Volume 1 

Number 2 

Second Quarter 1986 

FDIC 

Division of Research 

& Strategic Planning 

John Quinn 

(202) 898-3940 

Ross Waldrop 

(202) 898-3951 

uarterly 

Banking Rofile 

FEDERAL DEPOSIT INSURANCE CORPORATION 

COMMERCIAL BANKING PERFORMANCE - SECOND QUARTER, 1986 

Aggregate net income and overall profitability of 

insured commercial banks declined in the second 

quarter of 1986. Net income was down 11 percent 

from the level of a year ago, and down 18 percent 

from the first quarter of this year. Net income for 

the first half of 1986 was $9.25 bi IIion, down 2.4 

percent from the first half of 1985. The magnitude 

of these declines was limited by sizable gains 

from sales of securities and from nonrecurring 

items. Absent these gains, which have remained 

significant over the past several quarters, income 

would have been 18.4 percent lower than the second quarter a year earlier, despite asset growth 

of nearly 8 percent. 

Quarterly Net Income of FDIC-Insured 

$ Billions 

Commercial Banks 

1984-1986 

6 

5 

5.0 5.1 

4 

3 

2 

0 

-1 '-----------------------' 

2 3 4 2 3 4 1 2 

1984 1985 1986 

■ Securities and other nonrecurring gains (or losses) 

II Net operat ing income 

Falling interest rates contributed to year-to-year 

reductions in both total interest income and expense. Net interest margins contracted slightly, 

as earning assets growth of 8.5 percent outstripped net interest income expansion. 

Commercial Bank Net Interest Margins 

1983-1986 

Basis Points 

600 

550 

500 

450 

350 

300 L.1.____j__~__:______j_ _____j__----'--'----'---'----'--'-' 

123412341234 1 2 

1983 1984 1985 1986 

Banks' loan-loss provisions increased by 36.4 percent over year-earlier levels, as asset-quality 

problems accounted for most of the downward 

pressure on bank earnings. The number of 

banks with earnings losses (net income less than 

zero) in the second quarter was 2,384, up from 

1,876 in the same period of 1985. The FDIC's 

"problem" list increased by 128 commercial banks 

during the quarter, to 1,321 as of June 30. Through 

the first six months of 1986, 64 insured commercial banks failed. The smallest commercial banks 

continue to exhibit the most severe earnings erosion of any segment of the industry, reflecting 

pressures from credit problems in agriculture and 

real estate portfolios. 

Composition of Bank Loan Portfolios 

June 30, 1986 

Reel Es/a le 40 .2% 

Ban ks < $100 Million 

Consumer 17.6% 

C&I 

27.6% 

Othe r 2.8% 

Real Estate 2 5 .0% 

Ba nks >$100 Mi llion 

For assistance contact: Section508@fdic.gov
Small banks' level of problem loans remained 

highest and showed the most pronounced deterioration of any size group in the second quarter. 

Banks in the Midwest still show the highest 

regional level of loan charge-offs, but Southwestern banks experienced the sharpest growth 

in charge-offs during the quarter. 

Banks in the Southwest region have the highest 

proportion of nonperforming assets, and this level rose further in the second quarter. 

Net loan-loss levels increased more rapidly than 

loan-loss reserves at commercial banks in thesecond quarter, as small banks' aggregate loss 

provisioning fell short of actual losses. Most larger 

banks continued to bolster their reserve levels. 

Banks in the largest asset-size group maintained 

the highest ratio of loss reserves to loans outstanding of any size group-1 .67 percent. Equity 

capital and assets have grown at roughly comparable rates at commercial banks, while reserve 

growth has been much more rapid . 

Commercial Bank Loan Loss Reserve, 

Equity Capital and Asset Growth Index 

1984-1986 

Index 

4 2 3 4 2 3 4 1 2 

1983 1984 1985 1986 

Note: Year-end 1983 =100 

The Southwest region had the highest proportion 

of unprofitable banks in the second quarter-27 

percent-while the Western region had the largest 

share of banks on the " problem " list. These 

results reflected a continuation of the deteriorating trends in both regions. The Southeast, Northeast and Central regions had the fewest troubled 

institutions, and showed improving trends in this 

area. Nonperforming asset levels stabilized, and 

growth in overall reserve coverage of loan portfolios improved at Western banks in the second 

quarter. 

Through the first half of 1986, the Mississippi 

River has continued to represent a dividing line 

for commercial bank performance. Banks 

in the East have had fewer credit-quality problems 

and stronger asset growth than their Western 

Problem Banks, By Region and By Asset Size 

June 30, 1986 

Northeast 

Southeast 

Central (5.2%) 

Midwesl (13.4%) 

Southwest ( 11 . 4%) 

West (1 5.8%) 

<$25MM (11.8%) 

S25-100MM (8.6%} 

$1 00-300MM (6 .0%} 

$300MM·18 

>$18 

0 100 200 300 400 500 600 

Nu mber of Problem Ban ks 

Number of banks on FDIC '"Problem List"" and percent of all banks in ea:h region/assetsize group. 

counterparts. Problems in the agricultural and 

energy sectors have been the principal difference. 

