Fourth Quarter 1986 

FDIC 

Division of Research 

& Strategic Planning 

John Quinn 

(202) 898-3940 

Ross Waldrop 

(202) 898-3951 

uarterlY-----

,ro,~,"~~-~~iEg 11~f!J5;~ 

COMMERCIAL BANKING PERFORMANCE - FOURTH QUARTER, 1986 

Commercial banks' net income totalled $17.8 billion in 1986, down 1.4 percent from the record 

$18.1 billion reported in 1985, but still the second 

highest total ever reported, according to preliminary data. Fourth-quarter net income was $3.8 billion, up 7.7 percent from the fourth quarter a year 

ago. Net operating earnings were down 16.3 percent in 1986, despite earning asset growth of nearly 8 percent. For the full year, nonrecurring items 

and gains from the sale of securities amounted 

to $4.2 billion, or nearly one-fourth of bottom-line 

net income. 

Quarterly Net Income of FDIC-Insured 

Commercial Banks 

$ Billions 1984-1986 

5..---------------------, 

2 3 4 2 3 4 2 3 4 

1984 1985 1986 

securities & other lillITI Net operating income 

nonrecurring gains 

During 1986, total bank assets, loans, deposits and 

equity capital grew at almost identical rates. Weak 

loan demand and lower interest rates caused banks 

to adjust the composition of their balance sheets. 

The need to increase high-yielding assets prompted them to lengthen maturities in investment securities portfolios and to emphasize mortgage and 

consumer lending. While total loans grew 7.6 percent, real estate loans expanded a robust 17.2 percent and consumer loans increased 8.6 percent. 

Commercial and industrial loans, in contrast, grew 

only 4.0 percent, reflecting softness in demand and 

heightened nonbank competition. , 

Falling interest rates also contributed to year-to-year 

reductions in both interest income and expense. Net 

Commercial Bank Net Interest Margins 

1983- 1986 

Basis Points 

600 

550 

500 

450 

400 

350 .. 

300 1234123412341234 

1983 1984 1985 1986 

interest margins, which contracted 13 basis points 

for the year, were hurt by the 12.6 percent growth 

of nonperfonning assets. Noninterest income made 

a larger contribution to earnings in 1986, growing 

nearly 16 percent. Noninterest expense grew roughly in line with assets, and as a result, net noninterest 

expense declined to 1.85 percent of assets from 1.88 

percent in 1985. Most of this improvement was centered in the largest banks. 

Loan-Loss Expense, Net Loan Charge-Offs and 

Earnings Coverage of Loan Losses 

1980-1986 Cove rag e $ Billion 

7.5 25 

4.5 .. 

lei Loan Charge - Offs ... 

01L98-0--19-'-8-1--1---'98- 2--19--'--8-3---'19'-84--1-'-98-5---,19-,--'86 O 

• Earnings a,e nel operating earnings before loan loss provisions and taxes 

Note: Left and right hand scales are not relaled. 

Banks' loan-loss expense continued to be a drag on 

earnings. Provisions totalled $21.7 billion in 1986, up 

over $4 billion from year-ago levels - a 22.7 percent 

increase. They covered $16.3 billion in net loan 

For assistance contact: Section508@fdic.gov
charge-offs, and still boosted loss reserves 23.6 percent during 1986. At year-end, the ratio of loss 

reserves to nonperfonning assets stood at 50 percent, compared with 45 percent a year ago. Nonperfonning assets ended the year at 1.96 percent of total 

assets, up from 1.87 percent in 1985. 

The number of banks reporting losses (net income 

less than zero) in 1986 climbed to 2,784, or nearly 20 

percent of all insured commercial banks, compared 

with 2,453 in 1985. In the fourth quarter, 4,354 banks 

reported a net loss, down from 4,395 in the same 

period of 1985. It should be noted that quarterly income and loss figures are affected by the fact that 

many banks concentrate loan loss provisions in the 

fourth quarter of each year. 

Most (81.4 percent) of the unprofitable banks in 1986 

were located west of the Mississippi. In general, 

banks in the eastern part of the U.S. have had better 

asset growth, better credit quality, higher profitability and fewer problem institutions or failures than 

their western counterparts. The influences of agricultural problems on smaller banks and energy-related 

problems on small and large banks in the west account for much of these differences. 

