I Second Quarter 1987 

FDIC 

Office of Research 

& Strategic Planning 

John Quinn 

(202) 898-3940 

Ross Waldrop 

(202) 898-3951 

The FDIC 

uarte r 1r_______L_.W_i_llia_m_S_e_id_m_a_n,_C_ha_ir_m_an 

anking Rofile 

COMMERCIAL BANKING PERFORMANCE - SECOND QUARTER, 1987 

• ADDITIONS TO RESERVES BY LARGE BANKS DOMINATE 

EARNINGS RESULTS 

• AGGREGATE INDUSTRY LOSS IN SECOND QUARTER IS $10.6 BILLION 

• EARNINGS EXPECTED TO REBOUND IN SECOND HALF 

• BANK FAILURES CONTINUE AT RECORD PACE 

• BANKS SHOW IMPROVEMENT IN MIDWEST, DECLINE IN SOUTHWEST 

An unprecedented quarterly loan-loss provision of 

$21.2 billion resulted in a $10.6 billion aggregate 

second-quarter loss for the commercial banking 

industry. Most of the loss provision was set aside 

by the largest banks, and was earmarked for their 

developing-country (LDC) loans, particularly loans 

to Brazil. Their actions followed the placement, in 

the first quarter, of much of their $23.6 billion in 

Brazilian loans on nonaccrual status, where interest income is not recorded until payment is actually received. The magnitude of the 

second-quarter loss provision overwhelmed the 

first quarter's record earnings, giving the industry 

an aggregate loss of $5.3 billion for the first half 

of the year. Even though bank earnings are expected to recover in the second half of this year, 

full-year industry profitability will be at its lowest 

level since 1934. 

Chart A - Return on Assets at Insured 

Commercial Banks 

Percent 1935-1987 

1.0 .--,.---,----,-----,----,---....--, 

.2 t--t---+----+-----,1-----+----+--i 

.0 '--'-----L...--....1...-----'----'---J........J 

1937 1947 1957 1967 1977 1987' 

*Estimated full-year 1987 

Earnings results were mixed at banks with no 

significant foreign lending exposure. Smaller 

banks continued to account for a disproportionate 

share of unprofitable operations and failures, but 

they showed some encouraging signs in the second quarter. Net charge-offs were well below the 

level of a year ago, and growth in nonperforming 

Chart B - Distribution of Bank Return on 

Assets Ratios, By Asset Size Groups 

Percent June 30, 1987 

100 .--,,=r-,:=r-,=T""7=:-r-,=c-r80 

40 

20 

0 

< $100MM $100- $300 - $1 - 5B > $5B 10 All 

300MM 1B Largest Banks 

■ < OO/o go - .750/o ~ .75 - 1.s O/o [] > 1.50/o 

assets slowed considerably. Overall, small banks' 

net operating income improved, due in large part 

to lower loan-loss provisioning. Bottom-line net income was lower, however, because of reduced 

profits from securities sales. Medium-sized banks 

outside the Southwest continued to perform well, 

with strong growth in consumer and real estate 

loans, good asset quality, and wider net interest 

margins. 

For assistance contact: Section508@fdic.gov
The ten largest banks in the second quarter set 

aside $12 billion for reserves against anticipated 

future losses, producing an aggregate $9.7 billion 

loss for these banks in the quarter. Their combined equity capital fell by $9.6 billion, but this did 

not reduce their primary capital, since all of the 

$9.6 billion went into loss reserves, and transfers 

from equity to reserves have no effect on primary 

capital levels. Total capital of banks with foreign 

lending exposure continued to increase relative 

to their loans to troubled foreign borrowers. 

Chart C - Total Capital and Exposure 

to Five Major LDC Debtors 

June 1982-March 1987 $ Billion 

125~---~~-~---~~-~-~ 

; ' 

1151---+--+--+--+-l-----+--+--+--+~,-,::..+ --1 

105 Total C 

6/82 12/82 6/83 12/83 6/84 12/84 6/85 12/85 6/86 12/86 3/87 

• Data represent total capital (Equity + Reserves + Subordinated Debt) 

of U.S. banks with significant foreign lending exposure, and the amount 

owed them by Argentina, Brazil, Chile, Mexico, and Venezuela 

Domestic loan problems continue to plague banks 

west of the Mississippi. In the West and 

Southwest regions, the sharp decline in oil prices 

in late 1985 and early 1986 is still being felt in 

higher levels of charge-offs and nonperforming 

loans, particularly in real estate and commercial 

and industrial loans. At banks in the Midwest 

Chart D - Composition of Nonperfonning Loans* 

June 30, 1987 

Consumer 

5.5% 

*Nonperforming loans include: Loans 00 days or more past-due, 

renegotiated loans, and nonaccrual loans. 

