Report on the condition of the U.S. banking industry: second quarter, 2004

Federal Reserve Bulletin, Autumn, 2004

Assets of reporting bank holding companies rose $365 billion (3.9 percent) in the second quarter, to $9.65 trillion. Loans accounted for the majority of this overall growth (up $194 billion, or 4.3 percent). Loan growth was primarily in consumer categories, while commercial lending activity remained weak. Reflecting this weakness in business loans, unused commitments to lend grew only $70 billion, or one-third of the growth seen in each of the two previous quarters. The increase in total assets was significantly influenced by the addition of a new insurance-oriented financial holding company (John Hancock) with consolidated assets of $115 billion, mostly in other assets.

Even with the addition of the new insurance-oriented financial holding company, securities and money market assets rose only $41 billion, or 1.1 percent. The overall growth masked significant differences across the population of reporting bank holding companies. Holdings of these assets declined $16 billion, or 0.6 percent, at the fifty large bank holding companies as these institutions sought to position their balance sheets for possible future interest rate increases. In contrast, such assets rose slightly at the generally smaller "all other reporting companies" and more significantly at the few large bank holding companies excluded from the "fifty large" panel, because commercial banking operations account for only a small portion of their assets and earnings.

Deposits grew strongly (up $165 billion, or 3.4 percent), attributable in part to continued healthy increases in core deposits. Borrowings rose at a slower pace ($55 billion, or 1.9 percent). The remarkable growth in other assets and other liabilities--10.7 percent and 12.0 percent, respectively--was influenced significantly by insurance-related items associated with the addition of the new insurance-oriented financial holding company.

Strong asset growth was also reflected in slightly lower aggregate capital ratios during the quarter. Although these ratios remained well above minimum requirements, each of the three aggregate regulatory measures--the Tier 1 risk-based, total risk-based, and leverage capital ratios--fell about 20 basis points.

Net income fell $5 billion (18.0 percent), to $25 billion, related to widely publicized one-time litigation charges at two of the largest bank holding companies. Including these one-time charges, aggregate noninterest expenses rose $17 billion (20.0 percent) despite a slight decline in total employment at reporting bank holding companies (down 13,000, or 0.6 percent) that in turn was attributable to a falloff in mortgage origination activity. Net interest income and non-interest income each rose $4 billion, or about 6.0 percent. Net interest income was supported by an increase in interest-earning assets and a slight widening of the net interest margin (up 3 basis points, to 3.48 percent), while non-interest income benefited from stronger market-sensitive revenues. Realized securities gains fell 50.0 percent, or $1 billion, as rising long-term interest rates negatively affected the market value of investment securities.

Asset quality continued to improve with non-performing assets falling below 1.00 percent of loans and related assets for the first time in four years, reaching 0.97 percent. Net charge-offs declined to 0.64 percent of average loans, about on par with the loss rate experienced in 2000. With these indications of improvement, the aggregate allowance for loan losses remained unchanged at $75 billion despite the significant growth in loans noted earlier.