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Quarterly Banking ProfileThird Quarter 2012INSURED INSTITUTION PERFORMANCENet Income of 37.6 Billion Is Highest in Six Years Higher Revenues, Lower Loss Provisions Combine to Boost Earnings Loan Balances Increase for Fifth Time in Last Six Quarters Twelve Failures Are Fewest Since Fourth Quarter 2008 Quarterly Profits Continue to ImproveRevenue Growth Picks UpReduced expenses for loan losses and risingnon interest income helped lift insured institutions’earnings to 37.6 billion in third quarter 2012. Thisquarterly net income represents a 2.3 billion (6.6percent) improvement over third quarter 2011, and isthe highest quarterly total reported by the industrysince third quarter 2006. The average return on assets(ROA) rose to 1.06 percent, from 1.03 percent a yearearlier. More than half of all institutions (57.5percent) reported higher earnings than a year ago, andonly 10.5 percent reported negative net income forthe quarter. This is the lowest proportion of unprofitable institutions in more than five years (since secondquarter 2007).Net operating revenue (net interest income plus totalnoninterest income) increased by 4.9 billion (3percent), the largest year-over-year increase in quarterlyrevenue in almost three years (since fourth quarter2009). The greatest contribution to the year-over-yearimprovement in quarterly revenue came from noninterest income, which was 4.2 billion (7 percent) higherthan in third quarter 2011. Gains on asset sales were 5billion above the level of a year ago. Almost half of allinstitutions (47.8 percent) reported year-over-yearimprovement in income from asset sales. Gains on salesof loans were 3.9 billion (227.5 percent) above thelevel of a year earlier. Losses on sales of other real estateowned were 932 million (81.8 percent) less than ayear ago. Sales of other assets yielded 186 million morein income. Trading revenue was 3.3 billion (38.9percent) lower, reflecting a 3 billion year-over-yeardecline in income from trading credit derivatives.Chart 1Chart 2Most Banks Are Improving Their Earnings,While Fewer Are UnprofitableQuarterly Net Income, 2008–2012Billions of Dollars 50 40Securities and Other Gains/Losses, NetNet Operating Income 30 20 1019.317.44.8 0.920.923.835.228.7 28.521.434.8 34.4Percentage of All Insured Institutions8037.67025.460502.1 0- 1040-1.7-6.130-12.6- 2020- 30- 40- 50Percentage of Institutions withYear-Over-Year Quarterly Income Growth10-37.801 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 320082011200920122010FDIC Quarterly1 Percentage of Institutions with Quarterly Losses1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 320062007200820092010201120122012, Volume 6, No. 4

declined in all major loan categories except 1-4 familyresidential real estate loans, where NCOs were 1.3billion (15.5 percent) higher than a year earlier. Thisincrease was the result of new accounting and reportingguidelines applicable to national banks and federalsavings associations concerning the reporting of restructured loans.1Growth in Earning Assets Offsets Narrower MarginsNet interest income was 746 million (0.7 percent)higher than a year ago, even though the average netinterest margin (NIM) fell from 3.56 percent to 3.43percent. The increase in net interest income was madepossible by a 4.6 percent increase in interest-earningassets. Two out of every three insured institutions (67.8percent) reported year-over-year NIM declines, as average asset yields declined faster than average fundingcosts.Noncurrent Loan Balances Are Almost UnchangedThe amount of loans and leases that were noncurrent(90 days or more past due or in nonaccrual status)declined by only 100 million (0.03 percent) during thethird quarter. This marks the tenth consecutive quarterthat noncurrent loan balances have declined, but it isthe smallest decline registered during that time.Noncurrent real estate construction loan balances fellby 3.4 billion (14.6 percent) during the quarter,noncurrent real estate loans secured by nonfarmnon residential properties declined by 1.8 billion (5.2percent), and noncurrent loans to commercial andindustrial (C&I) borrowers fell by 1.4 billion (9.1percent). The same accounting guidance that producedthe increase in 1-4 family residential real estate loanNCOs also contributed to a 6.9 billion (3.6 percent)rise in reported noncurrent 1-4 family residential realestate loans.Expenses for Bad Loans Fall AgainProvisions for loan losses declined year over year for a12th consecutive quarter, falling by 3.8 billion (20.6percent). Banks set aside 14.8 billion in the thirdquarter, down from 18.6 billion in third quarter 2011.Slightly more than half of all institutions (50.4 percent)reduced their provisions from year-earlier levels. Lossprovisions represented 8.7 percent of net operatingrevenue, compared with 11.3 percent in third quarter2011.Loan Losses Decline Across Most Loan CategoriesFor the ninth quarter in a row, net charge-offs (NCOs)were lower than a year earlier. Banks