region, charge-offs remained high, but they were 

lower than a year earlier, and the level of nonperforming assets was down. A year earlier in the 

Midwest, both nonperforming loans and net 

charge-offs were still increasing. 

Forty-five commercial banks failed or required 

assistance to avert failure in the second quarter, 

bringing the total for the first half of this year to 

99. At the present pace, total failures for the year 

will approach 200, surpassing last year's record 

total (since the inception of the FDIC) of 144. All 

of the failures in the first half involved banks with 

less than $300 million in assets. The number of 

banks on the FDIC's "problem" list increased by 

100 in the second quarter, to 1,609 at midyear. All 

of the gain came from the western half of the 

country; the number of "problem" banks in the 

east declined in the second quarter. 

Chart E - Distribution of Problem Banks 

by Asset Size and Region 

June 30, 1987 

Percent of banks (in size range and region) 

25 

15 

10 

5 

0 0-25 25-100 100-500 > 500 All Banks 

Bank Asset Size Ranges (in $ millions) 

ITI]eas1 (TOl al Number of banks • 6,088) west (TOlal Number of banks •7,849) 

Includes commercial banks on the FDIC "Problem List" . East/West 

separated by Mississippi River. 

Commercial bank earnings should recover in the 

second half, as loan-loss provisioning returns to 

more normal levels. Small banks will remain 

vulnerable in some regions, but there are signs 

that the worst may be over for farm banks in the 

Midwest. A number of large banks that boosted 

their reserves in the second quarter should 

demonstrate outstanding earnings results over the 

rest of the year. However, several of the largest 

banks are likely to report a net loss for the full 

year, and the industry's return on assets is unlikely 

to surpass 0.25 percent, compared to 0.64 percent 

for 1986. 

2 
Table I. Aggregate Condition and Income Data, FDIC-Insured Commercial Banks 

(dollar figures in millions) 

Preliminary 

2nd Qtr 1st Qtr 2nd Qtr % Change 

1987 1987 1986 86:2-87:2 

Number of banks reporting .............. ..... .• ...... ............ 13,937 14,073 14,309 -2.6 

Total employees (full-time equivalent) ........................... . .. . 1,626,421 1,554,906 1,581,882 2.8 

CONOITTON DATA 

Total Assets .. . . ................... . .......... . . . ....... . .... . . $2,912,420 $2,900,594 $2,774,202 5.0 

Real estate loans .. . ...... ... ........ .... . . . . .. . . .. ..... ... . 556,375 556,375 532,084 19.1 

Commercial & industrial loans ........... .......... .... .. . ... . 582,762 585,168 581,163 0.3 

Loans to individuals .. ... .... ... .. ..... ........ . .. . . ... ..... . 332,840 328,571 317,888 4.7 

Farm loans ...... . ...... ... . ...•. ... . . . ...............•. .. . 30,839 29,225 34,678 -11 .1 

Other loans and leases . .. • . .•.•••. ..... . . .. .. .... . .••••..... 265,166 263,787 269,934 -1 .8 

Total loans and leases ..... . ... ... .................. .... .... . 1,767,982 1,738,834 1,670,875 5.8 

LESS: Reserve for losses . . .... . ..•. .. . . . ... .... .. ... . . . .. . • . 47,191 29,674 26,282 79.6 

Net loans and leases ........... . ......... ..... ...............• 1,720,126 1,709,161 1,644,593 4.68 

Temporary investments ...... ........ ... . . ................... . . 449,529 449,975 448,814 0.2 

Securities over 1 year ... . .. . ....... . ... . .. ... ... . ... . ........ . 375,799 367,035 318,597 18.0 

All other assets ....... .. .. ... ....... .. ... . ....... .. ......... . 366,301 374,422 362,199 1.1 

Total liabilities and capital . ... . .................................. . $2,912,420 $2,900,594 $2,774,202 5.0 

