Federal Deposit Insurance Corporation
On the Release of the
Quarterly Banking Profile
June 6, 1996
The numbers you have before you show that
commercial banks earned slightly more than $12 billion in the
first quarter of 1996. This was the third consecutive quarter
that commercial banks reported earnings of $12 billion or more
and the thirteenth consecutive quarter that they reported
earnings in excess of $10 billion. The average return on assets
(ROA) -- a basic yardstick of profitability -- was 1.12 percent
in the first quarter. It was the thirteenth consecutive quarter
that average bank ROA exceeded one percent. Seventy
percent of all banks reported ROAs above one percent. In
banking, an ROA of one percent or more historically has
marked strong earnings. The industry as a whole did not
achieve an average ROA of one percent or more in any year
between 1934 and 1992.
Commercial bank earnings in the first quarter of 1996
were 8.2 percent higher than those reported in the first quarter
of 1995. More than two out of every three commercial banks
reported higher earnings than a year ago. Higher net interest
income was the main source of the strength in commercial
bank earnings in the first quarter. Compared to a year ago,
net interest income rose $2.2 billion, reflecting a significant
increase in interest-earning assets over the past twelve months
-- a 6.7 percent rise to be precise.
Higher noninterest revenues, particularly fee income
and earnings from trading activities -- also contributed to
commercial bank earnings.
In addition, sales of investment securities totaled $487
million -- in stark contrast to a year earlier, when sales of
securities produced a net quarterly loss of $45 million.
There were a few dark spots in the picture.
Indicators of asset quality show a slight deterioration.
First-quarter net charge-offs totaled $3.6 billion, a 58-percent
increase from a year earlier. The annualized net charge-off
rate was 0.55 percent, the highest first-quarter rate since 1993,
but still well below the record high rate of 1.3 percent set in the
first quarter of 1990. Noncurrent loans -- those 90 days or
more past due or no longer accruing interest income -- grew by
$659 million -- only the second quarterly increase in the last
five years. However, in the last two quarters the percentage of
loans that were noncurrent -- 1.18 percent at the end of the
first quarter and 1.17 percent at the end of 1995 -- were the
two lowest in the 14 years that banks have reported noncurrent
We have some specific areas of concern.
As this chart on credit card lines shows, lines of credit
offered by commercial banks through credit cards, including
loans outstanding and unused commitments, have more than
doubled in the four years since March 31, 1992. Credit card
loans held by commercial banks have increased by 56 percent.
At the end of the first quarter of 1996, unused credit card
commitments at commercial banks totaled more than a trillion
dollars. Net charge-offs on credit-card loans in the first
quarter of 1996 were $2.2 billion -- up from $1.35 billion in the
first quarter of 1995.
As this chart on personal bankruptcy shows, quarterly
filings for personal bankruptcies have increased substantially
since mid-1994, and the 253,000 filings in the first quarter of
1996 exceeded the record for quarterly filings of 234,000 set in
1992. For 1996, the American Bankruptcy Institute is
projecting more than a million personal bankruptcy filings -- a
record for filings in one year -- and the result for the first
quarter of 1996 supports that projection.
As you can see from this chart, which overlays quarterly
credit card net charge-off rates and quarterly personal
bankruptcy filings, there is a correlation between the two -- a
correlation that has become especially clear since 1990. When
the number of personal bankruptcy filings went up, the
percentage of charge-offs rose -- when the number of personal
bankruptcy filings went down, charge-offs declined. Note the
increases in both bankruptcy filings and charge-offs over the
last year. This chart is not in the graph book, but a copy is
included in your press package.
Turning to another area of concern, as you are aware
the extreme drought in the southern plains and record-high
grain prices have combined to severely affect wheat and cattle
production. Banks serving farm communities have high
concentrations of agricultural-related credits. They therefore
are exposed to the current adverse conditions in this sector.
