Meet the Author

Joseph G. Haubrich |

Vice President and Economist

Joseph G. Haubrich

Joseph Haubrich is a vice president and economist at the Federal Reserve Bank of Cleveland, where he is responsible for leading the Research Department's Banking and Financial Institutions Group. He specializes in research related to financial institutions and regulations.

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Meet the Author

Saeed Zaman |

Economist

Saeed Zaman

Saeed Zaman is an economist in the Research Department of the Federal Reserve Bank of Cleveland. His current research focuses on inflation measurement and forecasting, including nowcasting methods, and he contributes to the development of macroeconomic forecasting and policy models at the bank. His research interests also include inflation and prices, macroeconomic forecasting, monetary policy, and banking and financial institutions.

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07.30.08

Economic Trends

Fourth District Bank Holding Company Conditions

Joseph G. Haubrich and Saeed Zaman

A BHC is an organization that consists of a parent company and one or more commercial bank subsidiaries. Other depository institutions and nonbank subsidiaries may also be included. As of the first quarter of 2008, there are 21 bank holding companies (BHCs) headquartered in the Fourth District whose consolidated assets total more than $1 billion, including five of the top fifty BHCs in the United States.

As a consequence of the ongoing consolidation in the banking system, the number of BHCs in the Fourth District with assets over $1 billion fell from 24 to 21 from 1999 to 2008, but their total assets have increased every year with one exception. That was in 2000, when Charter One Financial was acquired by a BHC headquartered in another Federal Reserve District (Citizens Financial Group in the First District). 


 
The largest five BHCs in the Fourth District rank in the top 50 of the largest banking organizations in the nation.  Fourth District BHCs of all asset sizes account for roughly 4.5 percent of BHC assets nationwide, and BHCs with over $1 billion in assets make up the majority of the assets held by Fourth District BHCs. 

The income stream of BHCs in the Fourth District stabilized somewhat in first quarter of 2008. The return on assets (which is measured by income before tax and extraordinary items because a bank’s extraordinary items can distort the true earnings picture) remained flat after having declined to its lowest level in the fourth quarter of 2007.  The net interest margin (interest income minus interest expense divided by earning assets) increased slightly to 3.0 percent.

Another indicator used to measure strength of earnings is income earned but not received, which has been low for some time for BHCs in the District.  If a loan allows the borrower to pay an amount that does not cover the interest accrued on the loan, the uncollected interest is booked as income even though there is no cash inflow.  The assumption is that the unpaid interest will eventually be paid before the loan matures.  However, if an economic slowdown forces an unusually large number of borrowers to default on their loans, the bank’s capital may be impaired unexpectedly.  Despite a slight rise over the past three years, income earned but not received fell slightly from 2007 to the first quarter of 2008, reaching 0.52 percent, which is well below the recent high of 0.82 percent set at the end of 2000.

Fourth District BHCs are heavily engaged in real-estate-related lending.  As of the first quarter of 2008, about 40 percent of their assets are in loans secured by real estate.  Including mortgage-backed securities, the share of real-estate-related assets on the balance sheet is 49 percent.

Deposits continue to be the most important source of funds for Fourth District BHCs.   Savings and small time deposits (time deposits in accounts less than $100,000) made up 54 percent of their liabilities in the first quarter of 2008.  Core deposits—the sum of transaction, savings, and small time deposits—made up more than 60 percent of their liabilities, the highest level since 1998.  Finally, total deposits made up about 70 percent of funds. Despite the requirement that large banking organizations must have a rated debt issue outstanding at all times, subordinated debt represents only 3.0 percent of funding.

Problem loans are loans that are more than 90 days past due but are still receiving interest payments, as well as loans that are no longer accruing interest.  Problem commercial loans rose sharply for Fourth District BHCs starting in 1999, peaked in 2002, and settled below 0.75 percent of assets in 2004.  As of the first quarter of 2008, 1.01 percent of all their commercial loans were problem loans.  Problem real estate loans, which peaked in 2007, decreased to 0.24 percent. Problem consumer loans (credit cards, installment loans, etc.) edged up slightly to 0.62 percent.

Net charge-offs are loans removed from the balance sheet because they are deemed unrecoverable, minus the loans that were deemed unrecoverable in the past but are recovered in the current year.  As of the first quarter of 2008, net charge-offs for the BHCs’ consumer loans increased significantly, for real-estate loans they increased slightly, and for commercial loans they remained flat. Net charge-offs were limited to 1.76 percent of outstanding consumer loans during the quarter, 0.57 percent of outstanding commercial loans, and 0.28 percent of outstanding real estate loans.

Capital is a bank’s cushion against unexpected losses.  The risk-based capital ratio (a ratio determined by assigning a larger capital charge on riskier assets) jumped to 11 percent for the Fourth District BHCs in the first quarter of 2008 from 10.5 percent at the end of 2007. The higher the capital ratio, the more protected is the bank. The leverage ratio (balance sheet capital over total assets) fell slightly, to 9.1 percent.

An alternative measure of balance sheet strength is the coverage ratio.  The coverage ratio measures the size of the bank’s capital and loan–loss reserves relative to its problem assets. This ratio has been falling since 2006, and as of the first quarter of 2008, Fourth District BHCs have $6.80 in capital and reserves for each $1 of problem assets.