Noninterest-bearing deposits .. . . . ... . . ...... . ... ..... . ...... ... . 471,831 462,607 469,337 0.5 

Interest-bearing deposits .....................•••..... . ......... 1,792,525 1,778,507 1,678,096 6.8 

Other borrowed funds .. ......... ... ..... .. ... ... ............. . 350,555 348,413 327,618 7.0 

Subordinated debt . ............... . .. ..... .. . ..... . .. . .. ... .. . 17,283 17,282 16,137 7.1 

All other liabilities ...... ......... .. ... . .. . .................. . . 104,901 106,987 107,338 -2.3 

Equity capital ........ ..... ... .. . ... . ..... . ..... .••.... . ...... 175,325 186,597 175,677 -0.2 

Primary Capital . ...... ...... ...... .. ........................ . .. . 218,843 212,883 199,234 9.8 

Nonperforming a55ets . ......... .. ..... . ........... ... ...... . .. . . 75,443 76,015 56,622 33.2 

Loan commitments and letters of credit .......... .. ..... . ..... .... . 766,461 752,626 732,226 4.7 

Domestic office assets ... . .. .. . . . .... ..................... ... . . . 2,494,264 2,472,617 2,357,473 5.8 

Foreign office a55ets ..... .... ................................. . . 418,935 427,976 416,729 0.3 

Domestic office deposits .... ..... . ................ .... ........ .. . 1,928,353 1,908,994, 1,825,741 5.6 

Foreign office deposits ........... . . .. . .... . .... ....... . ........ . 335,900 332,320 321,691 4.4 

Earning Assets .... ..... ...... ..... ........ .................... . 2,546,121 2,526,174 2,412,003 5.6 

Preliminary Preliminary 

Income 1st Half 87 1st Half 86 % Change 2nd Qtr 87 2nd Qtr 86 % Change 

Total interest income .. .... ... .•..... $118,635 $121,588 -2.4 $60,000 $59,251 1.6 

Total interest expense .... .. ..... .. . 69,893 74,661 -6.4 35,582 35,823 -0.7 

Net interest income .............• 48,742 46,927 3.9 24,626 23,427 5.1 

Provisions for loan losses .. . . ... .. . . 25,332 10,023 152.7 21,233 5,348 397.0 

Total noninterest income .. ...... ... . 19,088 16,962 12.5 9,690 8,543 13.4 

Total noninterest expense ... .. . .... . 46,926 43,584 7.7 23,786 21,926 8.5 

Applicable income taices . .. ........ . 2,053 3,125 -34.3 155 1,545 -90.0 

Net operating income .... . ...... . . -6,481 7,158 N/M -10,855 3,152 N/M 

Securities gains, net ..... .... ...... . 1,130 1,886 -40.1 334 924 -63.9 

Extraordinary gains, net . ........... . 36 146 -75.3 -53 45 N/M 

Net Income ... ....... .... ... .. . . -5,315 9,190 N/M -10,575 4,120 N/M 

Net charge-offs ......... .. ........ . 6,913 6,935 -0.3 3,640 3,914 -7.0 

Net additions to capital stock ... .... . 744 391 90.3 704 240 -65.9 

Cash dividends on capital stock ..... . 4,812 4,016 19.8 2,484 2,012 19.0 

Table II. Selected Indicators, FDIC-Insured Commercial Banks 

1981 1982 1983 1984 1985 1986 1987* 

Return on assets .............. . 0.78% 0.71% 0.66% 0.65% 0.70% 0.64% -0.37% 

Return on equity .......... . ... . 13.08 12.11 10.70 10.73 11 .31 10.18 -6.07 

Equity capital to a55ets ........ . 5.83 5.87 6.00 6.15 6.20 6.21 6.01 

Primary capital to a55ets .. ..... . 6.39 6.47 6.59 6.98 6.94 7.03 7.48 

Nonperforming assets to assets .. N/A 1.85 1.97 1.97 1.87 1.95 2.57 

Net charge-offs to loans ........ . 0.37 0.56 0.67 0.76 0.84 0.99 0.78 

Asset grow1h rate ..... ..... ... . 9.36 8.12 6.75 7.11 8.86 7.62 4.98 

Net operating income grow1h .. . . . 7.60 -0.62 -3.69 3.40 6.30 -16.20 N/M 

Number of unprofitable banks ... . 741 1,196 1,530 1,891 2,453 2,784 2,243 

Number of problem banks ...... . 196 326 603 8'.X) 1,098 1,457 1,609 

Number of failed banks .. ...... . 7 34 45 78 118 144 99 

*For 1987, return on assets, return on equity and net charge-off ratios are annualized. 

