Economic Research and Data

Economic Trends

Filling you in on the current state of the economy

12.21.06
Fourth District Banking Conditions

FDIC-insured commercial banks headquartered in the Fourth Federal Reserve District posted net income of $8.7 billion for the first three quarters of 2006 or $11.6 billion on an annual basis. (JP Morgan Chase, chartered in Columbus, is not included in this discussion because its assets are mostly outside the District and its size—roughly $1 trillion—dwarfs other District institutions.) The U.S. banking industry as a whole posted earnings of $112.75 billion for the same period or $150.32 billion on an annual basis.

 

Annual Net Income*

*Through 2006:IIIQ only. Data for 2006 are annualized.
Sources: Author’s calculation from Federal Financial Institutions Examination Council, Quarterly Banking Reports of Condition and Income, Third Quarter 2006.

 

Fourth District banks’ net interest margin (core profitability computed as interest income minus interest expense divided by average earning assets) fell slightly to 3.06% of total income at the end of 2006:IIIQ, but still exceeds the 2.95% U.S. average. Fourth District banks’ non-interest income edged up to 30.48%, while the national average slipped down to 30.52% of total income.

 

Income Ratios*

income ratios bank in 4th district

*Through 2006:IIIQ only. Data for 2006 are annualized.
Sources: Author’s calculation from Federal Financial Institutions Examination Council, Quarterly Banking Reports of Condition and Income, Third Quarter 2006.

 

Fourth District banks’ efficiency (operating expenses as a percent of total income) continued to worsen in 2006:IIIQ, deteriorating to 56.21% from the 52.64% record set in 2002. (Lower numbers correspond to greater efficiency.) Banks outside the Fourth District fared better, with the national average continuing to improve to 54.46% (from 56.40% at the end of 2005).

 

Efficiency*,**

* Through 2006:IIIQ only. Data for 2006 are annualized.
** Efficiency is operating expenses as a percent of net interest income plus non-interest income.
Sources: Author’s calculation from Federal Financial Institutions Examination Council, Quarterly Banking Reports of Condition and Income, Third Quarter 2006.

 

At the end of 2006:IIIQ, District banks posted a 1.39% return on assets (down from 1.43% at the end of 2005) and a 14.45% return on equity (down from 15.32% at the end of 2005). The District’s decline contrasted with an upward trend nationwide: At the end of 2006:IIIQ, the U.S. banking industry reported that return on assets rose to 1.19% (from 1.08% at the end of 2005); and return on equity rose to 12.63% (from 11.55% at the end of 2005).

 

Earnings*

*Through 2006:IIIQ only. Data for 2006 are annualized.
Sources: Author’s calculation from Federal Financial Institutions Examination Council, Quarterly Banking Reports of Condition and Income, Third Quarter 2006.

 

Overall, Fourth District banks’ financial indicators point to stable balance sheets. Asset quality, as measured by net charge-offs (losses realized on loans and leases currently in default minus recoveries on previously charged-off loans and leases) continued to improve in 2006:IIIQ. Net charge-offs dropped from 0.38 percent at the end of 2005 to 0.3 percent of total loans, the lowest level in over a decade. Problem assets (nonperforming loans and repossessed real estate) as a share of total assets, however, rose to 0.68 percent, from 0.59 percent at the end of 2005. The increase in problem assets may translate into higher charge-offs in the future if borrowers cannot catch up with their late payments. At the national level, both asset quality ratios are still improving. Net charge-offs and nonperforming loans fell to a historically low 0.32 percent of loans (down from 0.46 percent at the end of 2005) and 0.42 percent of assets (down from 0.45 percent at the end of 2005), respectively.

 

Asset Quality*

*Through 2006:IIIQ only. Data for 2006 are annualized.
a. Problem assets are shown as a percent of total assets, net charge-offs as a percent of total loans.
Sources: Author’s calculation from Federal Financial Institutions Examination Council, Quarterly Banking Reports of Condition and Income, 2006:IIIQ.

 

Fourth District banks held $17.62 in equity capital and loan loss reserves for every dollar of problem loans, well above the recent coverage ratio low of 10.75 at the end of 2002 but below the record high of 24.97 at the end of 2004.

 

Coverage Ratio*

*Through 2006:IIIQ only. Data for 2006 are annualized.
Sources: Author’s calculation from Federal Financial Institutions Examination Council, Quarterly Banking Reports of Condition and Income, 2006:IIIQ.

 

Equity capital as a percent of Fourth District banks’ assets (the leverage ratio) rose to 9.65 percent (from 9.36 percent at the end of 2005).

 

Core Capital (Leverage) Ratio*

*Through 2006:IIIQ only. Data for 2006 are annualized.
Sources: Author’s calculation from Federal Financial Institutions Examination Council, Quarterly Banking Reports of Condition and Income, 2006:IIIQ.

 

The percent of unprofitable institutions in the Fourth District fell to 5.17 percent for the third quarter of 2006 (from 5.43 percent at the end of 2005). Unprofitable banks’ asset size also dropped because the share of District banks’ assets accounted for by unprofitable banks fell from 0.56 percent to 0.14 percent. Industrywide, the share of unprofitable institutions rose from 6.28 percent to 6.82 percent at the end of 2006:IIIQ. However, unprofitable banks’ asset size dropped from 1.13 percent at the end of 2005 to 0.43 percent at the end of 2006:IIIQ. Thus, the industrywide increase in the number of unprofitable banks comes from the smaller financial institutions.

 

Unprofitable Institutions*

*Through 2006:IIIQ only. Data for 2006 are annualized.
Sources: Author’s calculation from Federal Financial Institutions Examination Council, Quarterly Banking Reports of Condition and Income, 2006:IIIQ.

 




Economic Trends is published by the Research Department of the Federal Reserve Bank of Cleveland.

Views stated in Economic Trends are those of individuals in the Research Department and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. Materials may be reprinted provided that the source is credited.

If you'd like to subscribe to a free e-mail service that tells you when Trends is updated, please send an empty email message to econpubs-on@mail-list.com. No commands in either the subject header or message body are required.

ISSN 0748-2922



top