Federal Deposit
Insurance Corporation

State of the Banking and Thrift Industries

Insured commercial banks and savings institutions enjoyed strong earnings during 1996. Commercial bank profits reached record levels for the fifth consecutive year. Thrift industry earnings would have set a new record, if not for a one-time special assessment to capitalize the Savings Association Insurance Fund (SAIF). Loan growth continued to show strength at banks and thrifts, helping to increase net interest income. Both industries also increased average capitalization levels in 1996. Savings institutions continued to benefit from lower levels of troubled loans, while the asset quality picture was mixed for commercial banks. Only five insured commercial banks and one savings institution failed during the year, the lowest number of failures since 1972. The following is an overview of conditions in these two industries.

Commercial Banks

Commercial banks reported record net income of $52.4 billion in 1996, an increase of $3.6 billion, or 7.5 percent, over the previous record in 1995. Banks registered three of their four highest quarterly earnings totals ever during 1996. The industry’s return on assets (ROA)—a basic yardstick of industry performance—was 1.19 percent. This is up from 1.17 percent in 1995, and just below the all-time high of 1.20 percent set in 1993. This also marks the fourth consecutive year that industry ROA has exceeded one percent. Prior to 1993, insured commercial banks’ ROA had never reached the one-percent benchmark. Earnings strength was widespread, with more than two-thirds of all commercial banks (69 percent) registering ROAs of one percent or higher in 1996.

Net interest margins narrowed slightly for the fourth consecutive year, but remained wide by historical standards. Earnings also received a boost from higher noninterest income (such as fees and service charges). The largest contribution to the improvement in industry earnings, in fact, was non-interest income, which was $11.1 billion higher than in 1995. Net interest income was $8.6 billion higher, and gains from sales of securities were up by $573 million. Together, these improvements outweighed the $3.6 billion increase in loan-loss provisions and an $11.0 billion rise in overhead expenses. Lower deposit insurance premiums helped limit the rise in overhead costs. Commercial banks paid approximately $3 billion less for deposit insurance coverage in 1996 than in 1995, and roughly $5.5 billion less than in 1994. These savings were offset somewhat by a one-time special assessment on deposits insured by the SAIF as required by the SAIF capitalization law. Commercial banks’ share of this assessment totaled approximately $1 billion, which meant a $650 million reduction in after-tax net income.

Banks continued to increase the share of loans in their asset portfolios, as the overall rate of asset growth slowed for the second consecutive year. Total assets of commercial banks increased by 6.2 percent ($266 billion) in 1996, after increasing by 7.5 percent in 1995 and 8.2 percent in 1994. At the end of 1996, net loans and leases accounted for 60.2 percent of total assets, up from 59.1 percent at the end of 1995. Commercial and industrial loans increased by $48.5 billion (7.3 percent) in 1996, while credit card loans grew by $15.6 billion (7.2 percent). Loans for real estate construction and development increased by $7.7 billion (11.2 percent). In contrast to the growth in loans, banks’ securities holdings declined by $10.2 billion (1.3 percent) in 1996.

Asset quality indicators presented a mixed picture in 1996. Noncurrent loans—those that were 90 days or more past due on scheduled payments or in nonaccrual status—declined by $874 million during the year due to a $3.3 billion increase in net loan charge-offs. At the same time, delinquent loans—with scheduled payments 30 to 89 days past due—increased by 15.1 percent. Consumer loans remained a focal point for asset quality concerns. Net charge-offs of credit-card loans totaled $9.5 billion in 1996, accounting for 61.1 percent of all loan charge-offs. In contrast to most other loan categories, noncurrent consumer loans increased by $1.1 billion during the year.

The industry’s reserve coverage ratio rose to a record level of $1.82 in reserves for every dollar of noncurrent loans at year-end. At the same time, the ratio of reserves to total loans declined for the fourth consecutive year, to 1.91 percent. This is the lowest level for this ratio since the first quarter of 1987. Total equity capital of commercial banks increased by $25.7 billion in 1996, to 8.20 percent of total assets at year-end. Retained earnings contributed $13.6 billion of the increase in equity, as banks paid out 74 percent of their earnings in dividends to stockholders in 1996.

The number of commercial banks reporting financial results fell to 9,528 at year-end, reflecting a net decline of 412 institutions during 1996. Mergers absorbed 554 commercial banks in 1996, while 146 new commercial banks were chartered. The number of commercial banks on the FDIC’s “problem list” fell from 144 to 82 during the year, and assets of “problem” banks declined from $16.8 billion to $5.1 billion.

Savings Institutions

Savings institutions insured by the FDIC earned just over $7 billion in 1996, for an annual ROA of 0.70 percent. This was $611 million less than the record earnings of $7.6 billion registered in 1995, when the industry’s ROA was 0.77 percent. Earnings for 1996 were lower than in 1995 at almost three out of every four savings institutions (72.6 percent). The decline in earnings can be traced to the special assessment on SAIF deposits, which cost thrifts $3.5 billion, or $2.2 billion in after-tax earnings. This one-time cost helped raise the industry’s total noninterest expenses to $25.7 billion, an increase of $3.9 billion over 1995. Absent the special SAIF assessment, thrift industry earnings would have set a new record in 1996.

Net interest margins widened at savings institutions in 1996, after declining in each of the previous two years. This improvement in margins contributed to the rise in net interest income, which was $1.6 billion higher than in 1995. Total assets of insured savings institutions increased by only $2.5 billion (0.2 percent) in 1996, as charter conversions and acquisitions by commercial banks resulted in the transfer of more than $43 billion in assets from the thrift industry to the banking industry. Sales of securities produced gains of $901 million in 1996, almost twice the $463 million reported in 1995. Noninterest income was $388 million (5.5 percent) higher. These revenue improvements were outweighed by the $3.9 billion rise in noninterest expenses. In addition, loan-loss provisions at insured savings institutions rose by $385 million.

Despite the lack of overall growth in thrift assets, total loans increased by $33.6 billion (5.1 percent). This increase was mirrored by a $26.2 billion decline in securities holdings and a $5.3 billion decline in other assets. Most of the increase in loans occurred in residential mortgage loans, although consumer loans and commercial and industrial loans also registered strong percentage increases. On the liability side, thrifts reduced their deposits by $13.9 billion, and increased their nondeposit borrowings by $18.4 billion.

At the end of 1996, there were 1,924 savings institutions, a net decline of 106 thrifts during the year. This marks the first time since 1937 that there have been fewer than 2,000 insured thrifts. Only one insured savings institution failed in 1996, the smallest number since 1962. The number of savings institutions on the FDIC’s “problem list” declined from 49 to 35 during 1996. Assets of “problem” thrifts fell from $14 billion to $7 billion. For more information about problem institutions by fund membership, not by financial institution type, click here.

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