fdic quarterly third quarter 2008 · 2019. 1. 11. · fdic-insured institutions reported net income...
TRANSCRIPT
FDIC Quarterly
Quarterly Banking Profile Third Quarter 2008
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
Highlights from the 2008 Summary of Deposits Data
2008 Volume 2 Number 4
The FDIC Quarterly is published by the Division of Insurance and Research of the Federal Deposit Insurance Corporation and contains a comprehensive summary of the most current financial results for the banking industry Feature articles appearing in the FDIC Quarterly range from timely analysis of economic and banking trends at the national and regional level that may affect the risk exposure of FDIC-insured institutions to research on issues affecting the banking system and the development of regulatory policy
Single copy subscriptions of the FDIC Quarterly can be obtained through the FDIC Public Information Center 3501 Fairfax Drive Room E-1002 Arlington VA 22226 E-mail requests should be sent to publicinfofdicgov Change of address information also should be submitted to the Public Information Center
The FDIC Quarterly is available on-line by visiting the FDIC Web site at wwwfdicgov To receive e-mail notification of the electronic release of the FDIC Quarterly and the individual feature articles subscribe at wwwfdicgovaboutsubscriptionsindexhtml
Chairman Sheila C Bair
Director Division of Insurance Arthur J Murton and Research
Executive Editor Maureen E Sweeney
Managing Editors Richard A Brown Diane L Ellis Paul H Kupiec Christopher J Newbury
Editor Kathy Zeidler
Publication Managers Peggi Gill Lynne Montgomery
Media Inquiries (202) 898-6993
FDIC Quarterly 2008 Volume 2 Number 4
The Federal Deposit Insurance Corporation Celebrates Its 75th Year See page ii
Quarterly Banking Profile Third Quarter 2008 FDIC-insured institutions reported net income of $17 billion in the third quarter of 2008 a decline of $270 billion (94 percent) from the $287 billion that the industry earned in the third quarter of 2007 The primary reason for the drop in industry profits was higher provisions for loan losses While large losses at a few institu-tions were chiefly responsible for the size of the earnings decline more than half of all insured institutions (584 percent) reported lower net income in the third quarter and almost one out of four institutions (241 percent) reported a net loss See page 1
Insurance Fund Indicators Estimated insured deposits (based on the basic FDIC insurance limit of $100000) increased by 18 percent in the third quarter The Deposit Insurance Fund reserve ratio fell to 076 percent and nine FDIC-insured insti-tutions failed during the quarter The FDIC Board adopted a restoration plan on October 7 that would raise the reserve ratio to 115 percent within five years See page 14
Feature Articles
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community The massive run-up in farmland prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 significantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for recent farmland price increases and analyzes their potential effect on FDIC-insured institutions See page 24
Highlights from the 2008 Summary of Deposits Data Each year the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting FDIC Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data See page 30
The views expressed are those of the authors and do not necessarily reflect official positions of the Federal Deposit Insurance Corporation Some of the information used in the preparation of this publication was obtained from publicly available sources that are considered reliable However the use of this information does not constitute an endorsement of its accuracy by the Federal Deposit Insurance Corporation Articles may be reprinted or abstracted if the publication and author(s) are credited Please provide the FDICrsquos Division of Insurance and Research with a copy of any publications containing reprinted material
The Federal Deposit Insurance Corporation Celebrates Its 75th Year
Chairman Bair and the Federal Deposit Insurance Corporation (FDIC) officially launched the agencyrsquos 75th anniversary on June 16 2008 The Corporation is celebrating this milestone with a campaign to promote awareness of deposit insurance and coverage limits as well as to reinforce its ongoing commitment to consumers through an initiative to enhance financial literacy and improve consumer savings Please visit our 75th anniversary web site for more infor-mation at wwwfdicgovanniversary
The FDIC is an independent government agency that has been protecting Americansrsquo savings for 75 years Created in 1933 the FDIC promotes public trust and confidence in the US banking system by insuring deposits
The FDIC insures more than $45 trillion of deposits in over 8300 US banks and thriftsmdash deposits in virtually every bank and thrift in the country Throughout our 75-year history no one has ever lost a penny of insured deposits as a result of a bank failure
In addition to immediately responding to insured depositors when a bank fails the FDIC monitors and addresses risks to the Deposit Insurance Fund and directly supervises and examines more than 5100 institutions that are not members of the Federal Reserve System The FDICmdashwith a staff of more than 4800 employees nationwidemdashis managed by a five-person Board of Directors all of whom are appointed by the President and confirmed by the Senate with no more than three being from the same political party Sheila C Bair heads this board as the 19th Chairman of the Federal Deposit Insurance Corporation
FDICFDIC QQUUAARRTTEERRLLYY iiII 20082008 VVOOLLUUMMEE 22 NNOO 44
Quarterly Banking Profile Third Quarter 2008
INSURED INSTITUTION PERFORMANCE
n Asset-Quality Problems Continue to Depress Earnings n Net Income of $17 Billion Is Second-Lowest Since 1990 n Loan-Loss Rate Rises to 17-Year High n Net Interest Margins Register Improvement n Nine Failures Are Highest Quarterly Total in 15 Years
More Institutions Report Declining Earnings Quarterly Losses Troubled assets continued to mount at insured commer-cial banks and savings institutions in the third quarter of 2008 placing a growing burden on industry earnings Expenses for credit losses topped $50 billion for a second consecutive quarter absorbing one-third of the industryrsquos net operating revenue (net interest income plus total noninterest income) Third quarter net income totaled $17 billion a decline of $270 billion (940 percent) from the third quarter of 2007 The industryrsquos quarterly return on assets (ROA) fell to 005 percent compared to 092 percent a year earlier This is the second-lowest quarterly ROA reported by the industry in the past 18 years Evidence of a deteriorating operating environment was widespread A majority of institutions (584 percent) reported year-over-year declines in quarterly net income and an even larger proportion (640 percent) had lower quarterly ROAs The erosion in profitability has thus far been greater for larger institutions The median ROA at institutions with assets greater than $1 billion has fallen from 103 percent to 056 percent since the third quarter
of 2007 while at community banks (institutions with assets less than $1 billion) the median ROA has declined from 097 percent to 072 percent Almost one in every four institutions (241 percent) reported a net loss for the quarter the highest percentage in any quarter since the fourth quarter of 1990 and the highest percentage in a third quarter in the 24 years that all insured institutions have reported quarterly earnings
Lower Asset Values Add to the Downward Pressure on Earnings Loan-loss provisions totaled $505 billion in the quarter more than three times the $168 billion of a year earlier Total noninterest income was $905 million (15 percent) lower than in the third quarter of 2007 Securitization income declined by $19 billion (330 percent) as reduced demand in secondary markets limited new secu-ritization activity Gains on sales of assets other than loans declined by $10 billion (787 percent) year-over-year and losses on sales of real estate acquired through foreclosure rose by $518 million (588 percent) Among the few categories of noninterest income that showed
Chart 1 Chart 2
Earnings Weakness Persisted in the Third Quarter $ Billions
Securities and Other GainsLosses Net450 Net Operating Income 400
369 380 381 368 353 356
350 340 332 347 325 326 318 312 310 287300
250
200 193
150
100 48 17
50 06
00
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2004 2005 2006 2007 2008
Almost One in Four Institutions Was Unprofitable in the Third Quarter
Insured Institutions with Third-Quarter Net Losses (Percent) 30
2425 20
20
15
10
5
0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
FDIC QUARTERLY 1 2008 VOLUME 2 NO 4
improvement loan sales produced net gains of $166 million in the third quarter compared to $12 billion in net losses a year earlier and trading revenue was up by $28 billion (1292 percent) Sales of securities and other assets yielded net losses of $76 billion in the third quar-ter compared to gains of $77 million in the third quarter of 2007 Expenses for impairment of goodwill and other intangible asset expenses were $18 billion (586 percent) higher than a year ago
Margin Improvement Provides a Boost to Net Interest Income One of the few relatively bright spots in third quarter results was net interest income which was $44 billion (49 percent) higher than a year ago The average net interest margin (NIM) in the third quarter was 337 percent unchanged from the second quarter but up from 335 percent in the third quarter of 2007 Two out of every three institutions reported margin improvement over second-quarter levels but more than half of all insured institutions (54 percent) reported lower NIMs than in the third quarter of 2007 The year-over-year improvement in the industryrsquos NIM was concentrated among larger institutions Higher margins helped offset sluggish growth in interest-earning assets Earning assets increased by only $523 billion (05 percent) during the quarter after shrinking by $336 billion (03 percent) in the second quarter Over the 12 months ended Septem-ber 30 the industryrsquos interest-earning assets were up by only 42 percent the lowest 12-month growth rate in more than six years
Loan Losses Continue to Mount The industry reported year-over-year growth in net charge-offs for the seventh consecutive quarter Net charge-offs totaled $279 billion in the quarter an increase of $170 billion (1564 percent) from a year earlier Two-thirds of the increase in charge-offs consisted of loans secured by real estate Charge-offs of closed-end first and second lien mortgage loans were $46 billion (423 percent) higher than in the third quar-ter of 2007 while charged-off real estate construction and development (CampD) loans were up by $39 billion (744 percent) Charge-offs of home equity lines of credit were $21 billion (306 percent) higher Charge-offs of loans to commercial and industrial (CampI) borrowers increased by $23 billion (139 percent) credit card loan charge-offs rose by $15 billion (374 percent) and charge-offs of other loans to individuals were $17 billion (764 percent) higher The quarterly net charge-off rate in the third quarter was 142 percent up from 132 percent in the second quarter and 057 percent in the third quarter of 2007 This is the highest quarterly net charge-off rate for the industry since 1991 The failure of Washington Mutual on September 25 meant that a significant amount of charge-off activity was not reflected in the reported industry totals for the quarter1
Growth in Reported Noncurrent Loans Remains High The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased
1 Under purchase accounting rules that apply to bank mergers income and expenses that have been booked by an acquired institution are reset to zero as of the date when a change in ownership occurs Income and expenses that have been incurred prior to that date are reflected in adjust-ments to the assets equity capital and reserves of the acquired institution
Chart 3 Chart 4
Rising Loss Provisions Remain the Most Significant Factor Affecting Industry Earnings
3rd Quarter 2008 vs 3rd Quarter 2007
Community Bank Margins Improved in the Third Quarter
Quarterly Net Interest Margin (Percent)
($ Billions) 40
35
30
25
20
15
10
5
0
-5
-10
338
Negative Factors
38 -09 -77
Increase in Decrease in Decrease in Increase in Loan Loss Noninterest Proceeds Noninterest Provision Income from Expense
Securities Sales
45 Assets lt $1 Billion
4 378
35
332
3 Assets gt $1 Billion
25 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2004 2005 2006 2007 2008
Positive Factor
44
Increase in Net Interest
Income
FDIC QUARTERLY 2 2008 VOLUME 2 NO 4
Quarterly Banking Profile
to $1843 billion at the end of September This is $214 billion (131 percent) more than insured institutions reported as of June 30 and is up by $1012 billion (122 percent) over the past 12 months The percentage of total loans and leases that were noncurrent rose from 204 percent to 231 percent during the quarter and is now at the highest level since the third quarter of 1993 The growth in noncurrent loans during the quarter was led by closed-end first and second lien mortgage loans where noncurrents rose by $96 billion (143 percent) Noncurrent real estate CampD loans increased by $69 billion (181 percent) while noncurrent loans secured by nonfarm nonresidential properties rose by $22 billion (181 percent) Noncurrent CampI loans were up by $18 billion (137 percent) during the quarter
Reserve Coverage of Noncurrent Loans Declines Loan-loss reserves increased by $117 billion (81 percent) during the quarter the smallest quarterly growth in reserves since the third quarter of 2007 The industryrsquos ratio of reserves to total loans and leases increased from 181 percent to 195 percent its highest level since the first quarter of 1995 However reserve growth did not keep pace with the growth in noncurrent loans and the ldquocoverage ratiordquo of reserves to noncurrent loans fell from 89 cents in reserves for every $100 of noncurrent loans to 85 cents This is the tenth consecutive quarter that the industryrsquos coverage ratio has fallen it is now at its lowest level since the first quarter of 1993
Failure-Related Restructuring Contributes to a Decline in Reported Capital Total equity capital fell by $442 billion (33 percent) during the third quarter A $146-billion decline in other
Chart 5
comprehensive income driven primarily by unrealized losses on securities held for sale was a significant factor in the reduction in equity but most of the decline stemmed from the accounting effect of the failure of Washington Mutual Bank (WaMu)2 The WaMu failure had a similar effect on the reported industry totals for tier 1 capital and total risk-based capital which declined by $336 billion and $353 billion respectively Unlike equity capital these regulatory capital amounts are not affected by changes in unrealized gains or losses on available-for-sale securities Almost half of all institutions (485 percent) reported declines in their leverage capital ratios during the quarter and slightly more than half (512 percent) reported declines in their total risk-based capital ratios Many institutions reduced their dividends to preserve capital of the 3761 institutions that paid divi-dends in the third quarter of 2007 more than half (574 percent) paid lower dividends in the third quarter of 2008 including 207 percent that paid no dividends Third quarter dividends totaled $110 billion a $169-billion (607-percent) decline from a year ago
Liquidity Program Provides a Boost to Asset Growth Total assets of insured institutions increased by $2732 billion (21 percent) in the third quarter led by growth in balances at Federal Reserve banks (up $1468 billion or
