December 5, 2000

Insured commercial banks rebounded from a disappointing second quarter to record their third-best quarterly earnings ever. Industry net income totaled $19.3 billion in the third quarter, up $4.6 billion (31.6 percent) from the previous quarter, but $106 million (0.6 percent) lower than in the third quarter of 1999. The favorable earnings performance was made possible by the absence of the sizable restructuring and credit-related charges at large banks that depressed the industry's second-quarter results. Without these charges, noninterest expenses declined from second-quarter levels, while noninterest income recovered to a more normal level. Compared to a year ago, noninterest revenues were moderately higher, and noninterest expenses were up more sharply. Third-quarter earnings were held down by rising loan-loss provisions and higher losses on sales of securities. The average return on assets (ROA) in the third quarter was 1.28 percent, compared to 0.99 percent in the second quarter, and a record-high 1.41 percent in the third quarter of 1999. For the first nine months of 2000, commercial banks' earnings of $53.4 billion were $777 million (1.4 percent) below the level of a year ago, and the industry ROA was 1.20 percent, down from 1.32 percent.

Earnings strength remained widespread, as almost two out of every three commercial banks (62.9 percent) reported an ROA of 1 percent or higher for the quarter. However, there were signs that banks may be having difficulty sustaining current levels of profitability. Fewer than half of all commercial banks (48.4 percent) reported a higher quarterly ROA than a year ago. Net interest margins continue to decline, while loan-loss provision expenses are rising. Growth in noninterest income, which has been the strongest source of rising bank revenues, is showing signs of slowing down. Noninterest income was only $2.3 billion (6.2 percent) higher than a year ago, when a large sale of assets boosted noninterest income by $1 billion. Banks' income from trust operations, which until recently had been growing at double-digit annual rates, was only $273 million (5.4 percent) higher than a year ago. In contrast, revenues from trading operations were up by $644 million (29.8 percent). Net interest income was only 4.9 percent ($2.4 billion) above the level of a year ago, even though banks' interest-earning assets were 10.2 percent higher, leaving the industry's net interest margin 19 basis points lower than a year ago. As short-term interest rates have risen in the 12 months ended September 30, and as the spreads between short-term interest rates and medium- and long-term rates have narrowed, banks' average funding costs have escalated more rapidly than the average yields on their assets.

Third-quarter loan-loss provisions were $1.4 billion (25.9 percent) above the level of a year ago. Through the first nine months of this year, loss provisions absorbed 7.4 percent of the industry's net operating revenues, compared to 6.3 percent in the first three quarters of 1999. The rising trend in loss provisions is a reflection of rising loan losses and growing inventories of noncurrent loans. Net charge-offs totaled $5.7 billion in the third quarter, up 16.5 percent ($802 million) from the third quarter of 1999. The largest amount of loan losses came from banks' credit-card loans. Net charge-offs of banks' credit-card loans totaled $2.4 billion in the quarter, for a net charge-off rate of 4.27 percent, compared to a 4.44 percent rate a year earlier. While charge-offs of credit-card loans remain higher than those of commercial and industrial loans, the latter category continues to exhibit more rapid growth. Almost one third of all loan charge-offs in the third quarter ($1.8 billion, 31.8 percent) occurred in loans to commercial and industrial borrowers. Commercial and industrial loan charge-offs were $548 million (43.7 percent) higher than a year ago, whereas credit-card charge-offs were up by a more modest $266 million (12.5 percent).

Even as banks charge off loans at higher rates, their remaining inventories of noncurrent loans continue to rise. Total noncurrent loans increased by $2.2 billion (6.0 percent) in the third quarter, and are up by $5.9 billion (17.8 percent) over the past 12 months. Noncurrent commercial and industrial loans rose by $1.3 billion (8.8 percent) in the quarter, and are up by $4.3 billion (37.7 percent) from the level at the end of the third quarter of 1999.

Banks increased their reserves for loan losses by $602 million (1.0 percent) in the third quarter, but reserve growth continues to lag behind growth in noncurrent loans, as well as growth in total loans. The industry's "coverage ratio" declined from $1.69 in reserves for every $1 of noncurrent loans to $1.61 during the third quarter. A year ago, the ratio was $1.77. At the same time, the industry's ratio of reserves to total loans declined to 1.66 percent, from 1.67 percent at the beginning of the quarter and 1.74 percent a year ago.

Asset growth accelerated in the third quarter, as total assets of insured commercial banks surpassed $6 trillion for the first time. The rising growth rate of industry assets continued a trend that began in the first quarter. As was the case in the two previous quarters, much of the increase in assets has consisted of loan growth. Total assets increased by $80.9 billion (1.4 percent) during the quarter, as loans and leases grew by $72.6 billion. The loan categories with the strongest growth in the third quarter included loans to depository institutions, which increased by 12.5 percent ($13.8 billion), home equity lines of credit, which rose by 5.8 percent ($6.8 billion), and real estate construction and development loans, which grew by $6.9 billion (4.6 percent). Commercial and industrial loan growth showed signs of slowing, as did commercial real estate and construction loans. Loans to commercial borrowers rose by $9.9 billion during the quarter, the smallest quarterly increase since the second quarter of 1996. Real estate construction loans increased by $6.9 billion, after a $7.9-billion increase in the previous quarter and a $9.3-billion quarterly increase a year ago. Loans secured by nonfarm nonresidential real estate rose by $8.7 billion, compared to a $13.3-billion increase in the second quarter, and a $10.9-billion increase in the third quarter of 1999. Over the last 12 months, total assets of commercial banks have increased by 10.0 percent, while loans and leases have grown by 12.4 percent.

Commercial banks' liabilities continued a recent pattern of strong growth in nondeposit liabilities and more expensive time deposits, while growth in lower-cost "core" deposits was slower. For the second consecutive quarter, brokered deposits registered a sharp increase. As was the case in the second quarter, two banks accounted for a large share of the increase. The shift toward higher-cost funding contributed to the decline in net interest margins in the third quarter.

Commercial banks' equity capital registered strong growth in the third quarter, thanks to higher retained earnings and improved market values on securities holdings. Equity capital rose by $17.8 billion (3.5 percent) during the third quarter, as the industry's equity-capital-to-assets ratio increased from 8.41 percent to 8.59 percent. Retained earnings contributed $6.8 billion to the increase in equity, while appreciation in securities portfolios added $5.7 billion.

The number of FDIC-insured commercial banks reporting financial results declined by 102 during the third quarter. Two commercial banks failed during the quarter, bringing the total for the first nine months of the year to 4 failures. The number of commercial banks on the FDIC's "Problem List" rose from 73 to 75 during the quarter, while assets of "problem" banks increased from $11.1 billion to $11.6 billion.

Ross Waldrop
FDIC Division of Research and Statistics
(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. First Three Quarters 2000, FDIC-Insured Commercial Banks

Table IV-A. Third Quarter 2000, FDIC-Insured Commercial Banks

Table V-A. Loan Performance, FDIC-Insured Commercial Banks

Quarterly Net Income 1996-1999 & Credit Quality of Commercial Banks' C&I Loans 1944-2000 Charts

Reserve Ratio and Coverage Ratio 1990-2000 Chart