N/A - Not available 

NIM - Not meaningful, due to negative earnings in 1987. 3 
Table 111. Second Quarter 1987 Bank Data (Dollar figures in billions, ratios in %) 

Asset Size Distribution Geographic Distribution 

EAST WEST Less Greater Ten 

than $100 $100-300 $300-1,000 $1-5 than $5 Largest Northeast Southeast Central Midwest Southwest West 

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

Number of banks 

reporting . . ........ 13,937 11,212 1,864 523 255 73 10 1,081 1,929 3,078 3,288 3,010 1,551 

Total assets . ... ... . . $2,912.0 $399.3 $300.7 $264.9 $548.5 $715.8 $683.3 $1,138.1 $381 .4 $462.8 $202.1 $286.2 $441 .7 

Total deposits . ..... .. 2,264.3 355.4 263.4 219.2 427.7 501.4 497.2 832.1 306.1 372.6 157.5 233.7 362.2 

% total banks .. ...... 100.0% 80.4% 13.4% 3.8% 1.8% 0.5% 0.1% 7.8% 13.8% 22.1% 23.6% 21 .6% 11 .1% 

Asset share (%) .. .... 100.0 13.7 10.3 9.1 18.8 24.6 23.5 39.1 13.1 15.9 6.9 9.8 15.2 

Deposit share (%) .... 100.0 15.7 11 .6 9.7 18.9 22.1 22.0 36.7 13.5 16.5 7.0 10.3 16.0 

Number of 

unprofitable banks ... 2,354 2,000 209 58 41 36 10 98 185 249 459 951 412 

Number of failed 

banks .............. 45 43 2 0 0 0 0 0 2 2 12 20 9 

Perfonnance Ratios 

(annualized) 

Yield on earning assets 9.59% 9.60% 9.51% 9.61% 9.35% 9.51% 10.09% 9.87% 9.78% 9.24% 9.67% 8.88% 9.81% 

Cost of funding 

earning assets . ... . . 5.67 5.16 5.11 5.12 5.10 5.75 6.97 6.36 5.21 5.35 5.46 5.45 5.07 

Net interest margin .. . 3.92 4.442 4.40 4.50 4.24 3.77 3.12 3.52 4.57 3.89 4.20 3.42 4.75 

Net noninterest 

expense to earning 

assets ...... .. .. . . . 2.25 2.80 2.69 2.69 2.38 2.08 1.64 1.95 2.56 2.20 1.91 2.39 2.97 

Net operating 

income to assets .... -1.50 0.57 0.67 0.32 0.33 -1 .61 -5.67 -2.94 0.83 -0.56 0.10 -1.08 -0.82 

Return on assets .... . -46 0.61 0.71 0.36 0.35 -1.58 -5.60 -2.84 0.88 -0.55 0.13 -1.17 -1.79 

Return on equity ..... -23.43 7.04 9.33 5.04 5.39 -28.97 -123.51 -50.30 12.70 -8.06 1.77 -17.85 -31 .36 

Net charge-offs to 

loans and leases .. . . 0.85 1.11 0.82 0.99 0.77 0.78 0.82 0.60 0.57 0.54 1.42 2.05 1.08 

Condition Ratios 

Loss allowance to 

loans and leases .•.. 2.66% 1.63% 1.53% 1.70% 1.68% 2.84% 4.60% 3.14% 1.43% 2.17% 2.38% 2.81% 3.00% 

Nonperfonning assets 

to assets . . ..... .. .. 2.57 2.29 1.94 2.04 1.60 2.38 4.19 2.58 1.12 1.48 2.16 4.97 3.62 

Equity capital ratio .. .. 6.01 8.69 7.60 7.12 6.40 5.20 3.87 5.30 6.94 6.69 7.46 6.41 5.47 

Primary capital ratio .. . 7.48 9.51 8.39 8.01 7.22 6.77 6.63 7.07 7.57 7.85 8.69 7.84 7.27 