Distribution of Problem Banks 

by Asset Size and Region 

Percent of banks (in size range and region) 

25~----------- ------~ 

(TI] East (Total number of banks "" 6,165) 

■ West (Total number of banks = 8,037) 

20 -----

All Banks 0-25 25 - 100 100-500 500+ 

Bank Asset Size Ranges (in $ millions) 

Includes commercial banks on the FDIC "Problem Lisr . EastJ\-\lest separated by 

Mississippi River. 

Banks in all three regions in the western half of the 

nation have seen their income reduced by exceptionally high loan losses. In the West region, these losses have centered around real estate and 

energy-related credits; banks in the Midwest region 

have been squeezed by losses stemming from 

depressed fann prices. The Southwest region has 

also had sizable losses associated with commercial 

real estate and agricultural problems, but loans to 

the energy sector have had the greatest negative impact. Despite the highest charge-off rate of any 

region in 1986, Southwest banks still were left with 

the highest level of nonperfonning assets - over 

four percent of total assets - at year-end. Sixty-two 

of the 144 commercial banks that failed or received 

assistance in 1986 were in the Southwest. The region 

also had the highest proportion of unprofitable banks 

in 1986 - 35 percent - while the West region had 

the largest share of banks on the "problem" list. The 

Southeast, Northeast and Central regions had the 

fewest troubled institutions, and showed improving 

trends in this area. 

Return on Average Assets, East vs. West 

1982-1986 Percent 

1.00 ~ ~-----.------,------,- ----,--, 

Q_84% 

o~~--~---~--------'-----'----' 1982 1983 1984 1985 1986 

Continued growth in the number of "problem" banks, 

up 33 percent over 1985's level to 1,457 at year-end, 

suggests 1987 will see another substantial increase 

in the number of bank failures. For the banking industry, 1987 is likely to be marked by continued 

credit-quality problems among commercial and realestate loans stemming from lingering weakness in 

the agricultural and energy sectors. Beyond the 

domestic portfolio, uncertainty has increased regarding LDC loans, although the level of exposure from 

these loans has fallen relative to bank capital. 

Numbers of Problem and Failed Commercial Banks 

1981-1986 No. of failed banks No. of problem banks 

150 1500 

90 ------- -----<goo 

60 --- ------------------------------- 600 

300 

(ill] Number ol Bank Failures -e- Number of Problem Banks 

NOTE: Number of problem banks represents those on the FDIC "Problem List " 

as ol the beginning ol the year. 

Deteriorating domestic credit quality in general, as 

well as uncertainties surrounding LDC loan exposure, call for a guarded earnings outlook for 1987. 

It should be noted, however, that the banking industry has continued to augment its capital position. 

During 1986, total primary capital increased by 9.2 

percent to $208 billion, the highest level ever. The 

ratio of primary capital to assets now stands at 7.04 

percent, up from 6.97 percent a year ago. 
U.S. COMMERCIAL BANKING INDUSTRY QUARTERLY PROFILE 

Aggregate Condition and Income Data, FDIC-Insured Commercial Banks (dollar figures in millions) 

Preliminary 

4th Otr 3rd Qtr 4th Otr % Change 

1986 1986 1985 85:4-86:4 

Number of banks reporting .. . .. . ...... .. .......... .... .. . ... .... . 14,181 14,306 14,404 -1.5 

Total employees (full-time equivalent) . . ... .. ......... ... ....... . ... . 1,562,433 1,568,231 1,561,698 0.0 

CONDITION DATA 

Total Assets ........ . ... .... . .... .... ..... ...... .... . ... .. ... . . $2,938,400 $2,801,855 $2,730,498 7.6 

Real estate loans .... ..................... ...... ... ........ . 514,001 486,839 438,426 17.2 

Commercial & industrial loans .... .... ..... . .... . . .... .. . ... . . 600,871 572,084 577,738 4.0 

Loans to individuals ................ .... .................... . 335,441 326,102 308,930 8.6 

Farm loans .. . .. . .... . .. . . ... . ... ..... ..... . . .. ... .. ... .. . . 31,686 34,204 36,107 -12.2 

