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Quarterly Banking Profile



    Benefits of Lower Interest Rates Outweigh Credit-Quality Problems

    Insured commercial banks registered their best fourth quarter earnings ever, reporting $19.0 billion in net income in the final quarter of 2001, an increase of $1.3 billion (7.3 percent) from the fourth quarter of 2000. Key factors in the improvement in industry earnings included sharply lower funding costs and higher gains on sales of securities and other assets. The increase in profits was limited by rising provisions for loan losses and lackluster growth in noninterest revenues. More than half of all commercial banks -- 58.5 percent -- reported higher earnings than in the fourth quarter of 2000, and slightly over half -- 51.3 percent -- reported higher quarterly returns on assets (ROAs). Full-year earnings of $74.6 billion easily eclipsed the previous record of $71.1 billion, set in 1999. Compared to 2000, 58.6 percent of all banks reported higher annual earnings in 2001.

    Steeper Yield Curve Helps Net Interest Margins at Larger Banks

    As was the case through much of 2001, lower interest rates continued to boost the values of banks' fixed-rate securities in the fourth quarter. Sales of securities yielded gains totaling $1.2 billion in the fourth quarter, compared to $207 million in gains a year earlier. Lower interest rates also helped produce a $26.1-billion (43.0-percent) decline in total interest expense from the fourth quarter of 2000, which contributed to a $6.3-billion (12.2 percent) improvement in net interest income. The improvement in net interest income was concentrated among large banks. The industry's average net interest margin rose to 4.15 percent in the fourth quarter, from 3.93 percent in the third quarter and 3.90 percent in the fourth quarter of 2000. Community banks were not a part of this trend, however. The average margin at banks with less than $100 million in assets did not improve; at 4.26 percent, it was unchanged from the third quarter, and was 21 basis points below the level of a year earlier.

    Rising Loss Provisions, Slowing Noninterest Income Limit Earnings Gains

    Not all earnings trends were favorable. Loss provisions soared to a 14-year high as asset-quality problems continued to mount. Banks set aside $15.2 billion in provisions for loan losses in the fourth quarter, an increase of $5.0 billion (48.8 percent) from a year earlier. It was the industry's largest quarterly loss provision since the second quarter of 1987. A slowing rate of growth in noninterest revenues also limited the improvement in bank earnings. Noninterest income was only $809 million (2.0 percent) higher than in the fourth quarter of 2000. Noninterest income provided 41.3 percent of banks' net operating revenue (net interest income plus noninterest income) in the fourth quarter, compared to 43.6 percent a year earlier. Net income from banks' overseas operations fell below $1 billion for the first quarter since the fourth quarter of 1998. Income from international operations totaled $988 million, compared to $1.7 billion in the fourth quarter of 2000. The quarterly loan-loss provision for international operations rose to $1.5 billion, from $569 million a year ago.

    Nonrecurring Gains Help Deliver New Annual Earnings Record

    After a slight dip in 2000, full-year earnings returned to record levels in 2001. For the ninth consecutive year, the industry's ROA surpassed the 1-percent benchmark level. In an environment of falling short-term interest rates and an unfolding recession, the industry's record earnings in 2001 were made possible by $4.5 billion in gains on sales of securities. Net operating income, which excludes these gains and other nonrecurring items, was $832 million (1.2 percent) lower than in 2000. Industry profits also received a boost from an $11.2-billion (5.5-percent) increase in net interest income. Noninterest expenses increased by only 2.9 percent from the previous year, the smallest annual increase since 1942. However, noninterest income growth was also modest; banks reported $157.6 billion in noninterest revenues in 2001, a $4.1-billion (2.7-percent) improvement over 2000. Loan-loss provisions registered their largest annual increase in 12 years, increasing to $43.1 billion from $30.0 billion in 2000. The average ROA of 1.16 percent was down from 1.19 percent in 2000. More than half -- 56.8 percent -- of all commercial banks reported higher net income in 2001, but only 42.1 percent reported higher ROAs.

    Large Banks' Commercial Loans, Credit Cards Lead Rise in Troubled Credits

    Asset-quality indicators continued to worsen in the fourth quarter. Net charge-offs of $12.7 billion were up by $3.9 billion (44.3 percent) from a year ago, and represent the highest quarterly total ever reported by the industry. Charge-offs of commercial and industrial (C&I) loans totaled $6.0 billion, accounting for 47.3 percent of all loans and leases charged-off in the fourth quarter. C&I charge-offs were $2.6 billion (77.1 percent) higher than in the fourth quarter of 2000. Charge-offs of credit-card loans also rose in the fourth quarter. Banks charged-off $3.5 billion in credit-card loans during the quarter, $724 million (25.8 percent) more than a year earlier, as the net charge-off rate on the industry's credit-card portfolio rose to a record-high 6.26 percent. Higher charge-offs were also reported in leases (up $198 million from a year earlier), commercial real estate loans (up $191 million), construction and development loans (up $74 million), home equity loans (up $72 million), and residential mortgage loans (up $67 million). As has been the case throughout the past two years of declining asset quality, the level of problems and the pace of deterioration continue to be significantly greater at large banks. During the fourth quarter, the overall net charge-off rate on all loans at banks with more than $1 billion in assets was 1.46 percent, up from 1.03 percent a year earlier. At banks with less than $1 billion in assets, the net charge-off rate was 0.57 percent, up from 0.45 percent in the fourth quarter of 2000.

