FDIC: FYI - Loan Weakness Spreads; Banks' Defenses Hold 

Loan Weakness Spreads; Banks' Defenses Hold

February 27, 2002 

Large banks' business loans have been hit hardest by the recession, but some 

weakening is now appearing for smaller banks and for other kinds of loans. At a 

February 28 webcast, FDIC analysts discussed how bank earnings are holding 

up in the face of these loan-loss trends, based on preliminary fourth quarter 2001 

data for commercial banks. 

Credit quality problems at the nation's banks have resided principally in the 

commercial and industrial (C&I) portfolio (see chart below). C&I loans represent 

about 25 percent of the $3.9 trillion loan portfolio of all 8,080 FDIC-insured 

commercial banks, and as such provide an indication of the overall health of the 

business economy. Based on preliminary, year-end 2001 Call Report data, 

noncurrent C&I loans (that is, loans 90 days or more past due and those in 

nonaccrual status) grew to $23.6 billion -- 2.40 percent of all C&I loans.1 Despite 

this rising trend, the noncurrent C&I rate remains considerably lower than the 

record, 5.19 percent, reached in 1987. Net chargeoffs of C&I loans increased to 

2.41 percent in the fourth quarter of 2001.2 The largest C&I chargeoff rate ever 

reported was 2.53 percent, at the end of 1991. Recent data show that C&I credit 

problems are trending upward, as illustrated by the chart. New announcements of 

corporate bankruptcies, debt defaults and ratings downgrades suggest that 

commercial lending problems will continue in the first quarter of 2002. 

[D]
Larger banks in particular have felt the weakness in the U.S. economy through 

some of their major corporate borrowers. The impact can be observed in the 

table that follows, which compares performance measures for C&I and other loan 

types for the 400 institutions with assets in excess of $1 billion vs. the 7,680 

smaller banks. 

Table 1 

Loan Quality Varies Substantially by Loan Type and Bank 

Size

Fourth Quarter 2001

Banks > $1 Billion Banks < $1 Billion

C&I Loans

 Noncurrent (%) 2.54 1.40

 Chargeoffs (%) 2.57 1.25

Non C&I Loans

 Noncurrent (%) 1.12 0.89

 Chargeoffs (%) 1.05 0.42

All Loans

 Noncurrent (%) 1.50 0.98

 Chargeoffs (%) 1.46 0.57

Noncurrent loans are expressed as a percentage of total loans of the same type at 

quarter end.

Net Chargeoffs are expressed as a percentage of average loans over the quarter. 

The table illustrates the uneven effects of the current economic downturn, which 

has been characterized as a "business recession." Impacts of the recession on 

consumers, however, are becoming more evident in the data. Consumer loan 

delinquencies and chargeoffs have turned upward at banks of all sizes with credit 

card debt contributing significantly to the volume of these problems. Consumer 

lending, at $1.57 trillion, represents 40.3 percent of all bank loans held in 

portfolio. 3,4 Chargeoffs of consumer loans increased from 1.06 percent and 1.28 

percent for the final quarters of 1999 and 2000 respectively - to 1.43 percent for 

the fourth quarter of 2001. 

The data show that the impact of the recession is now clearly discernable beyond 

C&I lending and at smaller institutions. However, the increase in credit weakness 

has been relatively modest so far - even though banks with assets of less than $1 

billion experienced increases in their year-to-year noncurrent loan rates in 11 of 

14 different loan types at year-end 2001, up from only five of the categories one 

year ago.5 At the same time, noncurrent loan rates at smaller banks grew from 

0.79 percent at the end of 1999 to 0.82 percent at year-end 2000 to 0.98 percent 

at the end of 2001. Loan chargeoffs at smaller banks showed a similar pattern 

with mostly moderate increases in all categories over the two-year period. In the 

fourth quarter of 2001, net chargeoffs by smaller institutions were 0.57 percent of 

average loans, up from 0.45 percent in the corresponding quarter of 2000 and 

from 0.47 percent in the fourth quarter of 1999. 
A pattern of weakening in lending segments other than C&I was evident at larger 

banks as well. The aggregate noncurrent loan rate at larger banks, in all 

categories except C&I, was 0.91 percent at the end of 1999 and 0.98 percent in 

December 2000, increasing to 1.12 percent by the close of 2001. Chargeoffs by 

larger banks followed a similar pattern. The net chargoff rate for all loan 

categories except C&I loans was 0.76 percent in the fourth quarter of 1999, 

increasing to 0.90 percent and 1.05 percent in the fourth quarters of 2000 and 

2001 respectively. 

Despite these adverse trends, banks continue to maintain high levels of capital 

and reserves. Equity capital of the industry stands at 9.10 percent of assets, up 

from 8.49 percent a year ago. Loan loss reserves at year-end are $72.1 billion 

(1.85 percent of loans and leases) up from $64.1 billion (1.68 percent of loans 

and leases) one year ago. 

Preliminary analysis of commercial banks' fourth quarter earnings will be 

released on February 28, 2002 at an FDIC news conference to be webcast on 

the Internet at www.fdic.gov. The Preliminary Bank Earnings Report is the 

earliest comprehensive analysis of the commercial banking industry each 

quarter, based on the quarterly Call Reports filed by all FDIC-insured commercial 

banks. 

For the complete Preliminary Bank Earnings Report (published February 28, 

2002), go to:

http://www.fdic.gov/news/news/press/2002/pr2302a.html. 

1. Nonaccrual loans are credits of sufficiently doubtful quality that interest is not booked until payments are 

actually received.

2. Net chargeoffs consist of loans charged off during the quarter, less recoveries on previously charged off 

loans. The rate is 

annualized.

3. "Consumer lending" comprises the following categories: 1-4 family home mortgages, home equity loans, 

credit card debt and 

non-card consumer credit. 4. This discussion does not address loans that have been securitized and sold. 5. The categories are: business real estate, 1-4 family homes, multifamily, construction loans, home equity, 

loans secured by 

farmland, C&I, lease financing, agricultural production, credit card, non-card consumer, depository 

institutions, foreign 

governments, and all remaining loan categories combined.
C&I Loan Weakness on the Rise

1996 - 2001

Quarter End Date C&I Net Chargeoffs

($Billions)

Noncurrent C&I Loans

($Billions)

3/31/96 0.42 8.10

6/30/96 0.48 7.78

9/30/96 0.38 7.76

12/31/96 0.53 6.97

3/31/97 0.32 7.11

6/30/97 0.43 7.22

9/30/97 0.64 7.08

12/31/97 0.74 6.80

3/31/98 0.58 7.92

6/30/98 0.73 8.03

9/30/98 0.86 8.35

12/31/98 1.39 8.87

3/31/99 1.01 10.16

6/30/99 1.26 10.38

9/30/99 1.25 11.51

12/31/99 1.90 11.40

3/31/00 1.29 12.82

6/30/00 1.76 14.57

9/30/00 1.80 15.86

12/31/00 3.40 17.48

3/31/01 2.36 19.00

6/30/01 3.11 20.82

9/30/01 3.30 21.95

12/31/01 6.02 23.62