2 Prior to September 25 2008 Washington Mutual FSB of Park City Utah an insured institution with $46 billion in assets and $29 billion in equity capital was directly owned by Washington Mutual Bank of Henderson Nevada Under accounting rules the subsidiary institutionrsquos assets and liabilities were included in the consolidated financial data reported by the parent institution resulting in double-reporting of some of the subsid-iaryrsquos financial data The direct ownership relationship ended with the failure of the parent institution during the third quarter at which point the subsidiary institutionrsquos financial data were no longer double-reported
Chart 6
Growth in Troubled Loans Remains High $ Billions
55 Quarterly Net Charge-offs Quarterly Change in Noncurrent Loans
45
263 35 163 196 279
25 109
15 270 262 267 89 214
85 5 71 82 153
55 61 64 35 48 38 05-5 -13
1 2 3 4 1 2 3 4 1 2 3 2006 2007 2008
Consumer Loans Account for Two-Thirds of Quarterly Charge-offs
Quarterly Net Charge-offs ($ Billions) 30
Loans to Commercial Borrowers Consumer Loans 25
20
15
10
5
0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008 Consumer loans include residential mortgage loans home equity loans credit card loans and other
loans to individuals
FDIC QUARTERLY 3 2008 VOLUME 2 NO 4
505 percent) and a $746-billion increase in asset-backed commercial paper holdings A number of large banks experienced sizable deposit inflows during the quarter and elected to place a large share of these funds with Federal Reserve banks The increase in holdings of commercial paper was attributable to the creation of a special lending facilitymdashthe Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)mdashby the Federal Reserve aimed at providing liquidity to money market mutual funds (MMFs) by funding bank purchases of asset-backed commercial paper from the MMFs3
Loans in categories experiencing the greatest credit-qual-ity problems shrank in the third quarter Residential mort-gage loans declined by $521 billion (24 percent) while real estate CampD loans fell by $102 billion (16 percent) One of the few loan categories showing significant growth was real estate loans secured by nonfarm nonresidential properties which increased by $244 billion (24 percent) Unused loan commitments declined by $2981 billion (37 percent) during the quarter The decline was led by a reduction in unused credit card lines which fell by $1228 billion (26 percent)
Discount Window Borrowings Fuel a Surge in Nondeposit Liabilities Nondeposit liabilities increased by $1625 billion (48 percent) in the third quarter as insured institutions increased their borrowings from the Federal Reserversquos Discount Window (which was used to fund the AMLF) as well as their advances from Federal Home Loan Banks
3 On September 19 the Federal Reserve instituted the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) to restore liquidity to the market for commercial paper and help money market mutual funds meet redemptions
Chart 7
Securities sold under repurchase agreements registered strong growth rising by $642 billion (112 percent) Total deposits increased by $1548 billion (18 percent) as noninterest-bearing deposits in domestic offices rose by $1757 billion (144 percent) The growth in deposits was concentrated in a few large banks Deposits in foreign offices declined by $38 billion (25 percent)
Nine Failures in Third Quarter Include Washington Mutual Bank The number of insured commercial banks and savings institutions fell to 8384 in the third quarter down from 8451 at midyear During the quarter 73 institutions were absorbed in mergers and 9 institutions failed This is the largest number of failures in a quarter since the third quarter of 1993 when 16 insured institutions failed Among the failures was Washington Mutual Bank an insured savings institution with $307 billion in assets and the largest insured institution to fail in the FDICrsquos 75-year history There were 21 new institutions chartered in the third quarter the smallest number of new charters in a quarter since 17 new charters were added in the first quarter of 2002 Four insured savings institutions with combined assets of $10 billion converted from mutual ownership to stock ownership in the third quarter The number of insured institutions on the FDICrsquos ldquoProblem Listrdquo increased from 117 to 171 and the assets of ldquoproblemrdquo institutions rose from $783 billion to $1156 billion during the quarter This is the first time since the middle of 1994 that assets of ldquoprob-lemrdquo institutions have exceeded $100 billion
Author Ross Waldrop Sr Banking Analyst Division of Insurance and Research (202) 898-3951
Chart 8
Earning Asset Growth Has Slowed Substantially
Quarterly Change in Interest-Bearing Assets ($ Billions) 400
350
300
250
200
150
100
50
0
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008
2008 Is a Record Year for Failed Bank Assets Total Assets of Failed FDIC-Insured Commercial Banks and Savings Institutions by Year 1988 ndash 2008 ($ Billions) 400
348 350
300
250
200 164
152 147 144150
100 90
50 10 2 1 0 0 0 2 0 2 3 1 0 0 0 3
0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Through first nine months of 2008
FDIC QUARTERLY 4 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE I-A Selected Indicators All FDIC-Insured Institutions 2008 2007 2007 2006 2005 2004 2003
Return on assets () 033 110 081 128 128 128 138 Return on equity () 385 1049 775 1230 1243 1320 1505 Core capital (leverage) ratio () 781 814 797 822 825 811 788 Noncurrent assets plus other real estate owned to assets () 154 073 094 054 050 053 075 Net charge-offs to loans () 118 050 059 039 049 056 078 Asset growth rate () 683 810 989 904 763 1137 758 Net interest margin () 333 331 329 331 347 352 373 Net operating income growth () -6287 -921 -2757 853 1143 399 1638 Number of institutions reporting 8384 8559 8534 8680 8833 8976 9181
Commercial banks 7146 7303 7283 7401 7526 7631 7770 Savings institutions 1238 1256 1251 1279 1307 1345 1411
Percentage of unproftable institutions () 2100 1033 1207 793 622 597 599 Number of problem institutions 171 65 76 50 52 80 116 Assets of problem institutions (in billions) $116 $19 $22 $8 $7 $28 $30 Number of failedassisted institutions 13 2 3 0 0 4 3
Excludes insured branches of foreign banks (IBAs) Through September 30 ratios annualized where appropriate Asset growth rates are for 12 months ending September 30
TABLE II-A Aggregate Condition and Income Data All FDIC-Insured Institutions (dollar fgures in millions)
Number of institutions reporting Total employees (full-time equivalent) CONDITION DATA Total assets
Loans secured by real estate 1-4 Family residential mortgages Nonfarm nonresidential Construction and development Home equity lines
Commercial amp industrial loans Loans to individuals
Credit cards Farm loans Other loans amp leases Less Unearned income Total loans amp leases Less Reserve for losses Net loans and leases Securities Other real estate owned Goodwill and other intangibles All other assets
Total liabilities and capital Deposits
Domestic offce deposits Foreign offce deposits
Other borrowed funds Subordinated debt All other liabilities Equity capital
Loans and leases 30-89 days past due Noncurrent loans and leases Restructured loans and leases Direct and indirect investments in real estate Mortgage-backed securities Earning assets FHLB Advances Unused loan commitments Trust assets Assets securitized and sold Notional amount of derivatives
3rd Quarter 2nd Quarter 3rd Quarter Change 2008 2008 2007 07Q3-08Q3
8384 2170671
$13573691 4750985 2102080 1043393
617055 652119
1503737 1082731
411627 59656
595646 2739
7990015 156065
7833950 2025534
22966 484178
3207062
13573691 8727485 7221963 1505522 2732570
176833 629706
1307097
121587 184269
14846 910
1260945 11493605
911465 7860609
19948345 1906828
177103186
8451 2203883
$13300540 4794248 2154173 1018988
627283 646903
1492357 1069479
396045 58284
584210 2513
7996065 144383
7851682 2017391
18902 481438
2931127
13300540 8572643 7029111
1543532 2598234
185078 593306
1351279
110814 162895
14499 972
1322210 11441334
840543 8158701
21750102 1750710
183303064
8559 -20 2220522 -22
$12706161 68 4701346 11 2238180 -61
939556 111 616538 01 591372 103
1388441 83 1013355 68
384506 71 56166 62
546851 89 2237 224
7703922 37 87037 793
7616885 28 1989103 18
9818 1339 461068 50
2629288 220
12706161 68 8180226 67 6739817 72 1440409 45 2454148 113
177469 -04 567141 110
1327177 -15
92558 314 83024 1219
4123 2601 1081 -159
1217755 35 11032330 42
770419 183 8301846 -53
21501132 -72 1663308 146
174574544 14
First Three First Three 3rd Quarter 3rd Quarter Change INCOME DATA Qtrs 2008 Qtrs 2007 Change 2008 2007 07Q3-08Q3 Total interest income $487019 $542106 -102 $159097 $188077 -154 Total interest expense 207949 278586 -254 63787 97215 -344
Net interest income 279070 263520 59 95310 90862 49 Provision for loan and lease losses 124517 37208 2347 50548 16785 2012 Total noninterest income 175521 187130 -62 58218 59123 -15 Total noninterest expense 274323 265254 34 93920 90162 42 Securities gains (losses) -8037 2325 NM -7592 77 NM Applicable income taxes 15679 48084 -674 717 13407 -947 Extraordinary gains net 534 -1917 NM 975 -995 NM
Net income 32569 100513 -676 1726 28714 -940 Net charge-offs 68559 27937 1454 27892 10879 1564 Cash dividends 42592 94397 -549 10979 27914 -607 Retained earnings -10023 6116 NM -9253 800 NM
Net operating income 37457 100869 -629 6135 29678 -793
Call Report flers only NM - Not Meaningful
FDIC QUARTERLY 5 2008 VOLUME 2 NO 4
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial bank 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 1726 451 3702 424 -1677 -3100 165 12 151 1599 Commercial banks 8284 377 3702 423 25 711 145 -19 164 2756 Savings institutions
Performance Ratios (annualized)
-6558 74 0 1 -1703 -3811 21 31 -13 -1157
Yield on earning assets 563 1212 484 636 591 584 680 463 607 441 Cost of funding earning assets 226 284 215 236 227 285 200 157 219 196
Net interest margin 337 928 269 400 364 299 480 307 388 245 Noninterest income to assets 176 673 202 067 144 055 174 1100 098 178 Noninterest expense to assets 283 691 248 266 303 208 305 1178 301 216 Loan and lease loss provision to assets 153 678 137 035 138 236 170 016 030 083 Net operating income to assets 019 023 036 112 014 -110 096 086 100 052 Pretax return on assets 007 063 044 121 -015 -118 143 088 079 050 Return on assets 005 039 049 101 -011 -117 093 013 064 028 Return on equity 053 184 659 921 -103 -1507 999 067 570 317 Net charge-offs to loans and leases Loan and lease loss provision to
142 624 144 041 121 103 200 043 034 111
net charge-offs 18123 14852 22242 12578 16375 32766 10068 15218 15569 16561 Effciency ratio 5798 4545 5816 6069 6116 6153 4869 7911 6596 5401 of unproftable institutions 2408 1923 000 863 3103 2494 1386 2088 1286 3250 of institutions with earnings gains
Structural Changes
4071 2308 5000 5539 3216 5327 4851 4242 5087 3000
New Charters 21 0 0 1 5 1 0 14 0 0 Institutions absorbed by mergers 73 0 2 6 57 3 1 0 1 3 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 0 0 7 2 0 0 0 0
Return on assets () 2007 092 407 069 130 099 031 117 220 107 081 2005 131 316 102 133 139 103 176 178 112 131 2003
Net charge-offs to loans
136 425 102 125 128 133 168 147 106 133
and leases () 2007 057 398 077 026 032 042 104 032 022 042 2005 051 428 119 016 023 010 139 018 020 026 2003 073 480 140 029 047 019 134 247 037 048
See Table IV-A (page 8) for explanations
FDIC QUARTERLY 6 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100
Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than
$10 Billion New York Atlanta Chicago Kansas
City Dallas San
Francisco 8384 3240 4470 560 114 1027 1197 1721 1943 1719 777
Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 1726 128 43 -1924 3479 226 2307 830 1322 361 -3320 Commercial banks 8284 150 301 -434 8267 2093 2437 1413 1340 801 200 Savings institutions
Performance Ratios (annualized)
-6558 -21 -258 -1490 -4788 -1867 -130 -583 -18 -440 -3520
Yield on earning assets 563 628 625 586 549 587 547 489 641 604 609 Cost of funding earning assets 226 230 250 230 221 224 241 214 198 219 236
Net interest margin 337 398 375 356 328 363 307 275 443 386 373 Noninterest income to assets 176 099 106 062 202 191 185 178 220 135 138 Noninterest expense to assets 283 368 329 278 277 293 256 274 383 329 268 Loan and lease loss provision to assets 153 046 074 112 170 145 139 139 142 101 219 Net operating income to assets 019 040 034 -016 021 033 040 007 057 032 -033 Pretax return on assets 007 037 008 -056 016 020 031 001 073 031 -068 Return on assets 005 030 001 -052 014 003 027 011 053 019 -056 Return on equity 053 224 013 -472 142 030 268 120 545 191 -634 Net charge-offs to loans and leases 142 042 069 104 163 149 128 132 160 084 179 Loan and lease loss provision to net charge-offs 18123 17209 14953 15534 18646 17641 17760 19567 13065 18081 19772 Effciency ratio 5798 7915 6999 6549 5529 5541 5582 6042 6185 6454 5674 of unproftable institutions 2408 2475 2309 2661 3158 3165 4027 2005 1482 1576 3964 of institutions with earnings gains
Structural Changes
4071 4519 3926 3000 2281 4021 2297 4567 4838 4602 2677
New Charters 21 16 3 1 1 3 6 1 1 5 5 Institutions absorbed by mergers 73 21 47 3 2 10 18 19 15 9 2 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 4 3 2 0 3 0 1 0 5
Return on assets () 2007 092 079 103 118 087 089 075 090 161 114 088 2005 131 108 127 134 132 124 135 108 173 118 160 2003 136 101 117 134 141 124 140 121 177 134 166
Net charge-offs to loans and leases () 2007 057 026 024 042 066 092 029 044 074 029 076 2005 051 016 018 023 064 097 027 029 054 025 059 2003 073 030 037 049 087 110 050 065 085 038 060
See Table IV-A (page 9) for explanations
FDIC QUARTERLY 7 2008 VOLUME 2 NO 4
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial banks 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 32569 8309 6912 1395 10596 -2295 530 413 625 6083 Commercial banks 38123 7908 6912 1392 11587 1938 317 272 624 7172 Savings institutions
Performance Ratios (annualized)
-5555 401 0 3 -991 -4233 213 141 0 -1089
Yield on earning assets 581 1199 527 648 606 534 694 471 616 480 Cost of funding earning assets 248 305 248 257 247 275 224 173 239 229
Net interest margin 333 894 280 391 359 259 471 297 377 251 Noninterest income to assets 180 869 172 067 152 062 197 1130 096 176 Noninterest expense to assets 281 675 258 262 296 174 309 1098 297 226 Loan and lease loss provision to assets 127 578 113 025 119 150 195 013 023 080 Net operating income to assets 038 210 029 115 032 -028 090 179 099 053 Pretax return on assets 049 376 032 134 038 -022 151 253 109 055 Return on assets 033 243 031 113 024 -029 100 156 089 036 Return on equity 335 1114 416 1015 218 -372 1090 772 787 400 Net charge-offs to loans and leases 118 564 128 028 097 074 181 043 029 088 Loan and lease loss provision to net charge-offs 18162 13896 20412 13553 17661 29078 12777 12377 14423 19658 Effciency ratio 5770 3947 6339 6125 6002 5689 4808 7627 6703 5663 of unproftable institutions 2100 769 2500 529 2785 2337 1188 1818 939 2500 of institutions with earnings gains
Condition Ratios ()
4073 3462 5000 5564 3245 4782 4950 4478 5275 4250
Earning assets to total assets Loss Allowance to
8468 7929 7991 9162 8690 9160 9318 8843 9155 8238
Loans and leases 195 584 236 128 170 165 197 133 122 148 Noncurrent loans and leases
Noncurrent assets plus 8469 24814 10400 9162 7075 5738 21115 14605 9694 8319
other real estate owned to assets 154 173 109 115 192 230 082 028 092 085 Equity capital ratio 963 2086 713 1107 1067 799 915 1955 1120 861 Core capital (leverage) ratio 781 1382 679 1018 803 779 897 1764 1097 684 Tier 1 risk-based capital ratio 979 1309 830 1349 942 1403 1044 3813 1783 971 Total risk-based capital ratio 1254 1560 1218 1455 1190 1501 1251 3903 1892 1263 Net loans and leases to deposits 8976 19328 6853 8431 9898 12074 10008 3152 6891 6944 Net loans to total assets 5771 6930 4178 6702 6882 6849 8222 2315 5596 4304 Domestic deposits to total assets
Structural Changes
5321 3301 3103 7949 6604 5666 8112 6992 8114 4914
New Charters 83 0 0 2 22 2 0 57 0 0 Institutions absorbed by mergers 214 0 2 24 159 12 2 1 8 6 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 0 0 1 10 2 0 0 0 0
