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1997 Annual Report

State of the Banking and Thrifts Industries

Annual Return on Assets (ROA) Buoyed by an environment of low and stable interest rates and a growing economy, insured commercial banks and savings institutions registered record profits in 1997. For commercial banks, it was the sixth consecutive year of record earnings. Higher net interest income and strong growth in non- interest income (such as service charges and other fees) helped propel comm- ercial bank earnings in 1997. For the thrift industry, 1997 marked the second time in three years that earnings set a new record. Only one insured commercial bank failed during 1997, and there were no failures of insured savings associations. This was the first year since 1946 that only one federally insured bank or thrift was closed. The following is an overview of conditions in these two industries.

Commercial Banks

Commercial bank earnings totaled a record $59.2 billion in 1997, up $6.9 billion (13.1 percent) from the previous year. Banks set successive earnings records in each quarter of 1997. Earnings were boosted by higher net interest income (up $11.7 billion, or 7.2 percent), which was attributable to strong growth in earning assets as the industry’s net interest margin declined for the fifth consecutive year. The increase in non-interest income (up $10.9 billion, or 11.7 percent) reflected higher revenues from trust activities (up $2.4 billion, or 17.8 percent) and growth in other fee income (up $5.2 billion, or 14.0 percent). Higher loan-loss provisions (up $3.5 billion, or 21.5 percent) and noninterest expenses (up $9.2 billion, or 5.8 percent) limited the rise in profits. Commercial banks’ return on assets (ROA) reached 1.23 percent in 1997, the highest annual rate reported in the 64 years that the FDIC has been in existence. Industry pros-perity was broad-based; more than two out of every three banks (68.7 percent) reported full-year ROAs of 1.00 percent or higher, and a similar proportion (68.8 percent) reported higher earnings compared to 1996. More than 95 percent of all commercial banks were profitable in 1997.

Assets of insured commercial banks registered their strongest growth in 17 years. Total assets increased by $436.6 billion, or 9.5 percent. This is the highest growth rate for industry assets since 1980, when assets grew by 9.7 percent. Net loans and leases increased by $158.3 billion (5.7 percent), as lending growth slowed for the third consecutive year. High growth rates were evident in leases (up $22.2 billion, or 28.3 percent), real estate construction and development loans (up $11.8 billion, or 15.5 percent), home equity loans (up $12.8 billion, or 15.0 percent) and commercial and industrial loans (up $86.3 billion, or 12.2 percent). Other asset categories that experienced strong growth in 1997 include short-term funds lent as "fed funds" sold and securities purchased under resale agreements, which increased by $97.9 billion (59.7 percent); assets in trading accounts, which were up by $55.8 billion (23.1 percent); and mortgage-backed securities, which grew by $48.3 billion (14.4 percent). At year-end, assets of insured commercial banks surpassed $5 trillion for the first time while the number of banks continued to decline.

Credit Card Losses and Personal Bankruptcy Filings 1985-1997 Deposit growth reached an 11-year high in 1997, as total deposits at commercial banks increased by 7.0 percent ($224.5 billion), the highest annual growth rate since 1986, when they grew by 7.7 percent. Despite the strong growth in deposits, the proportion of industry assets funded by deposits declined for the sixth consecutive year as banks continued to reduce their reliance on deposits to fund assets. Fed funds purchased and securities sold under repurchase agreements increased by $98.8 billion (31.1 percent), trading account liabilities grew by $55.7 billion (37.0 percent), and equity capital rose by $42.6 billion (11.4 percent).

Credit quality remained largely favorable in 1997. The percentage of loans that was noncurrent–90 days or more past due on scheduled payments or in nonaccrual status–declined to 0.96 percent at year-end, the lowest level in the 16 years that noncurrent loan data have been reported. The percentage of loans charged off during 1997 rose to 0.63 percent, from 0.58 percent in 1996. As has been the case since 1995, credit-card loans comprised the majority of total loan charge-offs. Of the $18.3 billion in total loans charged off by commercial banks in 1997, credit- card loans accounted for $11.7 billion (64.0 percent).

The number of insured commercial banks reporting financial results declined by 385 in 1997, from 9,528 to 9,143. Mergers absorbed 599 banks during the year, while 188 new banks were chartered, and one commercial bank failed. This is the first year since 1962 with only one commercial bank failure. (In 1972, only one commercial bank failed but another received assistance from the FDIC to prevent failure.) The number of commercial banks on the FDIC's "Problem List" declined from 82 to 71 during 1997. Assets of "problem" banks at year-end totaled $5.2 billion, up from $5.1 billion at the end of 1996.

Savings Institutions

Insured savings institutions reported total earnings of $8.8 billion in 1997, for an ROA of 0.93 percent. Industry earnings exceeded $8 billion for the first time, surpassing the previous full-year earnings record of $7.6 billion, set in 1995, by $1.2 billion. The 1997 earnings represent an increase of $1.8 billion over the results for 1996, when a special assessment to capitalize the Savings Association Insurance Fund (SAIF) cost SAIF-insured savings institutions $3.5 billion. The thrift industry's ROA rose to 0.93 percent, the highest annual rate since 1946. Savings institutions benefited from lower noninterest expenses and reduced expenses for loan losses. The capitalization of the SAIF in 1996 meant that most thrifts with SAIF-insured deposits enjoyed lower deposit insurance premiums in 1997, producing pre-tax savings of approximately $800 million.

The record profits were made possible by lower noninterest expenses, reduced costs related to credit losses, and higher gains on sales of securities. Total assets of insured savings institutions declined for the first year since 1993, falling by $2.1 billion (0.2 percent). This decrease was caused by the transfer of assets from the thrift industry to the commercial banking industry through mergers and charter conversions. During 1997, the commercial banking industry absorbed 116 savings institutions with $75 billion in assets. This is the largest number of institutions and the largest amount of assets ever transferred in a single year between the two industries.

Notwithstanding the decline in assets, the industry exhibited numerous signs of improved health. Almost nine out of ten savings institutions–89 percent–reported higher earnings in 1997,
and more than 96 percent were profitable. Noncurrent loans declined by $1.2 billion (13.4 percent) in 1997, while net charge-offs were $544 million (25.9 percent) lower than in 1996. The industry's equity capital to assets ratio rose to 8.71 percent at year-end, the highest level since 1943.

The number of insured savings institutions reporting financial results declined by 145 institutions during 1997, from 1,924 to 1,779. Mergers absorbed 127 thrifts, and another 39 converted to commercial bank charters. In addition, 12 new institutions were chartered, 11 commercial banks converted to thrift charters, five voluntarily liquidated, two active thrift charters did not file year-end reports, and one noninsured institution became insured. No insured savings institutions failed in 1997. This is the first year since 1959 without a thrift failure. The number of thrifts on the FDIC's "Problem List" declined from 35 to 21 during the year, and the assets of "problem" thrifts declined from $7 billion to $2 billion.

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Last Updated 02/16/1999 communications@fdic.gov