charged off 22.3billion (net) during the quarter, 4.4 billion (16.5percent) less than in third quarter 2011. The largestNCO declines occurred in credit cards (down 2.8billion, or 30.4 percent), and in real estate constructionloans (down 1.4 billion, or 61 percent). Charge-offsSee Topic 2A., “Troubled Debt Restructurings,” in OCC’s BankAccounting Advisory Series, June 2012; t 3Chart 4Indicators of Asset Quality Continue to ImproveQuarterly Revenue and Loan-Loss Provision, 2008-2012Billions of Dollars 180Billions of Dollars 120Quarterly Loan-Loss Provision 160 100 140 80 120 60Quarterly Net Operating Revenue* 100 80 40 60 20 40 0 20 0Quarterly Change in Noncurrent LoansQuarterly Net Charge-Offs- 201 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 320082009201020112012- 40*Net operating revenue net interest income noninterest incomeFDIC Quarterly2 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 32010200820092011201220072012, Volume 6, No. 4

Quarterly Banking Profileter 2011. Banks declared 20.4 billion in dividends inthe third quarter, an increase of 594 million (3percent) over third quarter 2011. A 38.3 percentincrease in unrealized gains on available-for-sale securities added 12.5 billion to equity during the quarter.Large Banks Reduce Their Reserves FurtherInsured institutions reduced their reserves for loan lossesby 9.6 billion (5.4 percent) during the quarter, as netcharge-offs of 22.3 billion exceeded loss provisions of 14.8 billion. This is the tenth consecutive quarter thatthe industry’s reserves have declined. Much of the totalreduction in reserves was concentrated among largerinstitutions. The ten largest banks together reducedtheir reserves by 7.3 billion (8.1 percent) during thequarter. Overall, a majority of institutions (53.5percent) added to their reserves during the quarter. Thecombination of sizable reserve reductions with smallerreductions in noncurrent loan balances meant that theindustry’s “coverage ratio” of reserves to noncurrentloans declined from 60.4 percent to 57.2 percent duringthe quarter. More than half of all institutions (53.4percent) increased their coverage ratios, but theirincreases were outweighed by larger declines at many ofthe biggest banks.Loan Balances Rise for Second Consecutive QuarterTotal assets increased by 192.1 billion (1.4 percent)between June 30 and September 30, with loan balancesrising for the fifth time in the last six quarters. Totalloans and leases increased by 64.8 billion (0.9percent), as C&I loans rose by 31.8 billion (2.2percent). Residential mortgage loans increased by 14.5billion (0.8 percent). Loans to individuals increased by 13.1 billion (1 percent), led by auto loans (up 7.4billion, or 2.4 percent). The largest net declines in loanbalances occurred in home equity lines of credit (down 12.9 billion, or 2.2 percent) and in real estateconstruction and development loans (down 6.9billion, or 3.2 percent). This is the 18th consecutivequarter in which construction loan balances havefallen. At the end of the quarter, they were 421.4billion (66.7 percent) below the peak level of 631.8billion at the end of first quarter 2008. Insured institutions’ securities holdings rose by 49.1 billion duringthe quarter, while Fed funds sold and reverse reposincreased by 39 billion (8.3 percent). Assets in tradingaccounts increased by 30.6 billion (4.4 percent).Equity Capital Receives a Boost From HigherRetained EarningsHigher retained earnings combined with improvedvalues in securities portfolios helped lift the industry’sequity capital by 30.5 billion (1.9 percent) in the thirdquarter. This is the largest quarterly increase in equitycapital in three years. Retained earnings totaled 17.2billion, the highest quarterly total in six years, and anincrease of 1.7 billion (11.3 percent) from third quar-Chart 5Chart 6Quarterly Change in Loan Balances, 2007–2012The 12-Month Loan Growth Rate Has Been Positivefor the Last Four QuartersBillions of DollarsPercent40 300237 250189 200221*203 100 5043 0- 5010267612820651024-60-7 -14-63- 100-116- 150- 200- 25030134 150-140-109-133-107-10-126-20-210-301 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3201020122007200920112008-40* FASB Statements 166 and 167 resulted in the consolidation of large amounts of securitizedloan balances back onto banks' balance sheets in the first quarter of 2010. Although the totalamount consolidated cannot be precisely quantified, the industry would have reported a declinein loan balances for the quarter absent this change in accounting standards.FDIC QuarterlyFAS 166/167 *Secured by 1-4 Family Residential PropertiesConstruction & DevelopmentNonfarm Nonresidential Real EstateC&I LoansLoans to IndividualsTotal Loans & Leases2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* FASB Statements 166 and 167 resulted in the consolidation of large amounts ofsecuritized loan balances back onto banks’ balance sheets in the first quarter of 2010.Most of these balances consisted of credit card loans.3 2012, Volume 6, No. 4