Number of institutions 2007 8559 28 4 1634 4739 780 120 376 821 57 2005 8858 29 4 1733 4557 928 125 420 992 70 2003 9236 36 6 1821 4167 1024 166 522 1391 103
Total assets (in billions)2007 $127062 $4235 $26440 $1573 $50544 $14541 $958 $401 $1114 $27255 2005 107007 3599 18389 1430 36674 16771 1092 477 1286 27290 2003 89431 3088 14279 1295 30958 15885 1919 622 1921 19463
Return on assets ()2007 110 381 087 125 109 073 140 237 104 109 2005 131 319 088 132 136 112 170 173 112 136 2003 138 393 105 125 130 144 154 136 109 131
Net charge-offs to loans amp leases () 2007 050 390 065 019 028 029 097 030 017 035 2005 047 427 088 015 022 010 146 029 027 020 2003 078 512 141 024 052 019 142 144 031 056
Noncurrent assets plus OREO to assets () 2007 073 134 051 081 081 109 053 026 064 054 2005 050 136 048 068 048 057 054 025 057 037 2003 077 134 098 095 079 064 088 036 074 061
Equity capital ratio () 2007 1045 2317 778 1132 1086 944 1189 1954 1158 1055 2005 1025 2207 823 1086 1021 1067 958 1926 1083 966 2003 913 1703 727 1081 942 879 749 1592 1057 875
Asset Concentration Group Defnitions (Groups are hierarchical and mutually exclusive) Credit-card Lenders - Institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables International Banks - Banks with assets greater than $10 billion and more than 25 percent of total assets in foreign offces Agricultural Banks - Banks whose agricultural production loans plus real estate loans secured by farmland exceed 25 percent of their total loans and leases Commercial Lenders - Institutions whose commercial and industrial loans plus real estate construction and development loans plus loans secured by commercial real estate properties
exceed 25 percent of total assets Mortgage Lenders - Institutions whose residential mortgage loans plus mortgage-backed securities exceed 50 percent of total assets Consumer Lenders - Institutions whose residential mortgage loans plus credit-card loans plus other loans to individuals exceed 50 percent of total assets Other Specialized lt $1 Billion - Institutions with assets less than $1 billion whose loans and leases are less than 40 percent of total assets All Other lt $1 billion - Institutions with assets less than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset concentrations All Other gt $1 billion - Institutions with assets greater than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset
concentrations
FDIC QUARTERLY 8 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
The FDIC Quarterly is published by the Division of Insurance and Research of the Federal Deposit Insurance Corporation and contains a comprehensive summary of the most current financial results for the banking industry Feature articles appearing in the FDIC Quarterly range from timely analysis of economic and banking trends at the national and regional level that may affect the risk exposure of FDIC-insured institutions to research on issues affecting the banking system and the development of regulatory policy
Single copy subscriptions of the FDIC Quarterly can be obtained through the FDIC Public Information Center 3501 Fairfax Drive Room E-1002 Arlington VA 22226 E-mail requests should be sent to publicinfofdicgov Change of address information also should be submitted to the Public Information Center
The FDIC Quarterly is available on-line by visiting the FDIC Web site at wwwfdicgov To receive e-mail notification of the electronic release of the FDIC Quarterly and the individual feature articles subscribe at wwwfdicgovaboutsubscriptionsindexhtml
Chairman Sheila C Bair
Director Division of Insurance Arthur J Murton and Research
Executive Editor Maureen E Sweeney
Managing Editors Richard A Brown Diane L Ellis Paul H Kupiec Christopher J Newbury
Editor Kathy Zeidler
Publication Managers Peggi Gill Lynne Montgomery
Media Inquiries (202) 898-6993
FDIC Quarterly 2008 Volume 2 Number 4
The Federal Deposit Insurance Corporation Celebrates Its 75th Year See page ii
Quarterly Banking Profile Third Quarter 2008 FDIC-insured institutions reported net income of $17 billion in the third quarter of 2008 a decline of $270 billion (94 percent) from the $287 billion that the industry earned in the third quarter of 2007 The primary reason for the drop in industry profits was higher provisions for loan losses While large losses at a few institu-tions were chiefly responsible for the size of the earnings decline more than half of all insured institutions (584 percent) reported lower net income in the third quarter and almost one out of four institutions (241 percent) reported a net loss See page 1
Insurance Fund Indicators Estimated insured deposits (based on the basic FDIC insurance limit of $100000) increased by 18 percent in the third quarter The Deposit Insurance Fund reserve ratio fell to 076 percent and nine FDIC-insured insti-tutions failed during the quarter The FDIC Board adopted a restoration plan on October 7 that would raise the reserve ratio to 115 percent within five years See page 14
Feature Articles
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community The massive run-up in farmland prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 significantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for recent farmland price increases and analyzes their potential effect on FDIC-insured institutions See page 24
Highlights from the 2008 Summary of Deposits Data Each year the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting FDIC Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data See page 30
The views expressed are those of the authors and do not necessarily reflect official positions of the Federal Deposit Insurance Corporation Some of the information used in the preparation of this publication was obtained from publicly available sources that are considered reliable However the use of this information does not constitute an endorsement of its accuracy by the Federal Deposit Insurance Corporation Articles may be reprinted or abstracted if the publication and author(s) are credited Please provide the FDICrsquos Division of Insurance and Research with a copy of any publications containing reprinted material
The Federal Deposit Insurance Corporation Celebrates Its 75th Year
Chairman Bair and the Federal Deposit Insurance Corporation (FDIC) officially launched the agencyrsquos 75th anniversary on June 16 2008 The Corporation is celebrating this milestone with a campaign to promote awareness of deposit insurance and coverage limits as well as to reinforce its ongoing commitment to consumers through an initiative to enhance financial literacy and improve consumer savings Please visit our 75th anniversary web site for more infor-mation at wwwfdicgovanniversary
The FDIC is an independent government agency that has been protecting Americansrsquo savings for 75 years Created in 1933 the FDIC promotes public trust and confidence in the US banking system by insuring deposits
The FDIC insures more than $45 trillion of deposits in over 8300 US banks and thriftsmdash deposits in virtually every bank and thrift in the country Throughout our 75-year history no one has ever lost a penny of insured deposits as a result of a bank failure
In addition to immediately responding to insured depositors when a bank fails the FDIC monitors and addresses risks to the Deposit Insurance Fund and directly supervises and examines more than 5100 institutions that are not members of the Federal Reserve System The FDICmdashwith a staff of more than 4800 employees nationwidemdashis managed by a five-person Board of Directors all of whom are appointed by the President and confirmed by the Senate with no more than three being from the same political party Sheila C Bair heads this board as the 19th Chairman of the Federal Deposit Insurance Corporation
FDICFDIC QQUUAARRTTEERRLLYY iiII 20082008 VVOOLLUUMMEE 22 NNOO 44
Quarterly Banking Profile Third Quarter 2008
INSURED INSTITUTION PERFORMANCE
n Asset-Quality Problems Continue to Depress Earnings n Net Income of $17 Billion Is Second-Lowest Since 1990 n Loan-Loss Rate Rises to 17-Year High n Net Interest Margins Register Improvement n Nine Failures Are Highest Quarterly Total in 15 Years
More Institutions Report Declining Earnings Quarterly Losses Troubled assets continued to mount at insured commer-cial banks and savings institutions in the third quarter of 2008 placing a growing burden on industry earnings Expenses for credit losses topped $50 billion for a second consecutive quarter absorbing one-third of the industryrsquos net operating revenue (net interest income plus total noninterest income) Third quarter net income totaled $17 billion a decline of $270 billion (940 percent) from the third quarter of 2007 The industryrsquos quarterly return on assets (ROA) fell to 005 percent compared to 092 percent a year earlier This is the second-lowest quarterly ROA reported by the industry in the past 18 years Evidence of a deteriorating operating environment was widespread A majority of institutions (584 percent) reported year-over-year declines in quarterly net income and an even larger proportion (640 percent) had lower quarterly ROAs The erosion in profitability has thus far been greater for larger institutions The median ROA at institutions with assets greater than $1 billion has fallen from 103 percent to 056 percent since the third quarter
of 2007 while at community banks (institutions with assets less than $1 billion) the median ROA has declined from 097 percent to 072 percent Almost one in every four institutions (241 percent) reported a net loss for the quarter the highest percentage in any quarter since the fourth quarter of 1990 and the highest percentage in a third quarter in the 24 years that all insured institutions have reported quarterly earnings
Lower Asset Values Add to the Downward Pressure on Earnings Loan-loss provisions totaled $505 billion in the quarter more than three times the $168 billion of a year earlier Total noninterest income was $905 million (15 percent) lower than in the third quarter of 2007 Securitization income declined by $19 billion (330 percent) as reduced demand in secondary markets limited new secu-ritization activity Gains on sales of assets other than loans declined by $10 billion (787 percent) year-over-year and losses on sales of real estate acquired through foreclosure rose by $518 million (588 percent) Among the few categories of noninterest income that showed
Chart 1 Chart 2
Earnings Weakness Persisted in the Third Quarter $ Billions
Securities and Other GainsLosses Net450 Net Operating Income 400
369 380 381 368 353 356
350 340 332 347 325 326 318 312 310 287300
250
200 193
150
100 48 17
50 06
00
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2004 2005 2006 2007 2008
Almost One in Four Institutions Was Unprofitable in the Third Quarter
Insured Institutions with Third-Quarter Net Losses (Percent) 30
2425 20
20
15
10
5
0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
FDIC QUARTERLY 1 2008 VOLUME 2 NO 4
improvement loan sales produced net gains of $166 million in the third quarter compared to $12 billion in net losses a year earlier and trading revenue was up by $28 billion (1292 percent) Sales of securities and other assets yielded net losses of $76 billion in the third quar-ter compared to gains of $77 million in the third quarter of 2007 Expenses for impairment of goodwill and other intangible asset expenses were $18 billion (586 percent) higher than a year ago
Margin Improvement Provides a Boost to Net Interest Income One of the few relatively bright spots in third quarter results was net interest income which was $44 billion (49 percent) higher than a year ago The average net interest margin (NIM) in the third quarter was 337 percent unchanged from the second quarter but up from 335 percent in the third quarter of 2007 Two out of every three institutions reported margin improvement over second-quarter levels but more than half of all insured institutions (54 percent) reported lower NIMs than in the third quarter of 2007 The year-over-year improvement in the industryrsquos NIM was concentrated among larger institutions Higher margins helped offset sluggish growth in interest-earning assets Earning assets increased by only $523 billion (05 percent) during the quarter after shrinking by $336 billion (03 percent) in the second quarter Over the 12 months ended Septem-ber 30 the industryrsquos interest-earning assets were up by only 42 percent the lowest 12-month growth rate in more than six years
Loan Losses Continue to Mount The industry reported year-over-year growth in net charge-offs for the seventh consecutive quarter Net charge-offs totaled $279 billion in the quarter an increase of $170 billion (1564 percent) from a year earlier Two-thirds of the increase in charge-offs consisted of loans secured by real estate Charge-offs of closed-end first and second lien mortgage loans were $46 billion (423 percent) higher than in the third quar-ter of 2007 while charged-off real estate construction and development (CampD) loans were up by $39 billion (744 percent) Charge-offs of home equity lines of credit were $21 billion (306 percent) higher Charge-offs of loans to commercial and industrial (CampI) borrowers increased by $23 billion (139 percent) credit card loan charge-offs rose by $15 billion (374 percent) and charge-offs of other loans to individuals were $17 billion (764 percent) higher The quarterly net charge-off rate in the third quarter was 142 percent up from 132 percent in the second quarter and 057 percent in the third quarter of 2007 This is the highest quarterly net charge-off rate for the industry since 1991 The failure of Washington Mutual on September 25 meant that a significant amount of charge-off activity was not reflected in the reported industry totals for the quarter1
Growth in Reported Noncurrent Loans Remains High The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased
1 Under purchase accounting rules that apply to bank mergers income and expenses that have been booked by an acquired institution are reset to zero as of the date when a change in ownership occurs Income and expenses that have been incurred prior to that date are reflected in adjust-ments to the assets equity capital and reserves of the acquired institution
Chart 3 Chart 4
Rising Loss Provisions Remain the Most Significant Factor Affecting Industry Earnings
3rd Quarter 2008 vs 3rd Quarter 2007
Community Bank Margins Improved in the Third Quarter
Quarterly Net Interest Margin (Percent)
($ Billions) 40
35
30
25
20
15
10
5
0
-5
-10
338
Negative Factors
38 -09 -77
Increase in Decrease in Decrease in Increase in Loan Loss Noninterest Proceeds Noninterest Provision Income from Expense
Securities Sales
45 Assets lt $1 Billion
4 378
35
332
3 Assets gt $1 Billion
25 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2004 2005 2006 2007 2008
Positive Factor
44
Increase in Net Interest
Income
FDIC QUARTERLY 2 2008 VOLUME 2 NO 4
Quarterly Banking Profile
to $1843 billion at the end of September This is $214 billion (131 percent) more than insured institutions reported as of June 30 and is up by $1012 billion (122 percent) over the past 12 months The percentage of total loans and leases that were noncurrent rose from 204 percent to 231 percent during the quarter and is now at the highest level since the third quarter of 1993 The growth in noncurrent loans during the quarter was led by closed-end first and second lien mortgage loans where noncurrents rose by $96 billion (143 percent) Noncurrent real estate CampD loans increased by $69 billion (181 percent) while noncurrent loans secured by nonfarm nonresidential properties rose by $22 billion (181 percent) Noncurrent CampI loans were up by $18 billion (137 percent) during the quarter
Reserve Coverage of Noncurrent Loans Declines Loan-loss reserves increased by $117 billion (81 percent) during the quarter the smallest quarterly growth in reserves since the third quarter of 2007 The industryrsquos ratio of reserves to total loans and leases increased from 181 percent to 195 percent its highest level since the first quarter of 1995 However reserve growth did not keep pace with the growth in noncurrent loans and the ldquocoverage ratiordquo of reserves to noncurrent loans fell from 89 cents in reserves for every $100 of noncurrent loans to 85 cents This is the tenth consecutive quarter that the industryrsquos coverage ratio has fallen it is now at its lowest level since the first quarter of 1993