Continuing growth in the number of "problem" 

banks portends no respite during the rest of 1986 

from the high level of bank failures. 

Commercial Banks on FDIC "Problem" List 

1982-1986 

No. o f banks 

1 4 00 1321 

1 20 0 rn 9B 

100 7 

1 000 940 

874 

8 00 

8 0 0 74 1 

671 577 603 625 

600 481 

401 

400 

1 23 4 123 4 12341234 1 2 

1 982 1983 1984 1 985 1986 

For the banking industry as a whole, recent trends 

of slowing GNP growth, lower industrial production and capacity utilization levels, and fewer 

housing starts all point to slack loan demand in 

the months ahead. The remainder of the year is 

likely to be marked by continued credit-quality 

problems among commercial and real estate loans 

stemming from the plunge in oil prices and lingering weakness in the agricultural sector. Continued growth in subquality asset levels may mean 

further increases in the number of problem banks. 

Slow economic growth and lower interest rates 

make lackluster year-to-year earnings comparisons likely for the second half of 1986. Net interest margins may remain under pressure with 

loan growth lagging behind last year's pace and 

lending spreads remaining narrow. The growth of 

nonperforming assets - up 10.8 percent in the 

first six months of 1986 - will almost certainly 

lead to higher charge-off rates in the second half. 
U.S. COMMERCIAL BANKING INDUSTRY QUARTERLY PROFILE 

Aggregate Condition and Income Data, FDIC-Insured Commercial Banks 

(dollar figures in millions) 

Preliminary 

2nd Otr 1st Otr 2nd Otr % Change 

1986 1986 1985 85.2-86.2 

Number of banks reporting . . . ... .. .. ... . . . . . . .. .. . ..... . .. . 14,311 14,382 14,467 - 1.1 

Total employees (full-time equivalent) 1,582,203 1,565,503 1,550,987 2.0 

CONDITION DATA 

Total Assets $2,774,592 $2,729,950 $2,570,936 7.9 

Real estate loans . 467,262 451 ,378 407,596 14.6 

Commercial & industrial loans .. .. ... . . ... . 581,208 580,390 570,905 1.8 

Loans to individuals . . . . .. ... .. .. . . . . . . 317,889 308,826 285,197 11.5 

Farm loans ...... . . . .. .. .. .. . . .. . .. . . 34,737 34,383 40,474 -1 4. 2 

Other loans and leases 269,867 266,393 249,110 8.3 

Total loans and leases ... . ... .. . . ... . . . . . . . . . . . . .... .. . . . 1,670,964 1,641 ,370 1,553,282 7.6 

LESS: Reserve for losses 26,244 24,833 20,936 25.4 

Net loans and leases .. . 1,644,720 1,616,537 1,532,346 7.3 

Temporary investments 448,879 457,776 422,966 6.2 

Securities over 1 year . 318,714 300,914 271 ,523 17.4 

All other assets ... . . ..... . ... . .. .. . . . . . . . . . .. .. . . ... .. . . 362,279 354,723 344, 101 5.3 

Total liabilities and capital. $2,774,592 $2,729,950 $2,570,936 7.9 

Noninterest-bearing deposits . 469,663 438,322 411 ,097 14.2 

Interest-bearing deposits . 1,678,103 1,675,582 1,588,307 5.7 

Other borrowed funds . .. ..... . . . . . . ..... ... .. . . .. . .. .. .. . . .. . . 327,528 319,483 275,012 19.1 

Subordinated debt .. .... .. .. . ..... . . .. .. . . .. ... . . . .... .. ..... . 16,194 15,386 12,323 31.4 

All other liabil ities .. .. . . . , .. . 107,328 107,896 122,762 -12.6 

Equity capital .. .... .. . . . .. ... . . . .. .... .. .. . ....... . .... . ... . . 175,776 173,281 161,435 8.9 

Nonperforming assets 56,615 54,777 53,343 6.1 

Loan commitments and letters of credit 733,101 734,924 682,231 7.5 

Domestic office assets . 2,357,871 2,311,758 2,160,717 9.1 

Foreign office assets .. 416,721 418,1 92 410,219 1.6 

Domestic office deposits . 1,826,075 1,780.719 1,670,330 9.3 

Foreign office deposits 321 ,691 333,185 329,074 -2.2 

Prelim. Prelim. 