Other loans and leases .. . . ..... .. .... . . .. .. . ...•. .. •........ 272,750 263,913 269,581 1.2 

Total loans and leases . ...................... .... ..... . ..... . 1,754,749 1,683,142 1,630,782 7.6 

LESS: Reserve for losses ................................... . 28,701 27,252 23,216 23.6 

Net loans and leases . ....... . .... .. ............. .. .... .... ... . 1,726,048 1,655,890 1,607,566 7.4 

Temporary investments . . .. . . . ......................... . .. ... . . 463,644 450,889 451,700 2.6 

Securities over _1 year ............ •• .. ....... . . ... . ...... . •.... 367,249 343,163 303,381 21.1 

All other assets ... .... ... . . ..... ........ . . .... . .. ... .. .... .. . 381,459 351,913 367,851 3.7 

Total liabilities and capital .. .. .......... . ..................... . .. . $2,938,400 $2,801,855 $2,730,498 7.6 

Noninterest-bearing deposits ....... . .. ....... . .... .. ... . ....... . 532,211 446,555 471,340 12.9 

Interest-bearing deposits ...................................... . 1,748,603 1,713,022 1,646,436 6.2 

Other borrowed funds . . . ..... ... ... .. . . .. ........ . . . ........ . . 358,809 339,243 320,366 12.0 

Subordinated debt .. . ............... . . ........ ............... . 16,888 16,500 14,659 15.2 

All other liabilities ... .. ..... .. ... . ... .. . . . .... ..... .. . .. ..... . 99,394 107,012 108,497 -8.4 

Equity capital ......... . .............. ... ......... . .•......... 182,495 179,523 169,200 7.9 

Nonperforming assets . . .......... ...... ........................ . 57,526 58,749 51,090 12.6 

Loan commitments and letters of credit . ... . .. ...... . . .. .. . . ... . .. . 750,935 745,697 728,546 3.1 

Domestic office assets . . ............................ . .... . ..... . 2,529,385 2,385,749 2,325,024 8.8 

Foreign office assets .......... ............. .................... . 409,015 416,106 405,474 0.9 

Domestic office deposits ..... .. .. .. . ... . . .. . ..... . .... .. . ...... . . 1,967.019 1,834,817 1,795,932 9.5 

Foreign office deposits .... .. . ..... ~ ... ........ . .. .... . .... . .... . 313,795 324,760 321,844 -2.5 

Prelim. Prelim. 

Full Year Full Year 4th Qtr 4th Qtr 

INCOME DATA 1986 1985 % Change 1986 1985 % Change 

Total interest income ........ .... . $237,661 $248,210 -4.3 $57,655 $62,479 -7.7 

Total interest expense . ........ ... . 142,691 157,300 -9.3 33,451 38,758 -13.7 

Net interest income . ...... . . .. . 94,970 90,910 4.5 24,204 23,721 2.0 

Provisions for loan losses ... .. .... 21,738 17,717 22.7 6,621 6,146 7.7 

Total noninterest income .. ... •.... 35,869 31,037 15.6 9,834 8,702 13.0 

Total noninterest expense ......... 90,094 82,320 9.4 24,052 22,161 8.5 

Applicable income taxes ........ .. 5,397 5,644 -4.4 554 959 -42.2 

Net operating income .......... 13,610 16,266 -16.3 2,811 3,157 -11.0 

Securities gains, ne't. ......... .... 3,927 1,567 150.6 944 386 144.6 

Extraordinary gains, net ........ . .. 270 224 20.5 57 -5 1240.0 

Net Income ..... . . . ....... . ... 17,807 18,057 -1.4 3,812 3,538 7.7 

Net charge-offs .................. 16,342 13,245 23.4 5,250 4,944 6.2 

Net additions to capital stock ...... 3,192 2,395 33.3 2,205 1,651 33.6 

Cash dividends on capital stock . ..• 9,208 8,529 8.0 3,226 2,844 13.4 

Selected Performance and Condition Indicators, FDIC-Insured Commercial Banks 

1982 1983 1984 1985 1986 

Return on assets ........... . ... . .. .. . . .... .. .. . ..... .. .. . .... . 0.71% 0.66% 0.65% 0.70% 0.64% 