Failure-Related Restructuring Contributes to a Decline in Reported Capital Total equity capital fell by $442 billion (33 percent) during the third quarter A $146-billion decline in other
Chart 5
comprehensive income driven primarily by unrealized losses on securities held for sale was a significant factor in the reduction in equity but most of the decline stemmed from the accounting effect of the failure of Washington Mutual Bank (WaMu)2 The WaMu failure had a similar effect on the reported industry totals for tier 1 capital and total risk-based capital which declined by $336 billion and $353 billion respectively Unlike equity capital these regulatory capital amounts are not affected by changes in unrealized gains or losses on available-for-sale securities Almost half of all institutions (485 percent) reported declines in their leverage capital ratios during the quarter and slightly more than half (512 percent) reported declines in their total risk-based capital ratios Many institutions reduced their dividends to preserve capital of the 3761 institutions that paid divi-dends in the third quarter of 2007 more than half (574 percent) paid lower dividends in the third quarter of 2008 including 207 percent that paid no dividends Third quarter dividends totaled $110 billion a $169-billion (607-percent) decline from a year ago
Liquidity Program Provides a Boost to Asset Growth Total assets of insured institutions increased by $2732 billion (21 percent) in the third quarter led by growth in balances at Federal Reserve banks (up $1468 billion or
2 Prior to September 25 2008 Washington Mutual FSB of Park City Utah an insured institution with $46 billion in assets and $29 billion in equity capital was directly owned by Washington Mutual Bank of Henderson Nevada Under accounting rules the subsidiary institutionrsquos assets and liabilities were included in the consolidated financial data reported by the parent institution resulting in double-reporting of some of the subsid-iaryrsquos financial data The direct ownership relationship ended with the failure of the parent institution during the third quarter at which point the subsidiary institutionrsquos financial data were no longer double-reported
Chart 6
Growth in Troubled Loans Remains High $ Billions
55 Quarterly Net Charge-offs Quarterly Change in Noncurrent Loans
45
263 35 163 196 279
25 109
15 270 262 267 89 214
85 5 71 82 153
55 61 64 35 48 38 05-5 -13
1 2 3 4 1 2 3 4 1 2 3 2006 2007 2008
Consumer Loans Account for Two-Thirds of Quarterly Charge-offs
Quarterly Net Charge-offs ($ Billions) 30
Loans to Commercial Borrowers Consumer Loans 25
20
15
10
5
0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008 Consumer loans include residential mortgage loans home equity loans credit card loans and other
loans to individuals
FDIC QUARTERLY 3 2008 VOLUME 2 NO 4
505 percent) and a $746-billion increase in asset-backed commercial paper holdings A number of large banks experienced sizable deposit inflows during the quarter and elected to place a large share of these funds with Federal Reserve banks The increase in holdings of commercial paper was attributable to the creation of a special lending facilitymdashthe Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)mdashby the Federal Reserve aimed at providing liquidity to money market mutual funds (MMFs) by funding bank purchases of asset-backed commercial paper from the MMFs3
Loans in categories experiencing the greatest credit-qual-ity problems shrank in the third quarter Residential mort-gage loans declined by $521 billion (24 percent) while real estate CampD loans fell by $102 billion (16 percent) One of the few loan categories showing significant growth was real estate loans secured by nonfarm nonresidential properties which increased by $244 billion (24 percent) Unused loan commitments declined by $2981 billion (37 percent) during the quarter The decline was led by a reduction in unused credit card lines which fell by $1228 billion (26 percent)
Discount Window Borrowings Fuel a Surge in Nondeposit Liabilities Nondeposit liabilities increased by $1625 billion (48 percent) in the third quarter as insured institutions increased their borrowings from the Federal Reserversquos Discount Window (which was used to fund the AMLF) as well as their advances from Federal Home Loan Banks
3 On September 19 the Federal Reserve instituted the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) to restore liquidity to the market for commercial paper and help money market mutual funds meet redemptions
Chart 7
Securities sold under repurchase agreements registered strong growth rising by $642 billion (112 percent) Total deposits increased by $1548 billion (18 percent) as noninterest-bearing deposits in domestic offices rose by $1757 billion (144 percent) The growth in deposits was concentrated in a few large banks Deposits in foreign offices declined by $38 billion (25 percent)
Nine Failures in Third Quarter Include Washington Mutual Bank The number of insured commercial banks and savings institutions fell to 8384 in the third quarter down from 8451 at midyear During the quarter 73 institutions were absorbed in mergers and 9 institutions failed This is the largest number of failures in a quarter since the third quarter of 1993 when 16 insured institutions failed Among the failures was Washington Mutual Bank an insured savings institution with $307 billion in assets and the largest insured institution to fail in the FDICrsquos 75-year history There were 21 new institutions chartered in the third quarter the smallest number of new charters in a quarter since 17 new charters were added in the first quarter of 2002 Four insured savings institutions with combined assets of $10 billion converted from mutual ownership to stock ownership in the third quarter The number of insured institutions on the FDICrsquos ldquoProblem Listrdquo increased from 117 to 171 and the assets of ldquoproblemrdquo institutions rose from $783 billion to $1156 billion during the quarter This is the first time since the middle of 1994 that assets of ldquoprob-lemrdquo institutions have exceeded $100 billion
Author Ross Waldrop Sr Banking Analyst Division of Insurance and Research (202) 898-3951
Chart 8
Earning Asset Growth Has Slowed Substantially
Quarterly Change in Interest-Bearing Assets ($ Billions) 400
350
300
250
200
150
100
50
0
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008
2008 Is a Record Year for Failed Bank Assets Total Assets of Failed FDIC-Insured Commercial Banks and Savings Institutions by Year 1988 ndash 2008 ($ Billions) 400
348 350
300
250
200 164
152 147 144150
100 90
50 10 2 1 0 0 0 2 0 2 3 1 0 0 0 3
0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Through first nine months of 2008
FDIC QUARTERLY 4 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE I-A Selected Indicators All FDIC-Insured Institutions 2008 2007 2007 2006 2005 2004 2003
Return on assets () 033 110 081 128 128 128 138 Return on equity () 385 1049 775 1230 1243 1320 1505 Core capital (leverage) ratio () 781 814 797 822 825 811 788 Noncurrent assets plus other real estate owned to assets () 154 073 094 054 050 053 075 Net charge-offs to loans () 118 050 059 039 049 056 078 Asset growth rate () 683 810 989 904 763 1137 758 Net interest margin () 333 331 329 331 347 352 373 Net operating income growth () -6287 -921 -2757 853 1143 399 1638 Number of institutions reporting 8384 8559 8534 8680 8833 8976 9181
Commercial banks 7146 7303 7283 7401 7526 7631 7770 Savings institutions 1238 1256 1251 1279 1307 1345 1411
Percentage of unproftable institutions () 2100 1033 1207 793 622 597 599 Number of problem institutions 171 65 76 50 52 80 116 Assets of problem institutions (in billions) $116 $19 $22 $8 $7 $28 $30 Number of failedassisted institutions 13 2 3 0 0 4 3
Excludes insured branches of foreign banks (IBAs) Through September 30 ratios annualized where appropriate Asset growth rates are for 12 months ending September 30
TABLE II-A Aggregate Condition and Income Data All FDIC-Insured Institutions (dollar fgures in millions)
Number of institutions reporting Total employees (full-time equivalent) CONDITION DATA Total assets
Loans secured by real estate 1-4 Family residential mortgages Nonfarm nonresidential Construction and development Home equity lines
Commercial amp industrial loans Loans to individuals
Credit cards Farm loans Other loans amp leases Less Unearned income Total loans amp leases Less Reserve for losses Net loans and leases Securities Other real estate owned Goodwill and other intangibles All other assets
Total liabilities and capital Deposits
Domestic offce deposits Foreign offce deposits
Other borrowed funds Subordinated debt All other liabilities Equity capital
Loans and leases 30-89 days past due Noncurrent loans and leases Restructured loans and leases Direct and indirect investments in real estate Mortgage-backed securities Earning assets FHLB Advances Unused loan commitments Trust assets Assets securitized and sold Notional amount of derivatives
3rd Quarter 2nd Quarter 3rd Quarter Change 2008 2008 2007 07Q3-08Q3
8384 2170671
$13573691 4750985 2102080 1043393
617055 652119
1503737 1082731
411627 59656
595646 2739
7990015 156065
7833950 2025534
22966 484178
3207062
13573691 8727485 7221963 1505522 2732570
176833 629706
1307097
121587 184269
14846 910
1260945 11493605
911465 7860609
19948345 1906828
177103186
8451 2203883
$13300540 4794248 2154173 1018988
627283 646903
1492357 1069479
396045 58284
584210 2513
7996065 144383
7851682 2017391
18902 481438
2931127
13300540 8572643 7029111
1543532 2598234
185078 593306
1351279
110814 162895
14499 972
1322210 11441334
840543 8158701
21750102 1750710
183303064
8559 -20 2220522 -22
$12706161 68 4701346 11 2238180 -61
939556 111 616538 01 591372 103
1388441 83 1013355 68
384506 71 56166 62
546851 89 2237 224
7703922 37 87037 793
7616885 28 1989103 18
9818 1339 461068 50
2629288 220
12706161 68 8180226 67 6739817 72 1440409 45 2454148 113
177469 -04 567141 110
1327177 -15
92558 314 83024 1219
4123 2601 1081 -159
1217755 35 11032330 42
770419 183 8301846 -53
21501132 -72 1663308 146
174574544 14
First Three First Three 3rd Quarter 3rd Quarter Change INCOME DATA Qtrs 2008 Qtrs 2007 Change 2008 2007 07Q3-08Q3 Total interest income $487019 $542106 -102 $159097 $188077 -154 Total interest expense 207949 278586 -254 63787 97215 -344
Net interest income 279070 263520 59 95310 90862 49 Provision for loan and lease losses 124517 37208 2347 50548 16785 2012 Total noninterest income 175521 187130 -62 58218 59123 -15 Total noninterest expense 274323 265254 34 93920 90162 42 Securities gains (losses) -8037 2325 NM -7592 77 NM Applicable income taxes 15679 48084 -674 717 13407 -947 Extraordinary gains net 534 -1917 NM 975 -995 NM
Net income 32569 100513 -676 1726 28714 -940 Net charge-offs 68559 27937 1454 27892 10879 1564 Cash dividends 42592 94397 -549 10979 27914 -607 Retained earnings -10023 6116 NM -9253 800 NM
Net operating income 37457 100869 -629 6135 29678 -793
Call Report flers only NM - Not Meaningful
FDIC QUARTERLY 5 2008 VOLUME 2 NO 4
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial bank 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 1726 451 3702 424 -1677 -3100 165 12 151 1599 Commercial banks 8284 377 3702 423 25 711 145 -19 164 2756 Savings institutions
Performance Ratios (annualized)
-6558 74 0 1 -1703 -3811 21 31 -13 -1157
Yield on earning assets 563 1212 484 636 591 584 680 463 607 441 Cost of funding earning assets 226 284 215 236 227 285 200 157 219 196
Net interest margin 337 928 269 400 364 299 480 307 388 245 Noninterest income to assets 176 673 202 067 144 055 174 1100 098 178 Noninterest expense to assets 283 691 248 266 303 208 305 1178 301 216 Loan and lease loss provision to assets 153 678 137 035 138 236 170 016 030 083 Net operating income to assets 019 023 036 112 014 -110 096 086 100 052 Pretax return on assets 007 063 044 121 -015 -118 143 088 079 050 Return on assets 005 039 049 101 -011 -117 093 013 064 028 Return on equity 053 184 659 921 -103 -1507 999 067 570 317 Net charge-offs to loans and leases Loan and lease loss provision to
142 624 144 041 121 103 200 043 034 111
net charge-offs 18123 14852 22242 12578 16375 32766 10068 15218 15569 16561 Effciency ratio 5798 4545 5816 6069 6116 6153 4869 7911 6596 5401 of unproftable institutions 2408 1923 000 863 3103 2494 1386 2088 1286 3250 of institutions with earnings gains
Structural Changes
4071 2308 5000 5539 3216 5327 4851 4242 5087 3000
New Charters 21 0 0 1 5 1 0 14 0 0 Institutions absorbed by mergers 73 0 2 6 57 3 1 0 1 3 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 0 0 7 2 0 0 0 0
Return on assets () 2007 092 407 069 130 099 031 117 220 107 081 2005 131 316 102 133 139 103 176 178 112 131 2003
Net charge-offs to loans
136 425 102 125 128 133 168 147 106 133
and leases () 2007 057 398 077 026 032 042 104 032 022 042 2005 051 428 119 016 023 010 139 018 020 026 2003 073 480 140 029 047 019 134 247 037 048
See Table IV-A (page 8) for explanations
FDIC QUARTERLY 6 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100
Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than
$10 Billion New York Atlanta Chicago Kansas
City Dallas San
Francisco 8384 3240 4470 560 114 1027 1197 1721 1943 1719 777
Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 1726 128 43 -1924 3479 226 2307 830 1322 361 -3320 Commercial banks 8284 150 301 -434 8267 2093 2437 1413 1340 801 200 Savings institutions
Performance Ratios (annualized)
-6558 -21 -258 -1490 -4788 -1867 -130 -583 -18 -440 -3520
Yield on earning assets 563 628 625 586 549 587 547 489 641 604 609 Cost of funding earning assets 226 230 250 230 221 224 241 214 198 219 236
Net interest margin 337 398 375 356 328 363 307 275 443 386 373 Noninterest income to assets 176 099 106 062 202 191 185 178 220 135 138 Noninterest expense to assets 283 368 329 278 277 293 256 274 383 329 268 Loan and lease loss provision to assets 153 046 074 112 170 145 139 139 142 101 219 Net operating income to assets 019 040 034 -016 021 033 040 007 057 032 -033 Pretax return on assets 007 037 008 -056 016 020 031 001 073 031 -068 Return on assets 005 030 001 -052 014 003 027 011 053 019 -056 Return on equity 053 224 013 -472 142 030 268 120 545 191 -634 Net charge-offs to loans and leases 142 042 069 104 163 149 128 132 160 084 179 Loan and lease loss provision to net charge-offs 18123 17209 14953 15534 18646 17641 17760 19567 13065 18081 19772 Effciency ratio 5798 7915 6999 6549 5529 5541 5582 6042 6185 6454 5674 of unproftable institutions 2408 2475 2309 2661 3158 3165 4027 2005 1482 1576 3964 of institutions with earnings gains
Structural Changes
4071 4519 3926 3000 2281 4021 2297 4567 4838 4602 2677
New Charters 21 16 3 1 1 3 6 1 1 5 5 Institutions absorbed by mergers 73 21 47 3 2 10 18 19 15 9 2 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 4 3 2 0 3 0 1 0 5
Return on assets () 2007 092 079 103 118 087 089 075 090 161 114 088 2005 131 108 127 134 132 124 135 108 173 118 160 2003 136 101 117 134 141 124 140 121 177 134 166
Net charge-offs to loans and leases () 2007 057 026 024 042 066 092 029 044 074 029 076 2005 051 016 018 023 064 097 027 029 054 025 059 2003 073 030 037 049 087 110 050 065 085 038 060
See Table IV-A (page 9) for explanations
FDIC QUARTERLY 7 2008 VOLUME 2 NO 4
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial banks 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 32569 8309 6912 1395 10596 -2295 530 413 625 6083 Commercial banks 38123 7908 6912 1392 11587 1938 317 272 624 7172 Savings institutions
Performance Ratios (annualized)
-5555 401 0 3 -991 -4233 213 141 0 -1089
Yield on earning assets 581 1199 527 648 606 534 694 471 616 480 Cost of funding earning assets 248 305 248 257 247 275 224 173 239 229
