Overview of the Industry 

The 9,025 commercial banks and

savings institutions insured by the

FDIC reported total earnings of 

$91.8 billion for the first three quarters

of 2004, an increase of $2.0 billion

(2.3 percent) over the same period of

2003. The industry set new earnings

records in two of the first three quarters of the year, as a strengthening

economy and positive interest rate

conditions boosted loan demand and

helped reduce the level of troubled

loans. Net interest income, (the 

difference between the interest that

institutions earn on their loans and

other investments and the interest

they pay on deposits and other 

interest-bearing liabilities), registered

strong growth, and lower provisions

for loan losses also contributed 

to the improvement in earnings.

Insured commercial banks reported

$78.1 billion in net income for the first

three quarters of 2004, $2.0 billion

(2.6 percent) more than they reported

for the first three quarters of 2003.

The improvement would have been

greater, except that a few large

mergers caused more than $3 billion

in income to be excluded from yearto-date reported earnings for 2004.

Almost two out of every three of 

the nation’s 7,660 commercial banks

(62.3 percent) reported higher earnings

than a year earlier. Loan-loss provisions

were $6.7 billion (25.2 percent) lower,

while net interest income increased

by $5.6 billion (3.2 percent). These

were the two largest factors contributing to the improved earnings.

In contrast, noninterest income 

was $2.6 billion (1.9 percent) lower

than a year earlier, and gains on sales

of securities and other assets were

$1.8 billion (33.9 percent) smaller.

The average return on assets (ROA)

for the first three quarters of 2004

was 1.31 percent, compared to 

1.39 percent for the same period 

of 2003. 

An overall strengthening in loan

demand was evident in 2004. Through

the first three quarters of the year,

total loans and leases grew by

$386.2 billion (8.7 percent), while

during the first three quarters of

2003, loans increased by $194.8 

billion (4.7 percent). Accelerating

growth in home equity and other

consumer loans and a return 

to growth in loans to commercial 

and industrial (C&I) borrowers outweighed the effect of a slowdown 

in residential mortgage lending. Home

equity loans increased by $90.6 billion

(31.9 percent) in the first nine months

of 2004, compared to an increase 

of $46.1 billion (21.4 percent) 

in the first nine months of 2003.

Commercial and Industrial (C&I) loans

increased by $19.5 billion in the first

three quarters of 2004; in the first

three quarters of 2003, C&I loans

declined by $32.8 billion (3.6 percent).

Reduced mortgage refinancing activity

in 2004 was reflected in somewhat

slower growth in mortgage assets.

Banks’ holdings of residential 

mortgage-related assets, including

home mortgage loans and mortgagebacked securities, increased by

$126.3 billion (7.1 percent) during

the first three quarters of 2004, 

compared to an increase of $137.3

billion (8.3 percent) during the same

period in 2003. 

The strong growth in total loans 

was responsible for the increase in

banks’ net interest income, since the

average net interest margin for the

first three quarters of 2004 was 

3.59 percent, well below the 3.83

percent average in the first three

quarters of 2003. Asset-quality 

indicators, which began improving 

in 2003 following three years of

deterioration, continued to improve

in 2004. During the first nine months

of the year, the amount of commercial

banks’ loans that were 90 days or

more past due or in nonaccrual 

status declined by $9.0 billion 

(17.0 percent). The amount of loans

that banks charged-off in the first

three quarters of 2004 was $6.9 billion

(24.6 percent) less than their chargeoffs in the first three quarters of

2003.

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Insured savings institutions reported

slightly higher net income during 

the first three quarters compared to

a year earlier, thanks to strong loan

growth, but reduced gains on sales

of securities and other assets limited the improvement. Net income

increased by only $79 million 

(0.6 percent), as a $2.2 billion 

(7.0 percent) improvement in net

interest income and a $3.2 billion

(28.5 percent) increase in noninterest

income were offset by a $3.5 billion

(14.0 percent) rise in noninterest

expenses and a $2.4 billion (43.8 percent) decline in gains on securities

sales. The average ROA for the

1,365 insured savings institutions

was 1.19 percent, down from 1.29

percent in the first three quarters of

2003. Fewer than half of all savings

institutions (46.6 percent) had higher

earnings than a year earlier. The

average net interest margin for the

first three quarters of 2004 was 

3.20 percent, down from 3.29 percent

for the first three quarters of 2003.

Asset quality indicators registered

modest improvement. Net charge-offs

were $85 million (3.9 percent) lower

than a year earlier, and loan-loss 

provisions were $179 million 

(8.4 percent) lower.