Net loans and leases 

to assets . .. . .. . . ... 59.08 51 .26 56.34 61 .45 62.43 61.20 59.03 59.10 60.34 57.47 53.30 54.56 65.20 

Net assets repriceable 

in one year or less 

to assets .... .. . . ... -6.39 -9.82 -8.35 -7.24 -5.96 -6.17 -3.76 -4.79 -9.81 -5.32 -14.53 -8.75 -3.43 

Growth Rates 

(from year-ago quarter) 

Assets ... .. . . . . ... .. 5.0% 5.1% 7.5% 10.1% 13.6% 12.2% -0.1% 7.8% 9.0% 6.0% 4.4% -2.8% -0.5% 

Earning assets . .. . .. . 5.6 5.7 8.3 10.7 14.5 12.9 -0.3 8.7 10.1 6.6 5.2 -3.2 -0.3 

Loans and leases . .... 5.6 5.7 8.3 10.7 14.8 12.9 -0.3 8.7 10.1 6.6 5.2 -3.2 -0.3 

Loss reserve . . . . . . . . . 79.6 16.7 25.0 34.0 42.2 93.3 165.2 140.1 25.5 64.0 33.7 27.6 66.2 

Net charge-offs ...... . 7.5 -17.8 0.4 29.6 32.7 -2.0 -19.0 3.1 16.8 -12.5 -28.7 -3.7 -14.1 

Nonperfonning assets . 33.2 3.7 10.1 28.0 29.5 52.6 63.6 74.5 19.1 3.0 -7.4 35.4 14.1 

Deposits .. . .. .. . .. . . 5.4 5.3 7.5 9.2 13.0 13.2 2.5 10.0 8.9 6.1 2.9 -3.3 -0.5 

Equity capital . .... . .. -0.2 3.6 7.9 6.3 13.6 3.6 -19.5 -2.0 11.3 0.9 3.5 -9.9 -2.4 

Interest income .. . .. . 1.6 -2.8 -0.1 2.3 7.0 9.2 2.9 9.5 3.2 -1 .0 -2.9 -13.3 -6.8 

Interest expense . . . . .. -0.7 -8.6 -6.2 -3.8 0.9 7.2 7.0 11 .5 -3.0 -5.8 -8.1 -15.1 -13.4 

Net interest income ... 5.1 5.0 8.0 10.5 15.4 12.3 -5.2 6.1 11.4 6.3 4.9 -10.2 -1.4 

Loan loss expense .. .. 397.0 -14.0 6.4 69.7 116.1 473.1 580.2 903.6 89.1 450.5 44.6 27.8 247.5 

Noninterest income . . . 13.4 10.7 9.4 10.0 10.6 16.0 20.8 18.8 13.3 7.1 5.2 10.7 7.6 

Noninterest expense . . 8.5 6.9 8.1 10.5 11.4 19.8 7.1 12.7 8.3 6.2 5.1 -0.4 5.2 

Net operating income . NIM 24.9 -5.4 -51 .5 - 49.6 NIM NIM NIM 4.3 NIM -81.1 NIM NIM 

Net income . .. . . .. . . . NIM -3.0 -10.2 -55.0 -52.8 NIM NIM NIM -12.0 NIM -81.8 NIM NIM 

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, California, Colorado, Hawaii, Idaho, Montana, Nevada, Oregon, Pacific Islands, Utah, Washington, Wyoming 

NIM - Not meaningful, due to negative earnings in 1987. 

4 
Table IV. First Half 1987 Bank Data (Dollar figures in billions, ratios in %) 

Asset Size Distribution Geographic Distribution 

EAST WEST Less Greater Ten 

than $100 $100-300 $300-1,CXJJ $1-5 than $5 Largest Northeast Southeast Central Midwest Southwest West 

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

Number of unprofitable 

banks .. . . . . . .. . . . . 2,243 1,951 174 53 26 29 10 95 195 184 446 941 382 

Number of failed banks 99 94 5 0 0 0 0 1 4 6 20 53 15 

Per1onnance ratios 

(annualized") 

Yield on earning assets 9.34% 9.56% 9.45% 9.49% 9.17% 9.21 % 9.79% 9.59% 9.55% 9.11% 9.57% 8.83% 9.63% 

Cost of funding 

earning assets ..... 5.50 5.17 5.09 5.06 5.00 5.53 6.69 6.11 5.11 5.29 5.41 5.43 4.99 