Net interest margin 333 894 280 391 359 259 471 297 377 251 Noninterest income to assets 180 869 172 067 152 062 197 1130 096 176 Noninterest expense to assets 281 675 258 262 296 174 309 1098 297 226 Loan and lease loss provision to assets 127 578 113 025 119 150 195 013 023 080 Net operating income to assets 038 210 029 115 032 -028 090 179 099 053 Pretax return on assets 049 376 032 134 038 -022 151 253 109 055 Return on assets 033 243 031 113 024 -029 100 156 089 036 Return on equity 335 1114 416 1015 218 -372 1090 772 787 400 Net charge-offs to loans and leases 118 564 128 028 097 074 181 043 029 088 Loan and lease loss provision to net charge-offs 18162 13896 20412 13553 17661 29078 12777 12377 14423 19658 Effciency ratio 5770 3947 6339 6125 6002 5689 4808 7627 6703 5663 of unproftable institutions 2100 769 2500 529 2785 2337 1188 1818 939 2500 of institutions with earnings gains
Condition Ratios ()
4073 3462 5000 5564 3245 4782 4950 4478 5275 4250
Earning assets to total assets Loss Allowance to
8468 7929 7991 9162 8690 9160 9318 8843 9155 8238
Loans and leases 195 584 236 128 170 165 197 133 122 148 Noncurrent loans and leases
Noncurrent assets plus 8469 24814 10400 9162 7075 5738 21115 14605 9694 8319
other real estate owned to assets 154 173 109 115 192 230 082 028 092 085 Equity capital ratio 963 2086 713 1107 1067 799 915 1955 1120 861 Core capital (leverage) ratio 781 1382 679 1018 803 779 897 1764 1097 684 Tier 1 risk-based capital ratio 979 1309 830 1349 942 1403 1044 3813 1783 971 Total risk-based capital ratio 1254 1560 1218 1455 1190 1501 1251 3903 1892 1263 Net loans and leases to deposits 8976 19328 6853 8431 9898 12074 10008 3152 6891 6944 Net loans to total assets 5771 6930 4178 6702 6882 6849 8222 2315 5596 4304 Domestic deposits to total assets
Structural Changes
5321 3301 3103 7949 6604 5666 8112 6992 8114 4914
New Charters 83 0 0 2 22 2 0 57 0 0 Institutions absorbed by mergers 214 0 2 24 159 12 2 1 8 6 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 0 0 1 10 2 0 0 0 0
Number of institutions 2007 8559 28 4 1634 4739 780 120 376 821 57 2005 8858 29 4 1733 4557 928 125 420 992 70 2003 9236 36 6 1821 4167 1024 166 522 1391 103
Total assets (in billions)2007 $127062 $4235 $26440 $1573 $50544 $14541 $958 $401 $1114 $27255 2005 107007 3599 18389 1430 36674 16771 1092 477 1286 27290 2003 89431 3088 14279 1295 30958 15885 1919 622 1921 19463
Return on assets ()2007 110 381 087 125 109 073 140 237 104 109 2005 131 319 088 132 136 112 170 173 112 136 2003 138 393 105 125 130 144 154 136 109 131
Net charge-offs to loans amp leases () 2007 050 390 065 019 028 029 097 030 017 035 2005 047 427 088 015 022 010 146 029 027 020 2003 078 512 141 024 052 019 142 144 031 056
Noncurrent assets plus OREO to assets () 2007 073 134 051 081 081 109 053 026 064 054 2005 050 136 048 068 048 057 054 025 057 037 2003 077 134 098 095 079 064 088 036 074 061
Equity capital ratio () 2007 1045 2317 778 1132 1086 944 1189 1954 1158 1055 2005 1025 2207 823 1086 1021 1067 958 1926 1083 966 2003 913 1703 727 1081 942 879 749 1592 1057 875
Asset Concentration Group Defnitions (Groups are hierarchical and mutually exclusive) Credit-card Lenders - Institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables International Banks - Banks with assets greater than $10 billion and more than 25 percent of total assets in foreign offces Agricultural Banks - Banks whose agricultural production loans plus real estate loans secured by farmland exceed 25 percent of their total loans and leases Commercial Lenders - Institutions whose commercial and industrial loans plus real estate construction and development loans plus loans secured by commercial real estate properties
exceed 25 percent of total assets Mortgage Lenders - Institutions whose residential mortgage loans plus mortgage-backed securities exceed 50 percent of total assets Consumer Lenders - Institutions whose residential mortgage loans plus credit-card loans plus other loans to individuals exceed 50 percent of total assets Other Specialized lt $1 Billion - Institutions with assets less than $1 billion whose loans and leases are less than 40 percent of total assets All Other lt $1 billion - Institutions with assets less than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset concentrations All Other gt $1 billion - Institutions with assets greater than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset
concentrations
FDIC QUARTERLY 8 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
FDIC Quarterly 2008 Volume 2 Number 4
The Federal Deposit Insurance Corporation Celebrates Its 75th Year See page ii
Quarterly Banking Profile Third Quarter 2008 FDIC-insured institutions reported net income of $17 billion in the third quarter of 2008 a decline of $270 billion (94 percent) from the $287 billion that the industry earned in the third quarter of 2007 The primary reason for the drop in industry profits was higher provisions for loan losses While large losses at a few institu-tions were chiefly responsible for the size of the earnings decline more than half of all insured institutions (584 percent) reported lower net income in the third quarter and almost one out of four institutions (241 percent) reported a net loss See page 1
Insurance Fund Indicators Estimated insured deposits (based on the basic FDIC insurance limit of $100000) increased by 18 percent in the third quarter The Deposit Insurance Fund reserve ratio fell to 076 percent and nine FDIC-insured insti-tutions failed during the quarter The FDIC Board adopted a restoration plan on October 7 that would raise the reserve ratio to 115 percent within five years See page 14
Feature Articles
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community The massive run-up in farmland prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 significantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for recent farmland price increases and analyzes their potential effect on FDIC-insured institutions See page 24
Highlights from the 2008 Summary of Deposits Data Each year the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting FDIC Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data See page 30
The views expressed are those of the authors and do not necessarily reflect official positions of the Federal Deposit Insurance Corporation Some of the information used in the preparation of this publication was obtained from publicly available sources that are considered reliable However the use of this information does not constitute an endorsement of its accuracy by the Federal Deposit Insurance Corporation Articles may be reprinted or abstracted if the publication and author(s) are credited Please provide the FDICrsquos Division of Insurance and Research with a copy of any publications containing reprinted material
The Federal Deposit Insurance Corporation Celebrates Its 75th Year
Chairman Bair and the Federal Deposit Insurance Corporation (FDIC) officially launched the agencyrsquos 75th anniversary on June 16 2008 The Corporation is celebrating this milestone with a campaign to promote awareness of deposit insurance and coverage limits as well as to reinforce its ongoing commitment to consumers through an initiative to enhance financial literacy and improve consumer savings Please visit our 75th anniversary web site for more infor-mation at wwwfdicgovanniversary
The FDIC is an independent government agency that has been protecting Americansrsquo savings for 75 years Created in 1933 the FDIC promotes public trust and confidence in the US banking system by insuring deposits
The FDIC insures more than $45 trillion of deposits in over 8300 US banks and thriftsmdash deposits in virtually every bank and thrift in the country Throughout our 75-year history no one has ever lost a penny of insured deposits as a result of a bank failure
In addition to immediately responding to insured depositors when a bank fails the FDIC monitors and addresses risks to the Deposit Insurance Fund and directly supervises and examines more than 5100 institutions that are not members of the Federal Reserve System The FDICmdashwith a staff of more than 4800 employees nationwidemdashis managed by a five-person Board of Directors all of whom are appointed by the President and confirmed by the Senate with no more than three being from the same political party Sheila C Bair heads this board as the 19th Chairman of the Federal Deposit Insurance Corporation
FDICFDIC QQUUAARRTTEERRLLYY iiII 20082008 VVOOLLUUMMEE 22 NNOO 44
Quarterly Banking Profile Third Quarter 2008
INSURED INSTITUTION PERFORMANCE
n Asset-Quality Problems Continue to Depress Earnings n Net Income of $17 Billion Is Second-Lowest Since 1990 n Loan-Loss Rate Rises to 17-Year High n Net Interest Margins Register Improvement n Nine Failures Are Highest Quarterly Total in 15 Years
More Institutions Report Declining Earnings Quarterly Losses Troubled assets continued to mount at insured commer-cial banks and savings institutions in the third quarter of 2008 placing a growing burden on industry earnings Expenses for credit losses topped $50 billion for a second consecutive quarter absorbing one-third of the industryrsquos net operating revenue (net interest income plus total noninterest income) Third quarter net income totaled $17 billion a decline of $270 billion (940 percent) from the third quarter of 2007 The industryrsquos quarterly return on assets (ROA) fell to 005 percent compared to 092 percent a year earlier This is the second-lowest quarterly ROA reported by the industry in the past 18 years Evidence of a deteriorating operating environment was widespread A majority of institutions (584 percent) reported year-over-year declines in quarterly net income and an even larger proportion (640 percent) had lower quarterly ROAs The erosion in profitability has thus far been greater for larger institutions The median ROA at institutions with assets greater than $1 billion has fallen from 103 percent to 056 percent since the third quarter
of 2007 while at community banks (institutions with assets less than $1 billion) the median ROA has declined from 097 percent to 072 percent Almost one in every four institutions (241 percent) reported a net loss for the quarter the highest percentage in any quarter since the fourth quarter of 1990 and the highest percentage in a third quarter in the 24 years that all insured institutions have reported quarterly earnings
Lower Asset Values Add to the Downward Pressure on Earnings Loan-loss provisions totaled $505 billion in the quarter more than three times the $168 billion of a year earlier Total noninterest income was $905 million (15 percent) lower than in the third quarter of 2007 Securitization income declined by $19 billion (330 percent) as reduced demand in secondary markets limited new secu-ritization activity Gains on sales of assets other than loans declined by $10 billion (787 percent) year-over-year and losses on sales of real estate acquired through foreclosure rose by $518 million (588 percent) Among the few categories of noninterest income that showed
Chart 1 Chart 2
Earnings Weakness Persisted in the Third Quarter $ Billions
Securities and Other GainsLosses Net450 Net Operating Income 400
369 380 381 368 353 356
350 340 332 347 325 326 318 312 310 287300
250
200 193
150
100 48 17
50 06
00
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2004 2005 2006 2007 2008
Almost One in Four Institutions Was Unprofitable in the Third Quarter
Insured Institutions with Third-Quarter Net Losses (Percent) 30
2425 20
20
15
10
5
0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
FDIC QUARTERLY 1 2008 VOLUME 2 NO 4
improvement loan sales produced net gains of $166 million in the third quarter compared to $12 billion in net losses a year earlier and trading revenue was up by $28 billion (1292 percent) Sales of securities and other assets yielded net losses of $76 billion in the third quar-ter compared to gains of $77 million in the third quarter of 2007 Expenses for impairment of goodwill and other intangible asset expenses were $18 billion (586 percent) higher than a year ago
Margin Improvement Provides a Boost to Net Interest Income One of the few relatively bright spots in third quarter results was net interest income which was $44 billion (49 percent) higher than a year ago The average net interest margin (NIM) in the third quarter was 337 percent unchanged from the second quarter but up from 335 percent in the third quarter of 2007 Two out of every three institutions reported margin improvement over second-quarter levels but more than half of all insured institutions (54 percent) reported lower NIMs than in the third quarter of 2007 The year-over-year improvement in the industryrsquos NIM was concentrated among larger institutions Higher margins helped offset sluggish growth in interest-earning assets Earning assets increased by only $523 billion (05 percent) during the quarter after shrinking by $336 billion (03 percent) in the second quarter Over the 12 months ended Septem-ber 30 the industryrsquos interest-earning assets were up by only 42 percent the lowest 12-month growth rate in more than six years
Loan Losses Continue to Mount The industry reported year-over-year growth in net charge-offs for the seventh consecutive quarter Net charge-offs totaled $279 billion in the quarter an increase of $170 billion (1564 percent) from a year earlier Two-thirds of the increase in charge-offs consisted of loans secured by real estate Charge-offs of closed-end first and second lien mortgage loans were $46 billion (423 percent) higher than in the third quar-ter of 2007 while charged-off real estate construction and development (CampD) loans were up by $39 billion (744 percent) Charge-offs of home equity lines of credit were $21 billion (306 percent) higher Charge-offs of loans to commercial and industrial (CampI) borrowers increased by $23 billion (139 percent) credit card loan charge-offs rose by $15 billion (374 percent) and charge-offs of other loans to individuals were $17 billion (764 percent) higher The quarterly net charge-off rate in the third quarter was 142 percent up from 132 percent in the second quarter and 057 percent in the third quarter of 2007 This is the highest quarterly net charge-off rate for the industry since 1991 The failure of Washington Mutual on September 25 meant that a significant amount of charge-off activity was not reflected in the reported industry totals for the quarter1
Growth in Reported Noncurrent Loans Remains High The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased
1 Under purchase accounting rules that apply to bank mergers income and expenses that have been booked by an acquired institution are reset to zero as of the date when a change in ownership occurs Income and expenses that have been incurred prior to that date are reflected in adjust-ments to the assets equity capital and reserves of the acquired institution
Chart 3 Chart 4
Rising Loss Provisions Remain the Most Significant Factor Affecting Industry Earnings
3rd Quarter 2008 vs 3rd Quarter 2007
Community Bank Margins Improved in the Third Quarter
Quarterly Net Interest Margin (Percent)
($ Billions) 40
35
30
25
20
15
10
5
0
-5
-10
338
Negative Factors
38 -09 -77
Increase in Decrease in Decrease in Increase in Loan Loss Noninterest Proceeds Noninterest Provision Income from Expense
Securities Sales
45 Assets lt $1 Billion
4 378
35
332
3 Assets gt $1 Billion
25 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2004 2005 2006 2007 2008
Positive Factor
44
Increase in Net Interest
Income
FDIC QUARTERLY 2 2008 VOLUME 2 NO 4
Quarterly Banking Profile
to $1843 billion at the end of September This is $214 billion (131 percent) more than insured institutions reported as of June 30 and is up by $1012 billion (122 percent) over the past 12 months The percentage of total loans and leases that were noncurrent rose from 204 percent to 231 percent during the quarter and is now at the highest level since the third quarter of 1993 The growth in noncurrent loans during the quarter was led by closed-end first and second lien mortgage loans where noncurrents rose by $96 billion (143 percent) Noncurrent real estate CampD loans increased by $69 billion (181 percent) while noncurrent loans secured by nonfarm nonresidential properties rose by $22 billion (181 percent) Noncurrent CampI loans were up by $18 billion (137 percent) during the quarter
