The 3Q is officially in the record books and the picture was certainly less than rosy. Some of the most interesting highlights were as follows:
Industry earnings: fell nearly 25% from a year ago, sinking to the lowest level in 4Ys. Overall, softness was driven primarily by higher credit losses and lower trading revenue. It is interesting to note, however, that most of the decline was attributable to 10 large institutions that accounted for more than 50% of the decline in industry earnings. Amazingly, the number of unprofitable institutions jumped 46% YOY, reaching just over 10%. Noninterest income slipped 5% from the same period last year, marking the first drop in the prior 12 quarters. Noninterest expenses climbed nearly 7%.
Return: ROA for the 3Q quarter dropped to 0.92%, the lowest level in 15Ys. ROE dropped 18% from the same period last year, slipping to 10.52%.
NIM: Interest-earning assets climbed nearly 8% from a year ago, as NIM benefited from a steeper yield curve. Overall, the average NIM was 3.36%, up from 3.34% in 2Q, but remained near 17Y lows.
Loans: Fire sales were common for the industry during the quarter, as total sales resulted in a net loss. This is the first time in 7Ys that a loss on sale has been recorded. Meanwhile, RE construction/development loans saw the smallest growth increase in 3Ys. Despite the slowdown, at the end of 3Q, about 25% of banks reported construction loan portfolios in excess of 100% of capital. Asset growth slowed sharply, coming in at 8.11% for the quarter vs. 9.84% thru 3Q 2006.
Loan Losses: Loan loss provisions swallowed up 11% of net operating revenue, doubling over the same period last year and soaring to their highest quarterly level in 20Ys. Overall, reserves increased 12% over the 3Q of 2006. The percentage of net charge offs to loans soared nearly 40% during the quarter, rising to the highest level in 5Ys (0.50%). Meanwhile, the largest increase occurred in C&I, where charge-offs were 91% higher than a year earlier.
Noncurrent: Delinquent loans had their largest quarterly increase in 20Ys, driven by construction/development (up 46%), soft residential real estate (up 24%) and home equity lines of credit (up 27%). Overall, the noncurrent rate was 1.08% at the end of the 3Q, the highest level in 4Ys.
Funding: Deposits were hard to find, leading bankers to significantly boost reliance on wholesale funding during the 3Q. Domestic deposits grew a mere 0.7%. The mix was tilted toward time deposits (up $82B) and other interest bearing liabilities (up $20B); and sharply away from noninterest bearing (down $53B). Meanwhile, funding gaps were filled aggressively with FHLB Advances, which soared $162B. Of interesting note, 15Ys ago domestic deposits funded 72% of industry assets, a number that has fallen to 53% as of the latest quarter.
M&A: 42 new banks opened for business during the quarter, while 93 were absorbed. For the year, 131 new banks were chartered, while 247 were absorbed and 2 failed.
Derivatives: Responding to competitive pressures to originate long-term fixed rate loans, but facing a funding base driven by short-term maturities, 1 in 8 institutions reported derivatives holdings at the end of the 3Q.