COMMERCIAL BANKS EARN $19.2 BILLION IN SECOND QUARTER
GAINS ON SECURITIES SALES BUOY PROFITS
MARGIN WOES CONTINUE TO ERODE COMMUNITY BANKS' PROFITABILITY
PROBLEMS WORSEN IN LARGE BANKS' COMMERCIAL LOANS
CHARGE-OFFS INCREASE IN CREDIT-CARD PORTFOLIOS
Insured commercial banks earned $19.2 billion in the second quarter of 2001, a 31-percent ($4.5 billion) improvement over the second quarter of 2000. A year ago, sizable restructuring and credit-related charges at a few large banks depressed industry earnings. The absence of comparable charges in the second quarter accounted for almost all of the improvement in net income. Lower interest rates allowed banks to realize gains on sales of securities, which also boosted net income. But slower growth and narrower net interest margins meant lower earnings for many community banks. More than one out of every ten banks with assets less than $100 million (11.6 percent) were unprofitable in the quarter. Fewer than half of all commercial banks - 49.4 percent - reported higher quarterly earnings than a year ago. The industry's return on assets (ROA) was 1.21 percent, down from 1.27 percent in the first quarter, but up from 0.99 percent a year ago. A majority of banks reported lower ROAs compared to a year ago. Through the first six months of 2001, industry earnings totaled a record $39.0 billion, $4.8-billion (14.1 percent) more than in the first half of 2000. The industry's ROA was 1.24 percent, compared to 1.16 percent for the first six months of last year.
Noninterest income was $3.6 billion (10.0 percent) higher than in the second quarter of 2000, despite lower revenue from trading and trust activities. Trading revenues were $209 million (6.9 percent) lower, while fiduciary (trust) income fell by $364 million (6.8 percent). One area of noninterest income improvement was service charges on deposit accounts, which rose by $922 million (15.8 percent).1 Declining interest rates boosted the market values of banks' fixed-rate securities during the quarter. Securities sales yielded gains totaling $861 million in the second quarter; a year ago, sales produced a $1.0-billion net loss for the industry. Loan-loss provisions continued to grow in the second quarter. Banks set aside $8.8 billion for future loan losses during the quarter, an increase of $1.6 billion (22.3 percent) from the second quarter of 2000. Quarterly loss provisions absorbed 9.6 percent of the industry's net operating revenues (noninterest income plus net interest income), up from 8.3 percent a year earlier. Noninterest expenses were only $76 million (0.1 percent) higher than a year ago, when restructuring charges at a few large banks inflated the industry total.
Net interest income was $2.2 billion (4.3 percent) higher in the second quarter than a year ago. Interest-earning assets were $297 billion (5.7 percent) higher at mid-year than they were 12 months earlier, but lower net interest margins limited the growth in net interest income. The industry's net interest margin remained 9 basis points lower compared to a year earlier, although it rose 7 basis points from its level in the first quarter, ending a stretch of six consecutive quarterly declines. Banks with less than $100 million in assets were the only asset-size group to report a margin decline during the second quarter; their margin fell by 3 basis points to 4.26 percent, 36 basis points lower than a year ago.
Loan charge-offs and noncurrent loans (loans 90 days or more past due or in nonaccrual status) continued to increase during the second quarter. Banks charged-off $7.9 billion in bad loans during the quarter, an increase of $2.6 billion (50.0 percent) from the level of the second quarter of 2000. As has been the case in recent quarters, the greatest deterioration in credit quality occurred in commercial and industrial (C&I) loan portfolios at larger banks. Although C&I loans represent only 26.6 percent of commercial banks' loans, they have generated more than half of the increase in all noncurrent loans in every quarter since the first quarter of 1998, and more than half of the increase in charged-off loans in every quarter since the fourth quarter of 1999. C&I loan charge-offs totaled $3.1 billion, up $1.4 billion (76.7 percent) from a year ago. They accounted for 39.3 percent of all loan charge-offs in the second quarter, and 51.1 percent of the increase in total charge-offs from a year earlier. Credit-card loans also registered increased charge-offs. Banks charged-off $2.8 billion in credit-card loans during the quarter, an increase of $592 million (26.5 percent) compared to the second quarter of 2000. Net charge-offs on leases were up by $108 million (94.7 percent), and the quarterly charge-off rate of 0.53 percent was the highest since the end of 1992. Residential mortgage loan charge-offs rose in the second quarter to $292 million, a $106-million (57.0-percent) increase from a year earlier.