Reserve Coverage of Noncurrent Loans Declines Loan-loss reserves increased by $117 billion (81 percent) during the quarter the smallest quarterly growth in reserves since the third quarter of 2007 The industryrsquos ratio of reserves to total loans and leases increased from 181 percent to 195 percent its highest level since the first quarter of 1995 However reserve growth did not keep pace with the growth in noncurrent loans and the ldquocoverage ratiordquo of reserves to noncurrent loans fell from 89 cents in reserves for every $100 of noncurrent loans to 85 cents This is the tenth consecutive quarter that the industryrsquos coverage ratio has fallen it is now at its lowest level since the first quarter of 1993
Failure-Related Restructuring Contributes to a Decline in Reported Capital Total equity capital fell by $442 billion (33 percent) during the third quarter A $146-billion decline in other
Chart 5
comprehensive income driven primarily by unrealized losses on securities held for sale was a significant factor in the reduction in equity but most of the decline stemmed from the accounting effect of the failure of Washington Mutual Bank (WaMu)2 The WaMu failure had a similar effect on the reported industry totals for tier 1 capital and total risk-based capital which declined by $336 billion and $353 billion respectively Unlike equity capital these regulatory capital amounts are not affected by changes in unrealized gains or losses on available-for-sale securities Almost half of all institutions (485 percent) reported declines in their leverage capital ratios during the quarter and slightly more than half (512 percent) reported declines in their total risk-based capital ratios Many institutions reduced their dividends to preserve capital of the 3761 institutions that paid divi-dends in the third quarter of 2007 more than half (574 percent) paid lower dividends in the third quarter of 2008 including 207 percent that paid no dividends Third quarter dividends totaled $110 billion a $169-billion (607-percent) decline from a year ago
Liquidity Program Provides a Boost to Asset Growth Total assets of insured institutions increased by $2732 billion (21 percent) in the third quarter led by growth in balances at Federal Reserve banks (up $1468 billion or
2 Prior to September 25 2008 Washington Mutual FSB of Park City Utah an insured institution with $46 billion in assets and $29 billion in equity capital was directly owned by Washington Mutual Bank of Henderson Nevada Under accounting rules the subsidiary institutionrsquos assets and liabilities were included in the consolidated financial data reported by the parent institution resulting in double-reporting of some of the subsid-iaryrsquos financial data The direct ownership relationship ended with the failure of the parent institution during the third quarter at which point the subsidiary institutionrsquos financial data were no longer double-reported
Chart 6
Growth in Troubled Loans Remains High $ Billions
55 Quarterly Net Charge-offs Quarterly Change in Noncurrent Loans
45
263 35 163 196 279
25 109
15 270 262 267 89 214
85 5 71 82 153
55 61 64 35 48 38 05-5 -13
1 2 3 4 1 2 3 4 1 2 3 2006 2007 2008
Consumer Loans Account for Two-Thirds of Quarterly Charge-offs
Quarterly Net Charge-offs ($ Billions) 30
Loans to Commercial Borrowers Consumer Loans 25
20
15
10
5
0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008 Consumer loans include residential mortgage loans home equity loans credit card loans and other
loans to individuals
FDIC QUARTERLY 3 2008 VOLUME 2 NO 4
505 percent) and a $746-billion increase in asset-backed commercial paper holdings A number of large banks experienced sizable deposit inflows during the quarter and elected to place a large share of these funds with Federal Reserve banks The increase in holdings of commercial paper was attributable to the creation of a special lending facilitymdashthe Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)mdashby the Federal Reserve aimed at providing liquidity to money market mutual funds (MMFs) by funding bank purchases of asset-backed commercial paper from the MMFs3
Loans in categories experiencing the greatest credit-qual-ity problems shrank in the third quarter Residential mort-gage loans declined by $521 billion (24 percent) while real estate CampD loans fell by $102 billion (16 percent) One of the few loan categories showing significant growth was real estate loans secured by nonfarm nonresidential properties which increased by $244 billion (24 percent) Unused loan commitments declined by $2981 billion (37 percent) during the quarter The decline was led by a reduction in unused credit card lines which fell by $1228 billion (26 percent)
Discount Window Borrowings Fuel a Surge in Nondeposit Liabilities Nondeposit liabilities increased by $1625 billion (48 percent) in the third quarter as insured institutions increased their borrowings from the Federal Reserversquos Discount Window (which was used to fund the AMLF) as well as their advances from Federal Home Loan Banks
3 On September 19 the Federal Reserve instituted the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) to restore liquidity to the market for commercial paper and help money market mutual funds meet redemptions
Chart 7
Securities sold under repurchase agreements registered strong growth rising by $642 billion (112 percent) Total deposits increased by $1548 billion (18 percent) as noninterest-bearing deposits in domestic offices rose by $1757 billion (144 percent) The growth in deposits was concentrated in a few large banks Deposits in foreign offices declined by $38 billion (25 percent)
Nine Failures in Third Quarter Include Washington Mutual Bank The number of insured commercial banks and savings institutions fell to 8384 in the third quarter down from 8451 at midyear During the quarter 73 institutions were absorbed in mergers and 9 institutions failed This is the largest number of failures in a quarter since the third quarter of 1993 when 16 insured institutions failed Among the failures was Washington Mutual Bank an insured savings institution with $307 billion in assets and the largest insured institution to fail in the FDICrsquos 75-year history There were 21 new institutions chartered in the third quarter the smallest number of new charters in a quarter since 17 new charters were added in the first quarter of 2002 Four insured savings institutions with combined assets of $10 billion converted from mutual ownership to stock ownership in the third quarter The number of insured institutions on the FDICrsquos ldquoProblem Listrdquo increased from 117 to 171 and the assets of ldquoproblemrdquo institutions rose from $783 billion to $1156 billion during the quarter This is the first time since the middle of 1994 that assets of ldquoprob-lemrdquo institutions have exceeded $100 billion
Author Ross Waldrop Sr Banking Analyst Division of Insurance and Research (202) 898-3951
Chart 8
Earning Asset Growth Has Slowed Substantially
Quarterly Change in Interest-Bearing Assets ($ Billions) 400
350
300
250
200
150
100
50
0
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008
2008 Is a Record Year for Failed Bank Assets Total Assets of Failed FDIC-Insured Commercial Banks and Savings Institutions by Year 1988 ndash 2008 ($ Billions) 400
348 350
300
250
200 164
152 147 144150
100 90
50 10 2 1 0 0 0 2 0 2 3 1 0 0 0 3
0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Through first nine months of 2008
FDIC QUARTERLY 4 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE I-A Selected Indicators All FDIC-Insured Institutions 2008 2007 2007 2006 2005 2004 2003
Return on assets () 033 110 081 128 128 128 138 Return on equity () 385 1049 775 1230 1243 1320 1505 Core capital (leverage) ratio () 781 814 797 822 825 811 788 Noncurrent assets plus other real estate owned to assets () 154 073 094 054 050 053 075 Net charge-offs to loans () 118 050 059 039 049 056 078 Asset growth rate () 683 810 989 904 763 1137 758 Net interest margin () 333 331 329 331 347 352 373 Net operating income growth () -6287 -921 -2757 853 1143 399 1638 Number of institutions reporting 8384 8559 8534 8680 8833 8976 9181
Commercial banks 7146 7303 7283 7401 7526 7631 7770 Savings institutions 1238 1256 1251 1279 1307 1345 1411
Percentage of unproftable institutions () 2100 1033 1207 793 622 597 599 Number of problem institutions 171 65 76 50 52 80 116 Assets of problem institutions (in billions) $116 $19 $22 $8 $7 $28 $30 Number of failedassisted institutions 13 2 3 0 0 4 3
Excludes insured branches of foreign banks (IBAs) Through September 30 ratios annualized where appropriate Asset growth rates are for 12 months ending September 30
TABLE II-A Aggregate Condition and Income Data All FDIC-Insured Institutions (dollar fgures in millions)
Number of institutions reporting Total employees (full-time equivalent) CONDITION DATA Total assets
Loans secured by real estate 1-4 Family residential mortgages Nonfarm nonresidential Construction and development Home equity lines
Commercial amp industrial loans Loans to individuals
Credit cards Farm loans Other loans amp leases Less Unearned income Total loans amp leases Less Reserve for losses Net loans and leases Securities Other real estate owned Goodwill and other intangibles All other assets
Total liabilities and capital Deposits
Domestic offce deposits Foreign offce deposits
Other borrowed funds Subordinated debt All other liabilities Equity capital
Loans and leases 30-89 days past due Noncurrent loans and leases Restructured loans and leases Direct and indirect investments in real estate Mortgage-backed securities Earning assets FHLB Advances Unused loan commitments Trust assets Assets securitized and sold Notional amount of derivatives
3rd Quarter 2nd Quarter 3rd Quarter Change 2008 2008 2007 07Q3-08Q3
8384 2170671
$13573691 4750985 2102080 1043393
617055 652119
1503737 1082731
411627 59656
595646 2739
7990015 156065
7833950 2025534
22966 484178
3207062
13573691 8727485 7221963 1505522 2732570
176833 629706
1307097
121587 184269
14846 910
1260945 11493605
911465 7860609
19948345 1906828
177103186
8451 2203883
$13300540 4794248 2154173 1018988
627283 646903
1492357 1069479
396045 58284
584210 2513
7996065 144383
7851682 2017391
18902 481438
2931127
13300540 8572643 7029111
1543532 2598234
185078 593306
1351279
110814 162895
14499 972
1322210 11441334
840543 8158701
21750102 1750710
183303064
8559 -20 2220522 -22
$12706161 68 4701346 11 2238180 -61
939556 111 616538 01 591372 103
1388441 83 1013355 68
384506 71 56166 62
546851 89 2237 224
7703922 37 87037 793
7616885 28 1989103 18
9818 1339 461068 50
2629288 220
12706161 68 8180226 67 6739817 72 1440409 45 2454148 113
177469 -04 567141 110
1327177 -15
92558 314 83024 1219
4123 2601 1081 -159
1217755 35 11032330 42
770419 183 8301846 -53
21501132 -72 1663308 146
174574544 14
First Three First Three 3rd Quarter 3rd Quarter Change INCOME DATA Qtrs 2008 Qtrs 2007 Change 2008 2007 07Q3-08Q3 Total interest income $487019 $542106 -102 $159097 $188077 -154 Total interest expense 207949 278586 -254 63787 97215 -344
Net interest income 279070 263520 59 95310 90862 49 Provision for loan and lease losses 124517 37208 2347 50548 16785 2012 Total noninterest income 175521 187130 -62 58218 59123 -15 Total noninterest expense 274323 265254 34 93920 90162 42 Securities gains (losses) -8037 2325 NM -7592 77 NM Applicable income taxes 15679 48084 -674 717 13407 -947 Extraordinary gains net 534 -1917 NM 975 -995 NM
Net income 32569 100513 -676 1726 28714 -940 Net charge-offs 68559 27937 1454 27892 10879 1564 Cash dividends 42592 94397 -549 10979 27914 -607 Retained earnings -10023 6116 NM -9253 800 NM
Net operating income 37457 100869 -629 6135 29678 -793
Call Report flers only NM - Not Meaningful
FDIC QUARTERLY 5 2008 VOLUME 2 NO 4
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial bank 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 1726 451 3702 424 -1677 -3100 165 12 151 1599 Commercial banks 8284 377 3702 423 25 711 145 -19 164 2756 Savings institutions
Performance Ratios (annualized)
-6558 74 0 1 -1703 -3811 21 31 -13 -1157
Yield on earning assets 563 1212 484 636 591 584 680 463 607 441 Cost of funding earning assets 226 284 215 236 227 285 200 157 219 196
Net interest margin 337 928 269 400 364 299 480 307 388 245 Noninterest income to assets 176 673 202 067 144 055 174 1100 098 178 Noninterest expense to assets 283 691 248 266 303 208 305 1178 301 216 Loan and lease loss provision to assets 153 678 137 035 138 236 170 016 030 083 Net operating income to assets 019 023 036 112 014 -110 096 086 100 052 Pretax return on assets 007 063 044 121 -015 -118 143 088 079 050 Return on assets 005 039 049 101 -011 -117 093 013 064 028 Return on equity 053 184 659 921 -103 -1507 999 067 570 317 Net charge-offs to loans and leases Loan and lease loss provision to
142 624 144 041 121 103 200 043 034 111
net charge-offs 18123 14852 22242 12578 16375 32766 10068 15218 15569 16561 Effciency ratio 5798 4545 5816 6069 6116 6153 4869 7911 6596 5401 of unproftable institutions 2408 1923 000 863 3103 2494 1386 2088 1286 3250 of institutions with earnings gains
Structural Changes
4071 2308 5000 5539 3216 5327 4851 4242 5087 3000
New Charters 21 0 0 1 5 1 0 14 0 0 Institutions absorbed by mergers 73 0 2 6 57 3 1 0 1 3 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 0 0 7 2 0 0 0 0
Return on assets () 2007 092 407 069 130 099 031 117 220 107 081 2005 131 316 102 133 139 103 176 178 112 131 2003
Net charge-offs to loans
136 425 102 125 128 133 168 147 106 133
and leases () 2007 057 398 077 026 032 042 104 032 022 042 2005 051 428 119 016 023 010 139 018 020 026 2003 073 480 140 029 047 019 134 247 037 048
See Table IV-A (page 8) for explanations
FDIC QUARTERLY 6 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100
Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than
$10 Billion New York Atlanta Chicago Kansas
City Dallas San
Francisco 8384 3240 4470 560 114 1027 1197 1721 1943 1719 777
Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 1726 128 43 -1924 3479 226 2307 830 1322 361 -3320 Commercial banks 8284 150 301 -434 8267 2093 2437 1413 1340 801 200 Savings institutions
Performance Ratios (annualized)
-6558 -21 -258 -1490 -4788 -1867 -130 -583 -18 -440 -3520
Yield on earning assets 563 628 625 586 549 587 547 489 641 604 609 Cost of funding earning assets 226 230 250 230 221 224 241 214 198 219 236
Net interest margin 337 398 375 356 328 363 307 275 443 386 373 Noninterest income to assets 176 099 106 062 202 191 185 178 220 135 138 Noninterest expense to assets 283 368 329 278 277 293 256 274 383 329 268 Loan and lease loss provision to assets 153 046 074 112 170 145 139 139 142 101 219 Net operating income to assets 019 040 034 -016 021 033 040 007 057 032 -033 Pretax return on assets 007 037 008 -056 016 020 031 001 073 031 -068 Return on assets 005 030 001 -052 014 003 027 011 053 019 -056 Return on equity 053 224 013 -472 142 030 268 120 545 191 -634 Net charge-offs to loans and leases 142 042 069 104 163 149 128 132 160 084 179 Loan and lease loss provision to net charge-offs 18123 17209 14953 15534 18646 17641 17760 19567 13065 18081 19772 Effciency ratio 5798 7915 6999 6549 5529 5541 5582 6042 6185 6454 5674 of unproftable institutions 2408 2475 2309 2661 3158 3165 4027 2005 1482 1576 3964 of institutions with earnings gains
Structural Changes
4071 4519 3926 3000 2281 4021 2297 4567 4838 4602 2677
New Charters 21 16 3 1 1 3 6 1 1 5 5 Institutions absorbed by mergers 73 21 47 3 2 10 18 19 15 9 2 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 4 3 2 0 3 0 1 0 5
