ANKING RIEF FOR PENNSYLBVANIA,NEW JERSEY, ANDBDELAWARE SPECIAL REPORT: COMMERCIAL BANKS IN 2003 Profits improved substantially both nationally and regionally at large banks in 2003. It appears that they are also beginning to put the asset quality problems of the past several years be- hind them. Small banks saw flat or decreasing profitability. This is explained in part by higher overhead costs and by generous increases in their loan-loss reserves. Large Banking Organizations Profitability increased substantially perienced their at large organizations both in the tri- first appreciable state area and nationally.1 Return on growth in loans average assets (ROA) increased from (4.9 percent) 0.96 percent to 1.28 percent for large since 1999 (Fig- organizations in the tri-state area (Fig- ure 3). This is ure 1).2 Nationally, ROA increased from still slower than 1.29 percent to 1.42 percent. Return on loan growth in average equity (ROE) was also up both the nation as a locally and nationally (Figure 2). In the whole. Real estate loans were primar- in consumer lending. Consumer lending tri-state area, ROE increased from 11.73 ily responsible for the increase in lend- was the main reason loan growth was percent to 15.30 percent. Nationally, ROE ing, as the regional real estate market slower in the region than nationally. In rose from 14.82 percent to 15.97 percent. continued to show robust growth.3 Total the nation as a whole, real estate lend- The local figures for ROA and ROE don’t real estate lending at large tri-state area ing grew almost 9 percent, C&I lending quite match performance in the mid- to banks increased over 10 percent in 2003. shrunk 6.6 percent, and consumer lend- late 1990s, but they are at their highest By contrast, commercial and industrial ing grew more than 11 percent. since 1999. (C&I) lending decreased over 12 percent. One of the major reasons for the Large banks in the tri-state area ex- There was a small increase (3.4 percent) increased profitability both locally and 1 Large banking organizations are determined annually as those firms that are at least as large as the 100th largest bank holding company in the na- tion at year-end (here, 2002), ranked by total assets. A large bank defined as being in the tri-state area must have one of the following characteristics: 1) a market share of deposits of at least 5 percent in either the entire region or in any one of the states, or 2) at least 5 percent of the organization’s total deposits located in the region. It should be noted that year-to-year ratios as presented are based on different samples, so the inclusion or exclusion of an organization can affect the numbers. See the Appendix for a description of the methodology used in grouping these banks. 2 All data used in Figures 1-26 are from Federal Financial Institutions Examination Council (FFIEC) Call Reports. All ratios are weighted averages of all banks within the sample. This means that the numerator and denominator are summed across all banks, with the resulting aggregates divided to get the ratio. 3 See Regional Highlights, Fourth Quarter 2003, www.phil.frb.org/files/reghigh/rh0403.pdf. RESEARCH DEPARTMENT FEDERAL RESERVE BANK OF PHILADELPHIA Ten Independence Mall, Philadelphia, PA 19106-1574 • 215-574-6428 • www.phil.frb.org nationally was improved loan quality. This market played a role in the decrease in the past few years. Recently, commercial was particularly true for banks in the tri- nonperformers, the major factor was a loan officers have been reporting an easing state area. The ratio of nonperforming decrease in nonperforming commercial of standards for C&I loans.6 loans to total loans fell from 1.90 percent and industrial loans. Nonperforming The decreases in nonperforming loans in 2002, a nearly decade-long high, to 1.21 C&I loans at large banks in the nation de- and assets are reflected in the charge-off percent (Figure 4).4 This figure also fell for creased more than 32 percent from 2002 rates as well. Net charge-offs as a per- all banks in the nation, but for the first time to 2003. Nonperforming real estate loans centage of average assets showed the first since 1999, tri-state area organizations had increased about 6.5 percent. Nonperform- decrease in several years, both in the tri- better loan quality than banks nationally. ing consumer loans increased about 12.8 state area and nationally (Figure 6). This The improved asset quality is also reflected percent. These numbers, combined with improvement is also evident in the loan- in the ratio of nonperforming assets to total the loan growth numbers above, are the loss coverage ratios, which increased for assets (Figure 5).5 Although the continu- result of large banks’ tightening their lend- the first time since 1999 (Figure 7).7 This ing strength of the residential real estate ing standards for commercial borrowers in was accomplished even though loan-loss 4 Nonperforming loans are defined as loans past due 90 days or more plus nonaccruing loans. 