Net interest margin . . 3.84 4.39 4.35 4.42 4.17 3.67 3.10 3.48 4.44 3.82 4.16 3.40 4.64 

Net noninterest 

expense to earning 

assets ............ 2.19 2.79 2.65 2.63 2.33 1.96 1.67 1.88 2.52 2.14 1.93 2.33 2.95 

Net operating 

income to assets . .. -0.45 0.59 0.71 0.52 0.55 -0.49 -2.65 -1.17 0.90 0.14 0.42 -0.54 -0.68 

Return on assets .. . . -0.37 0.68 0.80 0.60 0.62 -0.42 -2.55 -1.06 0.97 0.20 0.49 -0.48 -0.63 

Return on equity .. . . -6.07 7.92 10.68 8.38 9.70 -7.71 -54.50 -18.60 14.27 2.87 6.72 -7.36 -11 .01 

Net charge-offs to 

loans and leases . .. 0.78 0.97 0.74 0.90 0.69 0.77 0.81 0.58 0.52 0.49 1.42 1.78 1.03 

Growth Rates 

(from first half of 1986) 

Net charge-offs .. .. . 0.1 -11 .7 8.4 36.2 22.9 5.0 -6.0 10.5 14.7 -12.7 -18.0 3.7 -4.4 

Interest income . . .. . -2.4 -2.5 -1.3 0.5 4.1 3.4 -2.3 3.8 0.5 -3.8 -5.5 -16.3 -7.0 

Interest expense .... -6.4 -7.6 -7.3 -6.3 -3.3 -0.5 -2.4 2.0 -6.1 -9.0 -9.9 -18.3 -15.2 

Net interest income .. 3.9 -4.3 -6.9 9.6 14.7 9.9 -2.3 7.0 9.5 4.6 1.0 -12.9 3.7 

Loan loss expense ... 152.7 -11 .1 7.2 34.5 62.1 174.1 383.3 433.8 42.5 175.3 5.8 -6.8 97.2 

Noninterest income .. 12.5 11.2 9.8 13.0 10.5 19.0 16.9 15.4 12.7 10.7 19.4 5.8 7.5 

Noninterest expense . 7.7 6.9 7.9 10.7 10.7 16.5 9.9 11.9 8.1 5.9 6.2 -2.9 7.1 

Net operating income NIM 10.5 -0.0 -23.0 -16.7 NIM NIM NIM 1.1 -82.2 -13.2 NIM NIM 

Net income .. . . .. . . NIM -5.3 -6.8 -25.2 -17.9 NIM N/M NIM -3.1 -77.5 -31.2 NIM NIM 

NIM - Not meaningful, due to negative earnings in 1987. 

NOTES TO USERS 

COMPUTATION METHODOLOGY FOR PERFORMANCE AND CONDITION RATIOS 

All income figures used in calculating performance ratios represent amounts for that period, annualized (multiplied by the number of periods in a year). 

All asset and lialbility figures used in calculating performance ratios represent average amounts for the period (beginning-of-period amount plus end-of-period amount plus any 

periods in between, divided by the total number of periods}. 

All asset and lialbility figures used in calculating the condition ratios represent amounts as of the end of the quarter. 

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 wealknesses 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 and before gains (or losses} from securities transactions and from 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. The basic yardstick of bank profitalbility. 

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

Net Charge-offs-total loans and leases charged off (removed from balance sheet because of uncollectibility} during the quarter, less amounts recovered on loans and leases 

previously charged off. 

Nonperforming Assets-the sum of loans past-due 90 days or more, loans in nonaccrual status and noninvestment 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 (cannot exceed 20 percent of total primary capital}, 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-all assets with interest rates that are repricealble in one year or less plus assets with remaining maturity of one year or less, 

minus all lialbilities that are repriced or due to mature within one year of the reporting date. A positive value indicates that banks' income from assets is more sensitive to 

movements in interest rates than is the expense of their lialbilities, 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. 

Loan Loss Expense-the quarterly addition to the loan loss reserve that will keep the balance of the reserve adequate to absorb the quarter's anticipated 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 Office 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 Office 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, Office of Research and Strategic Planning, Federal Deposit Insurance Corporation, 550 17th Street, N.W., Washington, 

D.C. 20429 

5