Return on equity .... .. .......... '' '' .............. ' ........... 12.11 10.70 10.73 11.31 10.18 

Equity capital to assets ....... ' ............... '' ..... .....''' ... 5.87 6.00 6.15 6.20 6.21 

Nonperforming assets to assets ... .. . .. . ........ . . ... ........... 1.85 1.97 1.97 1.87 1.96 

Net charge-offs to loans ....... ... ... ... . . .. .... . . . ... .. .. ...... 0.56 0.67 0.76 0,84 0.99 

Asset growth rate ..... .. .. ...... ........ .. ... ... . ... .. . ...... ' 8.12 6.75 7.11 8.86 7.62 

Net operating income growth ... . ..... . ........ . .... . ........ . ... -0.62 -3.69 3.40 6.30 -16.20 

Number of unprofitable banks .... ... .. .. ... .. .. .. ...... ... ... ... 1,196 1,530 1,891 2,453 2,784 

Number of problem banks ........ ', ... '.' .. ... .' .. ' '' '' .. ''' ... 326 603 800 1,098 1,457 

Number of failed banks .... .. . ' .... ...... .. .. ... ' ... ..... . '' ... 34 45 78 118 144 
Preliminary Bank Data and Performance and Condition Ratios, 

Distributed by Asset Size and by Region, Fourth Quarter 1986 (Dollar figures in billions, ratios in %) 

Asset Size Distribution Geographic Distribution 

EAST WEST Less Greater 

than $25 $25-100 $100-300 $300-1,CXXl $1 -10 than $10 Northeast Southeast Central Midwest Southwest West 

All Banks Million Million Million Million Billion Billion Region Region Region Region Region Region 

Number of banks 

reporting . . . .. ...... 14,181 4,813 6,581 1,899 549 306 33 1,080 1,950 3,122 3,315 3,135 1,579 

Total assets . .. .. . ... $2,938.4 $71.0 $333.5 $304.4 $276.2 $897.9 $1,055.4 $1,133.4 $380.7 $463.6 $205.1 $301.7 $453.9 

Total deposits ........ 2,280.7 63.0 298.9 268.7 232.3 680.8 737.1 826.2 304.2 370.9 160.1 246.2 373.1 

% of total banks .... . 100.0% 33.9% 46.4% 13.4% 3.9% 2.2% 0.2% 7.6% 13.8% 22.0% 23.4% 22.1% 11 .1% 

Asset share (%) ...... 100.0 2.4 11.3 10.4 9.4 30.6 35.9 38.6 13.0 15.8 7.0 10.3 15.4 

Deposit share (%) ... . 100.0 2.8 13.1 11 .8 10.2 29.8 32.3 36.2 13.3 16.3 7.0 10.8 16.4 

Number of 

unprofitable banks .. . 4,354 2,082 1,814 357 79 22 0 118 411 572 1,172 1,513 568 

Number of failed 

banks . ............ 37 18 17 1 1 0 0 0 1 0 11 17 8 

Perfonnance ratios 

(annualized) 

Yield on earning assets .. . .. . 9.38% 10.10% 9.82% 9.68% 10.12% 9.11% 9.14% 9.15% 9.83% 9.20% 9.93% 8.92% 9.82% 

Cost of funding 

earning assets ...... 5.44 5.47- 5.45 5.32 5.49 5.08 5.77 5.54 5.37 5.37 5.66 5.57 5.15 

Net interest margin ... 3.94 4.63 4.37 4.37 4.63 4.03 3.37 3.61 4.47 3.83 4.27 3.35 4.67 

Net noninterest 

expense to 

earning assets . . . .. . 2.31 3.66 2.99 2.73 2.81 2.32 1.73 1.92 2.78 2.28 2.03 2.60 2.92 

Net operating income 

to assets . . . . ....... 0.40 -0.66 -0.00 0.33 0.28 0.59 0.48 0.64 0.68 0.65 0.46 -1.30 0.32 

Return on assets ..... 0.54 -0.48 0.17 0.47 0.42 0.72 0.63 0.76 0.88 0.74 0.63 -1.04 0.42 