1st Half 1st Half 2nd Otr 2nd Otr 

INCOME DATA 1986 1985 % Change 1986 1985 % Change 

Total interest income .. .. ... .... . . $121,626 $123,987 -1.9 $59,279 $62,239 -4.8 

Total interest expense .. .. . . .. ... . 74,673 79,713 -6.3 35,832 39,599 -9.5 

Net interest income .. 46,953 44,274 6.1 23,447 22,640 3.6 

Provisions for loan losses . 9,963 7,304 36.4 5,295 4,311 22.8 

Total noninterest income . 16,955 14,227 19.2 8,540 7,384 15.7 

Tota' noninterest expense . 43,581 39,665 9.9 21 ,929 20,321 7.9 

Applicable income taxes . .. .. . ... . 3,133 3,046 2.9 1,551 1,458 6.4 

Net operating income 7,231 8,485 - 14.8 3,212 3,934 - 18.4 

Securities gains, net . 1,881 789 284.7 920 600 53.3 

Extraordinary gains, net 140 210 -33.3 42 155 - 72.9 

Net Income . . 9,252 9,484 -2.4 4,1 74 4,689 - 11.0 

Net charge-offs . 6,900 5,055 36.5 3,877 2,873 34.9 

Net additions to capital stock . . . 390 461 - 15.4 240 373 -35.7 

Cash dividends on capital stock . 7,346 7,199 2.0 2,010 1,946 3.3 

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 % 0.67% 

Return on equity . . 1211 10.70 10.73 11.31 10.72 

Equity capital to assets ' . .. . .. ····· ·· 5.87 6.00 6.15 6.20 6.33 

Nonperforming assets to assets .. .. ·· ·•·. '. 1.85 197 1.97 1.87 2.04 

Net charge-offs to loans . .. ... .... ·• · .. . ' . . . ... . · •· · 0.56 0.67 0.76 0.84 0.86 

Asset growth rate . . .. .. .. .. .. . . . . ... .. ... .. . . . . . . .... .. 8.12 6.75 7.11 8.86 7.92 

Net operating income growth . -0.62 -3.69 -3.40 6.30 - 14.78 

"For 1986, performance ratios are annualized where appropriate, and growth rates refer to the 12 months through June 30. 
Preliminary Bank Data and Performance and Condition Ratios, 

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

Asset Size Distribution Geographic Distribution 

Less Greater 

than $25 $25 -100 $1 00-300 $300-1.000 $1-3 than $3 Nort heast Southeast Central Midwest Southwest West 

All Banks Mill ion Mill ion Million Mi llion Billion Bi llion Region Region Region Region Region Region 

Number of banks 

reporting ... . . . 14.311 5,065 6,597 1,813 518 198 120 1,081 1.970 3,162 3,366 3.140 1.592 

Total assets ... . . .. . $2,774.6 $74.1 $332.5 $289.6 $261.7 $338.0 $1,478 7 $1,055.7 $350.3 $436.6 $193.5 $294.5 $444.0 

Total deposits _ 2,147.8 65.4 296.5 254.4 218.1 267.5 1,045.9 756.8 281.3 351.1 153.1 241.7 363.8 

% of total banks ..... 100.0% 35.4 % 46.1 % 12.7% 3.6% 1.4% 0.8% 7.6 % 13.8% 22.1 % 23.5% 21.9% 11.1 % 

Asset share (%) .. ... . 100.0 2.7 12.0 10.4 9.4 12.2 53.3 38.1 12.6 15.7 7.0 10.6 16.0 

Deposit share (%) 100.0 3.0 13.8 11.8 10.2 12.5 48.7 35.2 13.1 16.4 7.1 11.3 16.9 

Number of 

unprofitable banks . 2,384 1,251 903 166 51 11 2 53 169 251 678 834 399 

Number of failed 

banks . ..... . 38 18 16 4 0 0 0 0 4 4 10 13 7 

Performance ratios 

(annualized) 

Yield on 

earning assets . .. . . 9.80% 10.81 % 10.49% 10.29% 10.30% 9.99% 9.79% 9.79% 10.17% 9.78% 10.32% 9.50% 10.65% 

Cost of funding 

earning assets 5.92 6.05 6.01 5.87 5.86 5.72 6.23 6.18 5.77 5.95 6.16 5.95 5.91 

Net interest margin 3.88 4.76 4.49 4.42 4.44 4.27 3.56 3.60 4.40 3.83 4.16 3.55 4.74 

Net noninterest 

expense to 

earning assets 2.21 3.24 2.78 2.71 2.78 1.63 1.87 1.96 2.60 2.18 1.87 2.33 2.89 

Net operating income 

to assets .. .. .... 0.47 0.11 0.57 0.69 0.60 0.67 0.35 0.61 0.95 0.81 0.58 - 0.20 -0.13 

