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 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 industrys
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.
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
noncurrent90 days or more past due on scheduled payments or in nonaccrual
statusdeclined 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.
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 institutions89
percentreported 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.