Return on equity .... . 8.46 -4.99 2.04 6.27 6.09 11.86 12.09 12.88 13.18 10.71 8.55 -15.67 7.38 

Net charge-offs to 

loans and leases . ... 1.24 2.99 2.24 1.62 1.62 0.95 1.01 0.74 0.90 0.96 2.48 3.26 1.37 

Condition Ratios 

Loss reserve to 

loans and leases . ... 1.64% 1.74% 1.53% 1.46% 1.59% 1.46% 1.83% 1.49% 1.29% 1.44% 1.93% 2.26% 1.86% 

Nonperforming assets 

to assets . .... . . .... 1.96 2.60 2.17 1.88 1.90 1.46 2.29 1.54 1.02 1.30 2.02 4.06 2.99 

Equity capital ratio ... . 6.21 9.59 8.16 7.28 6.74 5.95 5.14 5.81 6.57 6.80 7.15 6.46 5.68 

Primary capital ratio ... 7.04 10.42 8.91 7.97 7.51 6.60 6.19 6.58 7.07 7.52 8.11 7.69 6.74 

Net loans and leases 

to assets . .... . . .... 58.74 48.20 50.49 54.43 59.25 60.45 61.69 59.62 57.58 56.16 51.88 55.00 65.69 

Net assets repriceable 

in one year or less 

to assets .. ... . ..... -5.14 -5.28 -7.25 -6.60 -6.52 -3.76 -4.87 -4.20 -9.35 -3.49 -10.88 -6.32 -2.28 

Growth Rates 

(from year-ago quarter) 

Assets .. .. ... .. . .... 7.6% 6.3% 8.0% 10.8% 12.6% 16.0% 6.7% 11.9% 18.2% 9.2% 14.4% 0.8% 9.0% 

Earning assets ... . ... 7.9 6.4 7.9 10.5 12.2 16.1 7.4 12.9 18.6 8.7 14.6 0.9 8.1 

Loans and leases ... .. 7.6 4.1 5.0 9.1 13.7 18.1 7.3 13.5 18.8 9.9 11 .5 -2.5 10.2 

Loss reserve ......... 23.6 15.3 17.2 23.3 31 .7 30.8 29.0 24.2 22.2 15.8 33.0 44.0 35.7 

Net charge-0ffs ....... 6.2 2.1 1.9 21 .9 45.6 34.2 2.3 25.3 10.4 4.0 -1 .3 29.2 -10.4 

Nonperforming assets . 12.6 14.2 15.9 18.5 33.4 18.0 16.5 11 .4 20.3 -4.4 4.7 57.1 18.5 

Deposits ............ 7.6 7.2 8.6 11 .4 13.6 15.8 6.9 13.0 18.7 9.1 12.5 0.1 10.2 

Equity capital . . . . .. . . 7.9 0.5 5.4 8.3 10.7 15.8 ' 10.2 14.5 17.9 9.2 10.1 -6.1 12.4 

Interest income ...... -7.7 -6.2 -5.4 -2.8 0.3 0.2 -11 .5 -5.8 -1.4 -6.6 -9.4 -15.4 -10.8 

Interest expense .. . ... -13.7 -10.2 -9.1 -7.4 -6.3 -7.5 -17.2 -13.3 -6.2 -12.0 -12.7 -16.1 -19.0 

Net interest income . .. 2.0 -0.7 -0.0 3.6 9.4 11 .8 0.5 8.5 5.0 2.6 -4.8 10.1 0.6 

Loan loss expense .... 7.7 -16.3 -5.7 22.1 33.5 30.6 12.5 42.4 -2.3 -8.5 -17.6 26.5 -8.9 

Noninterest income . . . 13.0 9.2 7.9 18.9 18.7 8.3 22.9 11 .9 9.0 10.0 42.6 -0.2 15.8 

Noninterest expense .. 8.5 2.9 5.3 8.2 14.1 14.1 13.4 13.1 9.6 6.5 8.0 3.4 5.1 

Net operating income . -11.0 19.9 -94.6 -33.7 -51.3 -19.9 17.4 -4.8 -7.7 4.6 94.0 -317.2 448.1 

