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Fourth District Bank Holding Companies

A bank holding company (BHC) is a company that owns one or more commercial banks, other depository institutions, and nonbank subsidiaries. While BHCs come in all sizes, we focus here on BHCs with consolidated assets of more than $1 billion. There are 21 BHCs headquartered in the Fourth District that meet this definition as of the second quarter of 2007, including seven of the top fifty BHCs in the United States.

The banking system continues to consolidate nationwide, a process that is evident in the Fourth District. Between the beginning of 1999 and the second quarter of 2007, the number of BHCs in the Fourth District with assets over $1 billion fell from 24 to 21, but the total assets of the remaining BHCs increased every year except 2000. The decline that year reflects the acquisition of Charter One Financial by Citizens Financial Group, a BHC headquartered in in the First Federal Reserve District, served by the Federal Reserve Bank of Boston.

Annual Asset Growth

Fourth District BHCs of all asset sizes account for roughly 4.8 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.

Largest Fourth District Bank Holding Companies by Asset Size

The income stream of BHCs in the district has improved slightly in recent years. The return on assets has fluctuated between 1.7 percent and 2.3 percent since 1998, and it edged down to 1.8 percent in the second quarter of 2007 (Return on assets is measured by income before taxes and extraordinary items, because a bank's extraordinary items can distort the average earnings picture in a small sample of 21 banks). This decrease has coincided with a weakening of net interest margins (interest income minus interest expense divided by earning assets). Currently at 3.0 percent, the net interest margin is at its lowest level in over eight years.

Another indication of the strength of earnings is the continued low level of income earned but not received. 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 two years, income earned but not received in the second quarter of 2007 (0.59 percent) was still well below the recent high of 0.82 percent, registered at the end of 2000.

Income Stream

Fourth District BHCs are heavily engaged in real estate related lending. As of the second quarter of 2007, about 39 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 50 percent.

Balance Sheet Composition

Deposits continue to be the most important source of funds for Fourth district BHCs. Saving and small time deposits (time deposits in accounts less than $100,000) made up 53 percent of liabilities in the second quarter of 2007. Core deposits, the sum of transaction, saving, and small time deposits, made up 60 percent of the district's BHC liabilities as of the second quarter of 2007, the highest level since 1998. Finally, total deposits made up almost 68 percent of funds so far this year. Despite the requirement that large banking organizations must have a rated debt issue outstanding at all times, subordinated debt represents only 3 percent of funding. As with large holding companies outside the district, Fourth district BHCs rely heavily on large negotiable certificates of deposit and nondeposit liabilities for funding.


Problem loans are loans that are past due for more than 90 days but are still receiving interest payments, as well as loans that are no longer accruing interest. Problem commercial loans rose sharply starting in 1999, peaked in 2002, and settled below 0.75 percent of assets in 2004, thanks in part to the strong economy. Currently, 0.69 percent of all commercial loans are problem loans. Problem real estate loans are only 0.57 percent of all outstanding real-estate-related loans, though they have been creeping upward since 2005. Problem consumer loans (credit cards, installment loans, etc.) remained relatively flat, declining slightly through the second quarter of 2007. Currently, 0.36 percent of all outstanding consumer loans are problem loans.

Problem Loans

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 with problem loans, there was a sharp increase in the net charge-offs of commercial and consumer loans in 2001. Fortunately, the charge-off levels have returned to their pre-recession levels in recent years. Net charge-offs in the second quarter of 2007 were limited to 0.31 percent of outstanding commercial loans, 0.73 percent of outstanding consumer loans, and 0.15 percent of outstanding real estate loans.

Capital is a bank's cushion against unexpected losses. The recent upward trend in capital ratios indicates that Fourth District BHCs are sufficiently protected. The leverage ratio (balance sheet capital over total assets) at 9.6 percent and the risk-based capital ratio (a ratio determined by assigning a larger capital charge on riskier assets) at 11.2 percent are signs of strength for the district's BHCs.


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. As of the second quarter of 2007, the district's BHCs have $14.96 in capital and reserves for each dollar of problem assets. While the coverage ratio is below its recent high at the end of 2004, it remains well above the levels of the early 2000s.

Net Charge-Offs

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