Profits and balance sheet developments at U.S. commercial banks in 2004

Federal Reserve Bulletin, Spring, 2005 by Elizabeth C. Klee, Fabio M. Natalucci

[GRAPHIC OMITTED]

On net, BLPS respondents reported decreased demand for residential mortgages throughout the year (chart 8). Fluctuations over the course of the year in the percentage of banks reporting demand increases seemed to reflect changes in the trend of refinancing activity. (5) In the first half of 2004, the net percentage of banks reporting increased demand rose somewhat, but it dropped back a bit over the latter half of the year.

[GRAPHICS OMITTED]

Residential mortgages have expanded at a double-digit rate since 2002. Responses to special questions on the January 2005 BLPS indicate that several factors contributed to banks' increased holdings of residential mortgages over the previous three years. First, according to 75 percent of the respondents, many mortgages originated over this period had adjustable rates, making them relatively attractive to hold as assets. Second, sustained demand for mortgages had supported their returns. Finally, many banks noted that a widening of spreads between mortgages and mortgage-backed securities made the underlying loans more attractive to hold.

Consumer loans at banks grew 10.1 percent last year. However, after adjustment for the effect of a large merger in the third quarter, the growth rate of consumer loans was a more moderate 5.8 percent. (6)

Banks' standards and terms for consumer loans changed little on net last year according to the BLPS: Approximately the same proportion of banks tightened standards for credit card loans and other consumer loans as eased them (chart 9). Changes in terms reflected a similar trend, with a slight net percentage of domestic respondents having tightened credit card terms and a similarly slight net percentage having done so for other consumer loans (not shown in chart). Overall, demand for consumer loans reportedly moderated.

[GRAPHIC OMITTED]

Other Loans and Leases

Banks' holdings of other loans and leases grew 3.6 percent in 2004. Although the rate marks a slowdown from 2003, growth in that year was heavily influenced by an accounting change that shifted into this category an estimated $42 billion in assets that were previously off-balance-sheet items. (7) A 5 percent rise in farm loans reversed a downward trend seen since 2001. Improved overall economic conditions strengthened the fiscal situation of many state and local governments and contributed to a slowing in the growth of loans to this sector from 16.8 percent in 2003 to a still-rapid 13.9 percent in 2004.

Securities

Banks expanded their securities holdings considerably again in 2004. Last year's 10.6 percent advance was more than 1 percentage point faster than the 2003 pace and about in line with total asset growth. Much of the growth reflected a substantial rise in securities held in trading accounts, which jumped 36.8 percent on the year; securities held in investment accounts advanced 6.2 percent. As a share of average net consolidated assets, securities holdings in 2004 increased for the third year in a row, to 22.6 percent (chart 10).