Return on assets () 2007 092 079 103 118 087 089 075 090 161 114 088 2005 131 108 127 134 132 124 135 108 173 118 160 2003 136 101 117 134 141 124 140 121 177 134 166
Net charge-offs to loans and leases () 2007 057 026 024 042 066 092 029 044 074 029 076 2005 051 016 018 023 064 097 027 029 054 025 059 2003 073 030 037 049 087 110 050 065 085 038 060
See Table IV-A (page 9) for explanations
FDIC QUARTERLY 7 2008 VOLUME 2 NO 4
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial banks 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 32569 8309 6912 1395 10596 -2295 530 413 625 6083 Commercial banks 38123 7908 6912 1392 11587 1938 317 272 624 7172 Savings institutions
Performance Ratios (annualized)
-5555 401 0 3 -991 -4233 213 141 0 -1089
Yield on earning assets 581 1199 527 648 606 534 694 471 616 480 Cost of funding earning assets 248 305 248 257 247 275 224 173 239 229
Net interest margin 333 894 280 391 359 259 471 297 377 251 Noninterest income to assets 180 869 172 067 152 062 197 1130 096 176 Noninterest expense to assets 281 675 258 262 296 174 309 1098 297 226 Loan and lease loss provision to assets 127 578 113 025 119 150 195 013 023 080 Net operating income to assets 038 210 029 115 032 -028 090 179 099 053 Pretax return on assets 049 376 032 134 038 -022 151 253 109 055 Return on assets 033 243 031 113 024 -029 100 156 089 036 Return on equity 335 1114 416 1015 218 -372 1090 772 787 400 Net charge-offs to loans and leases 118 564 128 028 097 074 181 043 029 088 Loan and lease loss provision to net charge-offs 18162 13896 20412 13553 17661 29078 12777 12377 14423 19658 Effciency ratio 5770 3947 6339 6125 6002 5689 4808 7627 6703 5663 of unproftable institutions 2100 769 2500 529 2785 2337 1188 1818 939 2500 of institutions with earnings gains
Condition Ratios ()
4073 3462 5000 5564 3245 4782 4950 4478 5275 4250
Earning assets to total assets Loss Allowance to
8468 7929 7991 9162 8690 9160 9318 8843 9155 8238
Loans and leases 195 584 236 128 170 165 197 133 122 148 Noncurrent loans and leases
Noncurrent assets plus 8469 24814 10400 9162 7075 5738 21115 14605 9694 8319
other real estate owned to assets 154 173 109 115 192 230 082 028 092 085 Equity capital ratio 963 2086 713 1107 1067 799 915 1955 1120 861 Core capital (leverage) ratio 781 1382 679 1018 803 779 897 1764 1097 684 Tier 1 risk-based capital ratio 979 1309 830 1349 942 1403 1044 3813 1783 971 Total risk-based capital ratio 1254 1560 1218 1455 1190 1501 1251 3903 1892 1263 Net loans and leases to deposits 8976 19328 6853 8431 9898 12074 10008 3152 6891 6944 Net loans to total assets 5771 6930 4178 6702 6882 6849 8222 2315 5596 4304 Domestic deposits to total assets
Structural Changes
5321 3301 3103 7949 6604 5666 8112 6992 8114 4914
New Charters 83 0 0 2 22 2 0 57 0 0 Institutions absorbed by mergers 214 0 2 24 159 12 2 1 8 6 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 0 0 1 10 2 0 0 0 0
Number of institutions 2007 8559 28 4 1634 4739 780 120 376 821 57 2005 8858 29 4 1733 4557 928 125 420 992 70 2003 9236 36 6 1821 4167 1024 166 522 1391 103
Total assets (in billions)2007 $127062 $4235 $26440 $1573 $50544 $14541 $958 $401 $1114 $27255 2005 107007 3599 18389 1430 36674 16771 1092 477 1286 27290 2003 89431 3088 14279 1295 30958 15885 1919 622 1921 19463
Return on assets ()2007 110 381 087 125 109 073 140 237 104 109 2005 131 319 088 132 136 112 170 173 112 136 2003 138 393 105 125 130 144 154 136 109 131
Net charge-offs to loans amp leases () 2007 050 390 065 019 028 029 097 030 017 035 2005 047 427 088 015 022 010 146 029 027 020 2003 078 512 141 024 052 019 142 144 031 056
Noncurrent assets plus OREO to assets () 2007 073 134 051 081 081 109 053 026 064 054 2005 050 136 048 068 048 057 054 025 057 037 2003 077 134 098 095 079 064 088 036 074 061
Equity capital ratio () 2007 1045 2317 778 1132 1086 944 1189 1954 1158 1055 2005 1025 2207 823 1086 1021 1067 958 1926 1083 966 2003 913 1703 727 1081 942 879 749 1592 1057 875
Asset Concentration Group Defnitions (Groups are hierarchical and mutually exclusive) Credit-card Lenders - Institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables International Banks - Banks with assets greater than $10 billion and more than 25 percent of total assets in foreign offces Agricultural Banks - Banks whose agricultural production loans plus real estate loans secured by farmland exceed 25 percent of their total loans and leases Commercial Lenders - Institutions whose commercial and industrial loans plus real estate construction and development loans plus loans secured by commercial real estate properties
exceed 25 percent of total assets Mortgage Lenders - Institutions whose residential mortgage loans plus mortgage-backed securities exceed 50 percent of total assets Consumer Lenders - Institutions whose residential mortgage loans plus credit-card loans plus other loans to individuals exceed 50 percent of total assets Other Specialized lt $1 Billion - Institutions with assets less than $1 billion whose loans and leases are less than 40 percent of total assets All Other lt $1 billion - Institutions with assets less than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset concentrations All Other gt $1 billion - Institutions with assets greater than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset
concentrations
FDIC QUARTERLY 8 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
The Federal Deposit Insurance Corporation Celebrates Its 75th Year
Chairman Bair and the Federal Deposit Insurance Corporation (FDIC) officially launched the agencyrsquos 75th anniversary on June 16 2008 The Corporation is celebrating this milestone with a campaign to promote awareness of deposit insurance and coverage limits as well as to reinforce its ongoing commitment to consumers through an initiative to enhance financial literacy and improve consumer savings Please visit our 75th anniversary web site for more infor-mation at wwwfdicgovanniversary
The FDIC is an independent government agency that has been protecting Americansrsquo savings for 75 years Created in 1933 the FDIC promotes public trust and confidence in the US banking system by insuring deposits
The FDIC insures more than $45 trillion of deposits in over 8300 US banks and thriftsmdash deposits in virtually every bank and thrift in the country Throughout our 75-year history no one has ever lost a penny of insured deposits as a result of a bank failure
In addition to immediately responding to insured depositors when a bank fails the FDIC monitors and addresses risks to the Deposit Insurance Fund and directly supervises and examines more than 5100 institutions that are not members of the Federal Reserve System The FDICmdashwith a staff of more than 4800 employees nationwidemdashis managed by a five-person Board of Directors all of whom are appointed by the President and confirmed by the Senate with no more than three being from the same political party Sheila C Bair heads this board as the 19th Chairman of the Federal Deposit Insurance Corporation
FDICFDIC QQUUAARRTTEERRLLYY iiII 20082008 VVOOLLUUMMEE 22 NNOO 44
Quarterly Banking Profile Third Quarter 2008
INSURED INSTITUTION PERFORMANCE
n Asset-Quality Problems Continue to Depress Earnings n Net Income of $17 Billion Is Second-Lowest Since 1990 n Loan-Loss Rate Rises to 17-Year High n Net Interest Margins Register Improvement n Nine Failures Are Highest Quarterly Total in 15 Years
More Institutions Report Declining Earnings Quarterly Losses Troubled assets continued to mount at insured commer-cial banks and savings institutions in the third quarter of 2008 placing a growing burden on industry earnings Expenses for credit losses topped $50 billion for a second consecutive quarter absorbing one-third of the industryrsquos net operating revenue (net interest income plus total noninterest income) Third quarter net income totaled $17 billion a decline of $270 billion (940 percent) from the third quarter of 2007 The industryrsquos quarterly return on assets (ROA) fell to 005 percent compared to 092 percent a year earlier This is the second-lowest quarterly ROA reported by the industry in the past 18 years Evidence of a deteriorating operating environment was widespread A majority of institutions (584 percent) reported year-over-year declines in quarterly net income and an even larger proportion (640 percent) had lower quarterly ROAs The erosion in profitability has thus far been greater for larger institutions The median ROA at institutions with assets greater than $1 billion has fallen from 103 percent to 056 percent since the third quarter
of 2007 while at community banks (institutions with assets less than $1 billion) the median ROA has declined from 097 percent to 072 percent Almost one in every four institutions (241 percent) reported a net loss for the quarter the highest percentage in any quarter since the fourth quarter of 1990 and the highest percentage in a third quarter in the 24 years that all insured institutions have reported quarterly earnings
Lower Asset Values Add to the Downward Pressure on Earnings Loan-loss provisions totaled $505 billion in the quarter more than three times the $168 billion of a year earlier Total noninterest income was $905 million (15 percent) lower than in the third quarter of 2007 Securitization income declined by $19 billion (330 percent) as reduced demand in secondary markets limited new secu-ritization activity Gains on sales of assets other than loans declined by $10 billion (787 percent) year-over-year and losses on sales of real estate acquired through foreclosure rose by $518 million (588 percent) Among the few categories of noninterest income that showed
Chart 1 Chart 2
Earnings Weakness Persisted in the Third Quarter $ Billions
Securities and Other GainsLosses Net450 Net Operating Income 400
369 380 381 368 353 356
350 340 332 347 325 326 318 312 310 287300
250
200 193
150
100 48 17
50 06
00
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2004 2005 2006 2007 2008
Almost One in Four Institutions Was Unprofitable in the Third Quarter
Insured Institutions with Third-Quarter Net Losses (Percent) 30
2425 20
20
15
10
5
0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
FDIC QUARTERLY 1 2008 VOLUME 2 NO 4
improvement loan sales produced net gains of $166 million in the third quarter compared to $12 billion in net losses a year earlier and trading revenue was up by $28 billion (1292 percent) Sales of securities and other assets yielded net losses of $76 billion in the third quar-ter compared to gains of $77 million in the third quarter of 2007 Expenses for impairment of goodwill and other intangible asset expenses were $18 billion (586 percent) higher than a year ago
Margin Improvement Provides a Boost to Net Interest Income One of the few relatively bright spots in third quarter results was net interest income which was $44 billion (49 percent) higher than a year ago The average net interest margin (NIM) in the third quarter was 337 percent unchanged from the second quarter but up from 335 percent in the third quarter of 2007 Two out of every three institutions reported margin improvement over second-quarter levels but more than half of all insured institutions (54 percent) reported lower NIMs than in the third quarter of 2007 The year-over-year improvement in the industryrsquos NIM was concentrated among larger institutions Higher margins helped offset sluggish growth in interest-earning assets Earning assets increased by only $523 billion (05 percent) during the quarter after shrinking by $336 billion (03 percent) in the second quarter Over the 12 months ended Septem-ber 30 the industryrsquos interest-earning assets were up by only 42 percent the lowest 12-month growth rate in more than six years
Loan Losses Continue to Mount The industry reported year-over-year growth in net charge-offs for the seventh consecutive quarter Net charge-offs totaled $279 billion in the quarter an increase of $170 billion (1564 percent) from a year earlier Two-thirds of the increase in charge-offs consisted of loans secured by real estate Charge-offs of closed-end first and second lien mortgage loans were $46 billion (423 percent) higher than in the third quar-ter of 2007 while charged-off real estate construction and development (CampD) loans were up by $39 billion (744 percent) Charge-offs of home equity lines of credit were $21 billion (306 percent) higher Charge-offs of loans to commercial and industrial (CampI) borrowers increased by $23 billion (139 percent) credit card loan charge-offs rose by $15 billion (374 percent) and charge-offs of other loans to individuals were $17 billion (764 percent) higher The quarterly net charge-off rate in the third quarter was 142 percent up from 132 percent in the second quarter and 057 percent in the third quarter of 2007 This is the highest quarterly net charge-off rate for the industry since 1991 The failure of Washington Mutual on September 25 meant that a significant amount of charge-off activity was not reflected in the reported industry totals for the quarter1
Growth in Reported Noncurrent Loans Remains High The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased
1 Under purchase accounting rules that apply to bank mergers income and expenses that have been booked by an acquired institution are reset to zero as of the date when a change in ownership occurs Income and expenses that have been incurred prior to that date are reflected in adjust-ments to the assets equity capital and reserves of the acquired institution
Chart 3 Chart 4
Rising Loss Provisions Remain the Most Significant Factor Affecting Industry Earnings
3rd Quarter 2008 vs 3rd Quarter 2007
Community Bank Margins Improved in the Third Quarter
Quarterly Net Interest Margin (Percent)
($ Billions) 40
35
30
25
20
15
10
5
0
-5
-10
338
Negative Factors
38 -09 -77
Increase in Decrease in Decrease in Increase in Loan Loss Noninterest Proceeds Noninterest Provision Income from Expense
Securities Sales
45 Assets lt $1 Billion
4 378
35
332
3 Assets gt $1 Billion
25 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2004 2005 2006 2007 2008
Positive Factor
44
Increase in Net Interest
Income
FDIC QUARTERLY 2 2008 VOLUME 2 NO 4
Quarterly Banking Profile
to $1843 billion at the end of September This is $214 billion (131 percent) more than insured institutions reported as of June 30 and is up by $1012 billion (122 percent) over the past 12 months The percentage of total loans and leases that were noncurrent rose from 204 percent to 231 percent during the quarter and is now at the highest level since the third quarter of 1993 The growth in noncurrent loans during the quarter was led by closed-end first and second lien mortgage loans where noncurrents rose by $96 billion (143 percent) Noncurrent real estate CampD loans increased by $69 billion (181 percent) while noncurrent loans secured by nonfarm nonresidential properties rose by $22 billion (181 percent) Noncurrent CampI loans were up by $18 billion (137 percent) during the quarter
Reserve Coverage of Noncurrent Loans Declines Loan-loss reserves increased by $117 billion (81 percent) during the quarter the smallest quarterly growth in reserves since the third quarter of 2007 The industryrsquos ratio of reserves to total loans and leases increased from 181 percent to 195 percent its highest level since the first quarter of 1995 However reserve growth did not keep pace with the growth in noncurrent loans and the ldquocoverage ratiordquo of reserves to noncurrent loans fell from 89 cents in reserves for every $100 of noncurrent loans to 85 cents This is the tenth consecutive quarter that the industryrsquos coverage ratio has fallen it is now at its lowest level since the first quarter of 1993
Failure-Related Restructuring Contributes to a Decline in Reported Capital Total equity capital fell by $442 billion (33 percent) during the third quarter A $146-billion decline in other
Chart 5