However, as a group, agricultural banks are well capitalized,
with average equity to assets of 10.68 percent as compared to
the industry average of 8.21 percent. While the level of
noncurrent loans at farm banks has increased slightly beyond
normal seasonal fluctuations, it remains less than 1 percent,
which is low when viewed historically. [Nationwide, total
assets of 2,639 banks specializing in agricultural lending are
We are concerned about these trends, however, and we
are monitoring the agricultural sector and the condition of
insured institutions in drought-plagued areas closely.
Even with these dark spots and concerns, the picture for
the commercial banking industry remained bright. The
number of banks on the FDIC's "Problem List" declined from
144 with $17 billion in assets at the end of 1995, to 127 banks
with $13 billion in assets at the end of March. One bank failed
in the first quarter of this year. Five years ago, in 1991, there
were 1,016 banks on the problem list; they held $528 billion in
assets; and a total of 108 banks failed that year.
Consolidations in the banking industry have continued.
In the first quarter of 1996, the number of insured commercial
banks declined by 100 to 9,841. In addition to the single bank
failure, there were 131 bank mergers. On the other hand,
there were four conversions of savings institutions to
commercial bank charters and new banks were being
established: 29 new banks were chartered in the quarter, a
pace that, if continued, would outdistance the 102 new bank
charters issued last year. The year previous to 1995 when we
saw more than 100 new bank charters was 1991.
As this chart on the insurance funds shows, the Bank
Insurance Fund (BIF) increased slightly in the quarter to $25.7
billion -- or to $1.31 in reserves for every $100 in insured
deposits -- while the Savings Association Insurance Fund
(SAIF) grew to $3.7 billion -- or to 51 cents in reserves for
every $100 in insured deposits.
Deposits held by SAIF members, however, declined for
the 30th consecutive quarter. The decline in the first quarter
of $7.5 billion was attributable to two reasons. The first reason
was purchases of SAIF-assessable deposits by members of the
BIF -- BIF members now hold 31.2 percent of SAIF deposits.
A second reason -- suggested by call report data -- is that one
large company continued to shift deposits from its SAIF-member
affiliate to its BIF-member affiliate -- a shift of $3
billion in the first quarter of 1996 following a shift of about
$3.5 billion in 1995. Given the disparity between BIF and
SAIF premiums, based on call report data the institution has
evidently reduced its annual deposit insurance assessment by
about $15 million. In contrast, if current conditions continue,
more than nine-out-of-ten commercial banks will each pay the
$2,000 minimum for deposit insurance this year.
The largest thrift alone will pay approximately $71.5
million in SAIF premiums this year -- which is almost exactly
the same amount that all the BIF-member institutions -- 10,000
or so -- are expected to contribute to the bank insurance fund.
Of the ten largest predominantly SAIF-insured thrift
companies, three already have BIF-insured affiliates and three
have applications pending to charter new BIF-insured
institutions. These ten largest thrift companies hold $141.6
billion in SAIF-assessable deposits -- or 19.2 percent of the
total SAIF assessment base.
Moreover, at least 154 SAIF institutions already have
BIF member affiliations, 11 SAIF companies have acquisitions
of existing BIF members pending, and 12 thrift companies
have filed applications for 11 national bank and five state bank
Our call report data cover the period January 1
through March 31. Until mid-March, the prospects for
legislation to capitalize SAIF and to make it viable appeared
bright. Since then the prospects have appeared to dim, and we
have learned -- through anecdotes and press reports -- of
increasing interest among SAIF-insured institutions in
migrating deposits to BIF-insured affiliates.
Migrating deposits takes a great deal of effort. I would
hope that those interested in migrating deposits would instead
put the same level of effort into working for passage of
legislation to capitalize SAIF and make it viable -- legislation
that would lay the foundation for merging the two funds, the
only long-term solution that will guarantee a stable deposit
With me are Don Inscoe, the manager of the FDIC
Statistics Branch, and Ross Waldrop, Tim Critchfield and Jim
McFadyen, the FDIC analysts who put together the Quarterly
Banking Profile. We will now entertain questions.