    Rising Charge-offs Fail to Halt Increase in Noncurrent Loans

    Even with the stepped-up rate of charge-off activity, the level of noncurrent loans (loans 90 days or more past due or in nonaccrual status) increased by $3.2 billion (6.3 percent) during the quarter. During the 12 months ended December 31, commercial banks' noncurrent loans increased by $12.0 billion (27.9 percent). Most of the increase in noncurrent loans during both the quarter and the entire year has occurred in large banks' C&I loan portfolios. Total noncurrent C&I loans increased by $1.7 billion (7.6 percent) during the fourth quarter, and by $6.1 billion (35.1 percent) for all of 2001. These increases represent slightly more than 51 percent of the increases in total noncurrent loans for the quarter and the year. The only other loan categories that showed sizable increases in noncurrent levels during the quarter were consumer loans other than credit cards, where noncurrents increased by $596 million (15.4 percent), and residential mortgage loans, up $671 million (9.4 percent). The percentage of loans that were noncurrent at year-end averaged 0.98 percent at banks with less than $1 billion in assets, compared to 1.50 percent for banks with more than $1 billion in assets.

    C&I Loans Decline Further; MBSs, Commercial Real Estate Continue to Grow

    Total assets of commercial banks increased by $14.4 billion during the fourth quarter, the smallest increase since industry assets declined in the first quarter of 1999. The small increase in assets was caused primarily by the merger of two large affiliated banks. The merger produced a reduction of roughly $125 billion in assets and liabilities representing transactions between the two banks that were netted-out when their accounts were consolidated . Commercial banks' holdings of C&I loans declined for the fourth consecutive quarter, falling by $27.8 billion (2.8 percent). The decline was concentrated among large banks; more than 80 percent of the decline was attributable to 10 banks. More than half of all banks (51.4 percent) reported increases in their C&I loans during the fourth quarter. Banks' holdings of mortgage-backed securities (MBSs) grew by a record amount for the second consecutive quarter, rising by $53.3 billion, after increasing by $51.6 billion in the third quarter. Commercial real estate loans also continued to grow at a rapid rate, increasing by $13.8 billion (2.8 percent).

    Domestic Savings Deposits Show Strong Growth

    On the funding side, domestic savings deposits posted a quarterly record increase of $119.4 billion (6.7 percent). Domestic demand deposits registered a strong seasonal increase of $76.8 billion. Commercial bank borrowings from Federal Home Loan Banks rose by $7.1 billion. Deposits in foreign offices declined by $51.2 billion, while time deposits in domestic offices fell by $47.7 billion.

    Asset Growth Slowed to 9-Year Low in 2001

    For the year, asset growth slowed to 5.2 percent, the lowest annual rate since 1992. Loans increased by only 1.8 percent in 2001, after growing by 9.4 percent in 2000. C&I loans had a net decline for the first year since 1992, falling by $68.5 billion (6.5 percent). Banks continued to reduce their holdings of U.S. Treasury securities, which declined by $30.7 billion (40.5 percent). In the past two years, banks have reduced their Treasury securities by $68.0 billion (60.1 percent). In contrast, banks have been accumulating mortgage-backed securities, and the rate of accumulation jumped sharply in 2001. MBS portfolios increased by $142.3 billion (30.2 percent) during 2001, after rising by $16.8 billion (3.7 percent) in 2000.

    Reserve Growth Keeps Pace With Growth in Noncurrent Loans

    Banks increased their loss reserves by $3.9 billion (5.7 percent) in the fourth quarter, lifting the industry's reserves-to-loans ratio from 1.77 percent to 1.85 percent. However, the continued strong growth in noncurrent loans meant that the industry's "coverage ratio" remained unchanged from the end of the third quarter, at $1.32 in reserves for every $1.00 of noncurrent loans. Before the fourth quarter, the coverage ratio had declined for 7 consecutive quarters.

    Intangible Assets Lift Equity Capital

    Equity capital increased by $11.9 billion (2.0 percent) during the quarter, and the industry's equity-capital-to-assets ratio rose from 8.93 percent to 9.10 percent. Most of the increase in equity consisted of goodwill and other intangible assets. The industry's leverage capital ratio, which excludes intangibles, declined by one basis point during the quarter, from 7.81 percent to 7.80 percent.

    "Problem" Banks Register Sharp Increase

    The number of insured commercial banks reporting financial results declined from 8,149 to 8,080 during the quarter. There were 42 new banks added during the quarter, while 108 were absorbed by mergers. No commercial banks failed during the fourth quarter. However, the number of commercial banks on the FDIC's "Problem List" increased from 74 to 95, and total problem bank assets rose from $14.4 billion to $36.1 billion. This is the largest quarterly increase in problem banks since the third quarter of 1991, and the largest increase in problem-bank assets since the fourth quarter of 1991.

    Donald E. Inscoe, (202) 898-3940
    Ross Waldrop, (202) 898-3951

    TABLE I-A. Selected Indicators, FDIC-Insured Commercial Banks

    TABLE II-A. Aggregate Condition and Income Data, FDIC-Insured Commercial Banks

    TABLE III-A. Full Year 2001, FDIC-Insured Commercial Banks

    TABLE IV-A. Fourth Quarter 2001, FDIC-Insured Commercial Banks

    TABLE V-A. Loan Performance 2001, FDIC-Insured Commercial Banks

    Bank Earnings Finish the Year on a Strong Note

    Margins Improve In Fourth Quarter

    Troubled C&I Loans Registered a Sizeable Increase in the Fourth Quarter

    Troubled C&I Loans Are Rising Faster At Larger Banks

    Credit Card Loss Rates and Personal Bankruptcy Filings Are at All-Time Highs

    The Number and Assets of Problem Commercial Banks Increased Sharply in the Fourth Quarter

    Growth in Savings Deposits Sets Quarterly Record

    Unedited Transcript of February 28 Webcast

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