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.
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 industrys return on assets
(ROA)a basic yardstick of industry performancewas 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 loansthose that were 90 days or more past due on
scheduled payments or in nonaccrual statusdeclined by $874 million during the year
due to a $3.3 billion increase in net loan charge-offs. At the same time, delinquent
loanswith scheduled payments 30 to 89 days past dueincreased 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 industrys 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 FDICs
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 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
industrys 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 industrys
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 FDICs 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.