5 Nonperforming assets are defined as nonperforming loans plus other real estate owned (OREO). 6 See the Board of Governors’ Senior Loan Officer Opinion Survey for the previous several years at www.federalreserve.gov/boarddocs/snloansurvey. Lending standards are also discussed in the Fourth Quarter 2003 issue of Banking Brief at www.phil.frb.org/econ/bb/index.html. 7 Loan-loss coverage ratio is defined as the ratio of loan-loss reserves to nonperforming loans. 2 3 reserves did not increase appreciably for 1990s. One of the reasons for declining (fee) income as a percentage of average organizations in the nation as a whole and net interest margins is that deposits grew assets (Figure 11). Nationally, fee income actually decreased somewhat (from $21.6 faster than loans. Deposits at tri-state area rose 0.22 percentage point, to 2.79 percent, billion to $19.4 billion) for banks in the tri- banks grew more than 6.6 percent in 2003, while tri-state area banks saw an increase state area. Less aggressive reserving also well above the growth rate of the previous of 0.32 percentage point, to 3.00. Both of contributed to the rise in profits among several years (Figure 9). Deposits grew these figures are near historic highs for this these banks, because additions to loan-loss slightly faster nationally. Net interest ratio, but as the larger banks become more reserves come out of earnings. margins decreased because of a dispar- diversified, it is possible and even likely that One potential drag on future earnings, ity between growth of deposits and loans these institutions will generate even higher particularly for banks in the tri-state area, is (compare Figures 3 and 9). This disparity income from fees in the future. net interest margins.8 Net interest margins was less nationally than locally; thus the While noninterest income was rising at tri-state area banks decreased again in net interest margins decreased more lo- as a percentage of average assets, large 2003, and they are now at their lowest levels cally. Tri-state area banks also had lower organizations were able to control their in over a decade (Figure 8). Net interest loans-to-deposits ratios (Figure 10). costs. Noninterest (overhead) expenses margin also declined nationally, and it is Another factor contributing to higher as a percentage of average assets increased now at the same level as in the mid- to late profits was the rise in 2003 of noninterest slightly both regionally and nationally, but 8 Net interest margin is defined as the ratio of net interest income to average earning assets. Earning assets are defined as the sum of interest-bearing bal- ances, net loans, securities, and fed funds sold and securities purchased under agreements to resell. The large drop in net interest margins for large tri-state area banks in 2001 was due in part to a change in the sample from 2000. For further information, see Banking Brief Special Report: Commercial Banks in 2001 at www.phil.frb.org/bb/bbspecial01.pdf. 2 3 they are still well below the levels of nearly increased both in the region and nation- loans and deposits showed strong growth every year in the 1990s (Figure 12). Finally, ally. One major reason is that the asset in 2003 compared to the previous couple of capital ratios were basically stable from to quality problems of the last several years years, especially in the tri-state area. One 2003 (Figure 13). appear to be on the wane. Additionally, potential problem is a shrinking of inter- In summary, 2003 was a good year for noninterest income increased, while banks est rate spreads in the form of net interest large banking organizations. Profitability were able to control their overhead. Both margins. 4 5 Community Banks Community banks did not perform as decreased nationally and did not change estate loans. Real estate loans at community well as large banking organizations in at tri-state area banks in 2003 (Figures 18 banks increased at nearly the same rates 2003. ROA was basically flat nationally, and 19). both nationally and locally as those of the and it decreased 0.07 percentage point The ratio of net charge-offs to average large organizations (11.8 percent nationally at banks in the tri-state area (Figure 14). assets (Figure 20), which was essentially and 10.6 percent locally). However, real ROE decreased both nationally and in the flat nationally, appears to have more estate loans comprise approximately 68 region (Figure 15).