Despite the rising level of charge-off activity, noncurrent loans remaining in banks' loan portfolios continued to increase as well. Total noncurrent loans increased by $2.7 billion (5.8 percent) during the quarter. During the past 12 months, noncurrent loans have increased by $12.1 billion (33.1 percent). At mid-year, 1.26 percent of commercial banks' loans were noncurrent, the highest level in six years. C&I loans accounted for two-thirds ($1.8 billion) of the increase in noncurrent loans during the quarter. More than 2 percent of C&I loans were noncurrent at the end of the quarter, the first time since the end of 1993 that the noncurrent rate has been this high. Only one out of every three commercial banks had an increase in its noncurrent C&I loan rate during the quarter, but the banks that experienced deterioration held three-fourths of the banking industry's C&I loans.
Noncurrent rates increased in several other loan categories during the quarter, although not to the extent seen in C&I loans. The percentage of real estate loans secured by farmland that were noncurrent rose from 1.44 percent to 1.66 percent during the quarter. The noncurrent rate for leases rose from 0.79 percent to 0.93 percent, while the rate for loans secured by commercial real estate properties increased from 0.79 percent to 0.87 percent, and the percentage of agricultural production loans that were noncurrent rose from 1.44 percent to 1.52 percent.
Commercial banks' asset growth slowed for the third consecutive quarter. Industry assets grew by $44.8 billion during the quarter, after increasing by $71.7 billion in the first quarter and $138.0 billion in the second quarter of last year. Loans increased by only $27.8 billion (0.7 percent). Growth in mortgage-backed securities (up $23.7 billion, or 4.8 percent) accounted for more than half of the total increase in commercial bank assets in the second quarter. Real estate construction and development loans continued to exhibit strong growth, rising by $10.4 billion (5.9 percent). Banks' C&I loans declined by $19.9 billion (1.9 percent), the largest quarterly decline ever reported by the industry. The trend in C&I lending over the past 12 months suggests that most of this decline has been in loans to larger commercial borrowers. Data reported annually each June 30 show that C&I loans with original amounts of less than $1 million have increased over the past year by $10.8 billion (4.6 percent), while larger C&I loans to U.S. borrowers have declined by $20.0 billion (3.2 percent).
Deposit growth kept pace with overall asset growth during the quarter. Growth in savings deposits remained strong, despite a marked slowdown in the growth of brokered money-market deposit accounts (MMDAs). Demand deposits increased by $14.5 billion, while retail (< $100,000) time deposits fell by $18.6 billion. Federal Home Loan Bank (FHLB) advances increased by $4.5 billion.
Reserves increased by $1.0 billion, as loan-loss provisions exceeded net charge-offs by $911 million. The growth in reserves, combined with modest loan growth, produced a slight increase in the industry's reserve ratio, from 1.69 percent to 1.70 percent. However, the relatively larger increase in noncurrent loans meant that the industry's "coverage ratio" fell for the sixth consecutive quarter. At the end of June, commercial banks held $1.35 in reserves for every $1.00 of noncurrent loans, the lowest level since the first quarter of 1994.
Equity capital increased by $10.8 billion during the quarter, lifting the industry's equity-to-assets ratio from 8.65 percent to 8.76 percent. However, $3.5 billion of the increase in equity consisted of goodwill; tangible capital rose by only $6.7 billion. The industry's core capital "leverage" ratio increased from 7.68 percent to 7.73 percent. Most of the improvement in capital levels occurred at larger banks.
The number of insured commercial banks reporting financial results declined by 60 institutions during the quarter, from 8,238 to 8,178. There were 31 new banks reporting, while 89 banks were absorbed by mergers during the quarter, and one insured commercial bank failed. At midyear, the FDIC's "Problem List" contained 80 commercial banks with combined assets of $16.5 billion, representing an increase of two banks and a decline of $1 billion in assets during the quarter.
1Changes in the reporting of banks' noninterest income that became effective in 2001 make year-to-year comparisons of other noninterest income components problematic.
September 5, 2001
Don Inscoe (202) 898-3940
Ross Waldrop (202) 898-3951