

fixed-rate securities, and gains from

sales of securities and other assets

were $2.2 billion (33.5 percent)

lower than in the first three quarters

of 2004. Noninterest expenses were

up by $20.5 billion (9.5 percent), 

but some of this increase reflected

merger accounting in 2004, and the

actual growth in overhead expenses

was lower.

Residential real estate lending 

continued to support overall asset

growth during the first three quarters

of 2005. During the 12 months ended

September 30, 2005, residential 

mortgage assets (1-4 family mortgage

loans, home equity loans, mortgagebacked securities, and multifamily

residential mortgage loans) increased

by $426 billion (12.3 percent),

accounting for 52 percent of total

asset growth at insured institutions.

Loans to commercial and industrial

(C&I) borrowers was another area 

of strength; C&I loans increased by

$99 billion (10.4 percent). Real estate

construction and development loans

grew by $98.5 billion (30.9 percent),

and commercial real estate loans

rose by $72 billion (9.9 percent). 
Deposit growth remained strong, 

as rising short-term interest rates

attracted more investment-oriented

deposits into insured institutions.

Total deposits increased by $585 

billion (9.2 percent) in the 12 months

ended September 30. Deposits in

accounts of less than $100,000 grew

by $185 billion (6.6 percent), while

deposits in accounts of $100,000 

or more increased by $318.5 billion

(11.4 percent). Deposits in foreign

offices rose by $82.9 billion 

(10.1 percent).

Capital growth kept pace with the

growth in total assets during the 

first three quarters of 2005. The

industry’s equity capital ratio reached

a 67-year high at mid-year, fueled 

in part by large increases in mergerrelated goodwill. At the same time,

the industry's core capital (leverage)

ratio, which excludes goodwill,

reached its highest level in the 

25 years that risk-based capital 

standards have been in effect. At 

the end of September 2005, more

than 99 percent of all FDIC-insured

institutions met or exceeded the

highest standards for regulatory 

capital.

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