Net income .......... 7.7 32.2 3.9 -17.3 -33.8 -3.1 31.9 9.5 16.1 6.5 126.0 -587.2 222.5 

REGIONS: Northeast - Connecticut, Delaware, D1stnct of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, 

Puerto Rico, Rhode Island, Vermont 

Southeast - Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, West Virginia 

Central - Illinois, Indiana, Kentucky, Michigan, Ohio, Wisconsin 

Midwest - Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota 

Southwest - Arkansas, Louisiana, New Mexico, Oklahoma, Texas 

West - Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, Oregon, Pacific Islands, Utah, Washington, Wyoming 
NOTES TO USERS 

Computation Methodology for Performance and Condition Ratios 

All income figures used in calculating performance ratios represent amounts for that quarter, annualized. 

All asset and liability figures used in calculating performance ratios represent average amounts (beginningof-period amount plus end-of-period amount, divided by two). 

All asset and liability figures used in calculating the condition ratios represent amounts as of the end of 

the period. 

Definitions 

"Problem" Banks - Federal regulators assign to each financial institution a uniform composite rating, based 

upon an evaluation of financial and operational criteria. The rating is based on a scale of 1 to 5 in ascending 

order of supervisory concern. "Problem" banks are those institutions with financial, operational or managerial weaknesses that threaten their continued financial viability. Depending upon the degree of risk and supervisory concern, they are rated either "4" or "5". 

Earning Assets - all loans and other investments that earn interest, dividend or fee income. 

Yield on Earning Assets - total interest, dividend and fee income earned on loans and investments as a 

percentage of average earning assets. 

Cost of Funding Earning Assets - total interest expense paid on deposits and other borrowed money as 

a percentage of average earning assets. 

Net Interest Margin - the difference between the yield on earning assets and the cost of funding them, 

i.e., the profit margin a bank earns on its loans and investments. 

Net Noninterest Expense - total noninterest expense, excluding the expense of providing for loan losses, 

less total noninterest income. A measure of banks' overhead costs. 

Net Operating Income - income after taxes but before gains (or losses) from securities transactions and 

nonrecurring items. The profit earned on banks' regular banking business. 

Return on Assets - net income (including securities transactions and nonrecurring items) as a percentage 

of average total assets. A basic yardstick of bank profitability. 

Return on Equity - net income as a percentage of average total equity capital. 

Net Charge-offs - total loans and leases charged off due to uncollectibility, less amounts recovered on previous charge-offs. 

Nonperforming Assets - the sum of loans past-due 90 days or more, loans in nonaccrual status and real 

estate owned other than bank premises. ' 

Primary Capital - total equity capital plus the allowance for loan and lease losses plus minority interests 

in consolidated subsidiaries plus qualifying mandatory convertible debt, less intangible assets except purchased mortgage servicing rights. 

Net Loans and Leases - total loans and leases less unearned income and the allowance for loan and lease 

losses. 

Net Assets Repriceable in One Year or Less - short-term and variable rate interest-earning assets, minus 

interest-bearing liabilities maturing or repriceable within the same one-year interval. A measure of banks' sensitivity to interest rate changes, where a positive value indicates that banks' income from assets is more 

sensitive to movements in interest rates than is the expense of their liabilities, and vice-versa for a negative 

value. 

Temporary Investments - the sum of interest-bearing balances due from depository institutions, federal funds 

sold and resold, trading-account assets and investment securities with remaining maturities of one year or 

less. These are banks' more liquid investments. 

Loan Loss Expense - the addition to the allowance for loan and lease losses, the reserve maintained to 

absorb expected loan losses. 

Additional information regarding bank performance, bank failures and economic issues affecting the 

banking industry is available in the Banking and Economic Review, published by the Division of Research 

and Strategic Planning, FDIC. Information on legislative issues and changes in state and federal laws 

and regulations governing banks is contained in the Regulatory Review, also published by the Division 

of Research and Strategic Planning. Single-copy subscriptions are available to the public free of charge. 

Requests should be mailed to: 

Banking and Economic Review or Regulatory Review 

Division of Research and Strategic Planning 

Federal Deposit Insurance Corporation 

550 17th Street, N.W. 

Washington, DC 20429