Return on assets . 0.61 0.29 0.76 0.86 0.75 0.79 0.48 077 108 0.90 0.78 - 0.03 -0.02 

Return on equity ..... 9.57 2.96 9.02 11 .42 10.66 11.86 9.06 13.04 15.91 12.80 10.32 -0.47 - 0.51 

Net charge-offs to 

loans and leases .... 0.94 1.85 1.29 0.93 0.95 0.74 0.93 0.63 0.54 0.65 2.03 1.82 1.23 

Condition Ratios 

Loss reserve to 

loans and leases 1.57% 1.62% 1.44% 1.37% 1.49% 1.41% 1.67% 1.43% 1.29% 1.44% 1.84% 2.01 % 1.81 % 

Nonperforming assets 

to assets . . . . . . . . . . . 2.04 2.72 2.31 1.95 1.87 1.57 2.10 1.60 1.09 1.52 2.44 3.57 3.17 

Equity capital ratio . 6.34 9.98 8.37 7.47 6.97 6.69 5.28 5.83 6.80 7.03 7.54 6.93 5.58 

Primary capital ratio _ 7.16 10.77 9.10 8.14 7.73 7.37 6.20 6.60 7.27 7.78 8.50 8.06 6.62 

Net loans and leases 

to assets . 59.28 49.67 51.88 55.96 60.01 60.95 61 .56 59.19 57.81 56.35 53.97 58.23 66.52 

Net assets repriceable 

in one year or less 

to assets . . . ... . . . - 4.76 - 4.74 -6.87 -6.45 -7.56 - 4.10 - 3.61 - 3.22 -7.94 -3.00 - 9.16 - 5.62 - 5.15 

Growth Rates 

(from year-ago quarter) 

Assets ..... . 7.9% 7.3% 7.7% 9.2% 12.4% 15.0% 10.8% 11.4% 13.6% 5.8% 6.5% 0.5% 3.9% 

Earning assets . ... 8.5 7.3 7.7 9.2 13.1 15.0 11 .9 12.2 13.8 6.5 6.1 1.5 4.4 

Loans and leases . .... 7.3 4.3 5.2 9.3 14.3 16.3 10.5 11.2 14.7 5.4 2.2 -0.3 4.6 

Loss reserve . _ . . . .. . . 25.4 24.5 23.6 22.8 32.6 30.3 30.8 23.0 21.1 19.9 28.1 37.6 27.0 

Net charge-offs . .. 34.9 23.6 23.1 26.7 63.5 60.2 25.0 66.4 16.4 7.3 41.8 60.0 10.7 

Nonperforming assets . 6.1 23.9 22.6 23.2 30.7 16.5 0.9 -4.2 15.2 - 2.6 11 .8 37.2 2.4 

Deposits .. . .. . 7.4 8.3 8.2 9.6 12.6 14.9 10.1 10.4 12.8 6.3 5.4 0.8 4.3 

Equity capital .. .. . . . ' 8.9 1.7 5.9 8.7 10.2 20.3 12.9 15.0 13.0 8.0 5.4 -1.8 3.8 

Interest income . . . ... - 4.8 - 2.0 - 2.0 - 0.4 2.5 3.9 -2.5 -3.2 2.6 -4.1 -4.3 -1 1.4 -9.8 

Interest expense ... _ -9.5 -4.5 -5.2 -4.3 -1.5 -0.9 -8.5 -8.7 -1 .9 -8.9 -6.4 - 13.1 - 17.3 

Net interest income . 3.6 1.4 2.8 5.3 8.2 11.2 10.0 8.2 6.6 4.3 - 1.0 -8.5 1.7 

Loan loss expense . 22.8 16.0 12.0 22.3 46.9 85.3 24.4 28.2 - 5.0 5.8 16.8 75. 1 12.5 

Noninterest income ... 15.7 13.1 7.0 8.8 13.1 16.8 25.2 23.0 13.1 10.8 32.2 -0.5 7.8 

Noninterest expense . . 7.9 7.7 8.8 9.1 16.3 10.7 13.9 15.2 10.1 4.6 9.1 3.0 -0.9 

Net operating income -18.4 -66.4 - 23.4 - 14.0 - 25.5 - 15.8 -1 1.7 3.8 7.5 9.9 -1 6.3 - 135.6 - 303.1 

Net income . . . .. - 11.0 -44.4 -13.3 -5.8 -17.4 - 6.1 -6.7 2.6 14.3 10.3 - 3.4 - 104.7 -1 33.3 

REGIONS: Northeast - Connecticut, Delaware, District 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, Cal ifornia, Colorado, Hawaii, Idaho, Montana, Nevada, Oregon, Pacific Islands, Utah, Wash ington, 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 arTd 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