comprehensive income driven primarily by unrealized losses on securities held for sale was a significant factor in the reduction in equity but most of the decline stemmed from the accounting effect of the failure of Washington Mutual Bank (WaMu)2 The WaMu failure had a similar effect on the reported industry totals for tier 1 capital and total risk-based capital which declined by $336 billion and $353 billion respectively Unlike equity capital these regulatory capital amounts are not affected by changes in unrealized gains or losses on available-for-sale securities Almost half of all institutions (485 percent) reported declines in their leverage capital ratios during the quarter and slightly more than half (512 percent) reported declines in their total risk-based capital ratios Many institutions reduced their dividends to preserve capital of the 3761 institutions that paid divi-dends in the third quarter of 2007 more than half (574 percent) paid lower dividends in the third quarter of 2008 including 207 percent that paid no dividends Third quarter dividends totaled $110 billion a $169-billion (607-percent) decline from a year ago
Liquidity Program Provides a Boost to Asset Growth Total assets of insured institutions increased by $2732 billion (21 percent) in the third quarter led by growth in balances at Federal Reserve banks (up $1468 billion or
2 Prior to September 25 2008 Washington Mutual FSB of Park City Utah an insured institution with $46 billion in assets and $29 billion in equity capital was directly owned by Washington Mutual Bank of Henderson Nevada Under accounting rules the subsidiary institutionrsquos assets and liabilities were included in the consolidated financial data reported by the parent institution resulting in double-reporting of some of the subsid-iaryrsquos financial data The direct ownership relationship ended with the failure of the parent institution during the third quarter at which point the subsidiary institutionrsquos financial data were no longer double-reported
Chart 6
Growth in Troubled Loans Remains High $ Billions
55 Quarterly Net Charge-offs Quarterly Change in Noncurrent Loans
45
263 35 163 196 279
25 109
15 270 262 267 89 214
85 5 71 82 153
55 61 64 35 48 38 05-5 -13
1 2 3 4 1 2 3 4 1 2 3 2006 2007 2008
Consumer Loans Account for Two-Thirds of Quarterly Charge-offs
Quarterly Net Charge-offs ($ Billions) 30
Loans to Commercial Borrowers Consumer Loans 25
20
15
10
5
0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008 Consumer loans include residential mortgage loans home equity loans credit card loans and other
loans to individuals
FDIC QUARTERLY 3 2008 VOLUME 2 NO 4
505 percent) and a $746-billion increase in asset-backed commercial paper holdings A number of large banks experienced sizable deposit inflows during the quarter and elected to place a large share of these funds with Federal Reserve banks The increase in holdings of commercial paper was attributable to the creation of a special lending facilitymdashthe Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)mdashby the Federal Reserve aimed at providing liquidity to money market mutual funds (MMFs) by funding bank purchases of asset-backed commercial paper from the MMFs3
Loans in categories experiencing the greatest credit-qual-ity problems shrank in the third quarter Residential mort-gage loans declined by $521 billion (24 percent) while real estate CampD loans fell by $102 billion (16 percent) One of the few loan categories showing significant growth was real estate loans secured by nonfarm nonresidential properties which increased by $244 billion (24 percent) Unused loan commitments declined by $2981 billion (37 percent) during the quarter The decline was led by a reduction in unused credit card lines which fell by $1228 billion (26 percent)
Discount Window Borrowings Fuel a Surge in Nondeposit Liabilities Nondeposit liabilities increased by $1625 billion (48 percent) in the third quarter as insured institutions increased their borrowings from the Federal Reserversquos Discount Window (which was used to fund the AMLF) as well as their advances from Federal Home Loan Banks
3 On September 19 the Federal Reserve instituted the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) to restore liquidity to the market for commercial paper and help money market mutual funds meet redemptions
Chart 7
Securities sold under repurchase agreements registered strong growth rising by $642 billion (112 percent) Total deposits increased by $1548 billion (18 percent) as noninterest-bearing deposits in domestic offices rose by $1757 billion (144 percent) The growth in deposits was concentrated in a few large banks Deposits in foreign offices declined by $38 billion (25 percent)
Nine Failures in Third Quarter Include Washington Mutual Bank The number of insured commercial banks and savings institutions fell to 8384 in the third quarter down from 8451 at midyear During the quarter 73 institutions were absorbed in mergers and 9 institutions failed This is the largest number of failures in a quarter since the third quarter of 1993 when 16 insured institutions failed Among the failures was Washington Mutual Bank an insured savings institution with $307 billion in assets and the largest insured institution to fail in the FDICrsquos 75-year history There were 21 new institutions chartered in the third quarter the smallest number of new charters in a quarter since 17 new charters were added in the first quarter of 2002 Four insured savings institutions with combined assets of $10 billion converted from mutual ownership to stock ownership in the third quarter The number of insured institutions on the FDICrsquos ldquoProblem Listrdquo increased from 117 to 171 and the assets of ldquoproblemrdquo institutions rose from $783 billion to $1156 billion during the quarter This is the first time since the middle of 1994 that assets of ldquoprob-lemrdquo institutions have exceeded $100 billion
Author Ross Waldrop Sr Banking Analyst Division of Insurance and Research (202) 898-3951
Chart 8
Earning Asset Growth Has Slowed Substantially
Quarterly Change in Interest-Bearing Assets ($ Billions) 400
350
300
250
200
150
100
50
0
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008
2008 Is a Record Year for Failed Bank Assets Total Assets of Failed FDIC-Insured Commercial Banks and Savings Institutions by Year 1988 ndash 2008 ($ Billions) 400
348 350
300
250
200 164
152 147 144150
100 90
50 10 2 1 0 0 0 2 0 2 3 1 0 0 0 3
0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Through first nine months of 2008
FDIC QUARTERLY 4 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE I-A Selected Indicators All FDIC-Insured Institutions 2008 2007 2007 2006 2005 2004 2003
Return on assets () 033 110 081 128 128 128 138 Return on equity () 385 1049 775 1230 1243 1320 1505 Core capital (leverage) ratio () 781 814 797 822 825 811 788 Noncurrent assets plus other real estate owned to assets () 154 073 094 054 050 053 075 Net charge-offs to loans () 118 050 059 039 049 056 078 Asset growth rate () 683 810 989 904 763 1137 758 Net interest margin () 333 331 329 331 347 352 373 Net operating income growth () -6287 -921 -2757 853 1143 399 1638 Number of institutions reporting 8384 8559 8534 8680 8833 8976 9181
Commercial banks 7146 7303 7283 7401 7526 7631 7770 Savings institutions 1238 1256 1251 1279 1307 1345 1411
Percentage of unproftable institutions () 2100 1033 1207 793 622 597 599 Number of problem institutions 171 65 76 50 52 80 116 Assets of problem institutions (in billions) $116 $19 $22 $8 $7 $28 $30 Number of failedassisted institutions 13 2 3 0 0 4 3
Excludes insured branches of foreign banks (IBAs) Through September 30 ratios annualized where appropriate Asset growth rates are for 12 months ending September 30
TABLE II-A Aggregate Condition and Income Data All FDIC-Insured Institutions (dollar fgures in millions)
Number of institutions reporting Total employees (full-time equivalent) CONDITION DATA Total assets
Loans secured by real estate 1-4 Family residential mortgages Nonfarm nonresidential Construction and development Home equity lines
Commercial amp industrial loans Loans to individuals
Credit cards Farm loans Other loans amp leases Less Unearned income Total loans amp leases Less Reserve for losses Net loans and leases Securities Other real estate owned Goodwill and other intangibles All other assets
Total liabilities and capital Deposits
Domestic offce deposits Foreign offce deposits
Other borrowed funds Subordinated debt All other liabilities Equity capital
Loans and leases 30-89 days past due Noncurrent loans and leases Restructured loans and leases Direct and indirect investments in real estate Mortgage-backed securities Earning assets FHLB Advances Unused loan commitments Trust assets Assets securitized and sold Notional amount of derivatives
3rd Quarter 2nd Quarter 3rd Quarter Change 2008 2008 2007 07Q3-08Q3
8384 2170671
$13573691 4750985 2102080 1043393
617055 652119
1503737 1082731
411627 59656
595646 2739
7990015 156065
7833950 2025534
22966 484178
3207062
13573691 8727485 7221963 1505522 2732570
176833 629706
1307097
121587 184269
14846 910
1260945 11493605
911465 7860609
19948345 1906828
177103186
8451 2203883
$13300540 4794248 2154173 1018988
627283 646903
1492357 1069479
396045 58284
584210 2513
7996065 144383
7851682 2017391
18902 481438
2931127
13300540 8572643 7029111
1543532 2598234
185078 593306
1351279
110814 162895
14499 972
1322210 11441334
840543 8158701
21750102 1750710
183303064
8559 -20 2220522 -22
$12706161 68 4701346 11 2238180 -61
939556 111 616538 01 591372 103
1388441 83 1013355 68
384506 71 56166 62
546851 89 2237 224
7703922 37 87037 793
7616885 28 1989103 18
9818 1339 461068 50
2629288 220
12706161 68 8180226 67 6739817 72 1440409 45 2454148 113
177469 -04 567141 110
1327177 -15
92558 314 83024 1219
4123 2601 1081 -159
1217755 35 11032330 42
770419 183 8301846 -53
21501132 -72 1663308 146
174574544 14
First Three First Three 3rd Quarter 3rd Quarter Change INCOME DATA Qtrs 2008 Qtrs 2007 Change 2008 2007 07Q3-08Q3 Total interest income $487019 $542106 -102 $159097 $188077 -154 Total interest expense 207949 278586 -254 63787 97215 -344
Net interest income 279070 263520 59 95310 90862 49 Provision for loan and lease losses 124517 37208 2347 50548 16785 2012 Total noninterest income 175521 187130 -62 58218 59123 -15 Total noninterest expense 274323 265254 34 93920 90162 42 Securities gains (losses) -8037 2325 NM -7592 77 NM Applicable income taxes 15679 48084 -674 717 13407 -947 Extraordinary gains net 534 -1917 NM 975 -995 NM
Net income 32569 100513 -676 1726 28714 -940 Net charge-offs 68559 27937 1454 27892 10879 1564 Cash dividends 42592 94397 -549 10979 27914 -607 Retained earnings -10023 6116 NM -9253 800 NM
Net operating income 37457 100869 -629 6135 29678 -793
Call Report flers only NM - Not Meaningful
FDIC QUARTERLY 5 2008 VOLUME 2 NO 4
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial bank 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 1726 451 3702 424 -1677 -3100 165 12 151 1599 Commercial banks 8284 377 3702 423 25 711 145 -19 164 2756 Savings institutions
Performance Ratios (annualized)
-6558 74 0 1 -1703 -3811 21 31 -13 -1157
Yield on earning assets 563 1212 484 636 591 584 680 463 607 441 Cost of funding earning assets 226 284 215 236 227 285 200 157 219 196
Net interest margin 337 928 269 400 364 299 480 307 388 245 Noninterest income to assets 176 673 202 067 144 055 174 1100 098 178 Noninterest expense to assets 283 691 248 266 303 208 305 1178 301 216 Loan and lease loss provision to assets 153 678 137 035 138 236 170 016 030 083 Net operating income to assets 019 023 036 112 014 -110 096 086 100 052 Pretax return on assets 007 063 044 121 -015 -118 143 088 079 050 Return on assets 005 039 049 101 -011 -117 093 013 064 028 Return on equity 053 184 659 921 -103 -1507 999 067 570 317 Net charge-offs to loans and leases Loan and lease loss provision to
142 624 144 041 121 103 200 043 034 111
net charge-offs 18123 14852 22242 12578 16375 32766 10068 15218 15569 16561 Effciency ratio 5798 4545 5816 6069 6116 6153 4869 7911 6596 5401 of unproftable institutions 2408 1923 000 863 3103 2494 1386 2088 1286 3250 of institutions with earnings gains
Structural Changes
4071 2308 5000 5539 3216 5327 4851 4242 5087 3000
New Charters 21 0 0 1 5 1 0 14 0 0 Institutions absorbed by mergers 73 0 2 6 57 3 1 0 1 3 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 0 0 7 2 0 0 0 0
Return on assets () 2007 092 407 069 130 099 031 117 220 107 081 2005 131 316 102 133 139 103 176 178 112 131 2003
Net charge-offs to loans
136 425 102 125 128 133 168 147 106 133
and leases () 2007 057 398 077 026 032 042 104 032 022 042 2005 051 428 119 016 023 010 139 018 020 026 2003 073 480 140 029 047 019 134 247 037 048
See Table IV-A (page 8) for explanations
FDIC QUARTERLY 6 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100
Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than
$10 Billion New York Atlanta Chicago Kansas
City Dallas San
Francisco 8384 3240 4470 560 114 1027 1197 1721 1943 1719 777
Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 1726 128 43 -1924 3479 226 2307 830 1322 361 -3320 Commercial banks 8284 150 301 -434 8267 2093 2437 1413 1340 801 200 Savings institutions
Performance Ratios (annualized)
-6558 -21 -258 -1490 -4788 -1867 -130 -583 -18 -440 -3520
Yield on earning assets 563 628 625 586 549 587 547 489 641 604 609 Cost of funding earning assets 226 230 250 230 221 224 241 214 198 219 236
Net interest margin 337 398 375 356 328 363 307 275 443 386 373 Noninterest income to assets 176 099 106 062 202 191 185 178 220 135 138 Noninterest expense to assets 283 368 329 278 277 293 256 274 383 329 268 Loan and lease loss provision to assets 153 046 074 112 170 145 139 139 142 101 219 Net operating income to assets 019 040 034 -016 021 033 040 007 057 032 -033 Pretax return on assets 007 037 008 -056 016 020 031 001 073 031 -068 Return on assets 005 030 001 -052 014 003 027 011 053 019 -056 Return on equity 053 224 013 -472 142 030 268 120 545 191 -634 Net charge-offs to loans and leases 142 042 069 104 163 149 128 132 160 084 179 Loan and lease loss provision to net charge-offs 18123 17209 14953 15534 18646 17641 17760 19567 13065 18081 19772 Effciency ratio 5798 7915 6999 6549 5529 5541 5582 6042 6185 6454 5674 of unproftable institutions 2408 2475 2309 2661 3158 3165 4027 2005 1482 1576 3964 of institutions with earnings gains
Structural Changes
4071 4519 3926 3000 2281 4021 2297 4567 4838 4602 2677
New Charters 21 16 3 1 1 3 6 1 1 5 5 Institutions absorbed by mergers 73 21 47 3 2 10 18 19 15 9 2 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 4 3 2 0 3 0 1 0 5
Return on assets () 2007 092 079 103 118 087 089 075 090 161 114 088 2005 131 108 127 134 132 124 135 108 173 118 160 2003 136 101 117 134 141 124 140 121 177 134 166
Net charge-offs to loans and leases () 2007 057 026 024 042 066 092 029 044 074 029 076 2005 051 016 018 023 064 097 027 029 054 025 059 2003 073 030 037 049 087 110 050 065 085 038 060
See Table IV-A (page 9) for explanations
FDIC QUARTERLY 7 2008 VOLUME 2 NO 4
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial banks 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 32569 8309 6912 1395 10596 -2295 530 413 625 6083 Commercial banks 38123 7908 6912 1392 11587 1938 317 272 624 7172 Savings institutions
Performance Ratios (annualized)
-5555 401 0 3 -991 -4233 213 141 0 -1089
Yield on earning assets 581 1199 527 648 606 534 694 471 616 480 Cost of funding earning assets 248 305 248 257 247 275 224 173 239 229
Net interest margin 333 894 280 391 359 259 471 297 377 251 Noninterest income to assets 180 869 172 067 152 062 197 1130 096 176 Noninterest expense to assets 281 675 258 262 296 174 309 1098 297 226 Loan and lease loss provision to assets 127 578 113 025 119 150 195 013 023 080 Net operating income to assets 038 210 029 115 032 -028 090 179 099 053 Pretax return on assets 049 376 032 134 038 -022 151 253 109 055 Return on assets 033 243 031 113 024 -029 100 156 089 036 Return on equity 335 1114 416 1015 218 -372 1090 772 787 400 Net charge-offs to loans and leases 118 564 128 028 097 074 181 043 029 088 Loan and lease loss provision to net charge-offs 18162 13896 20412 13553 17661 29078 12777 12377 14423 19658 Effciency ratio 5770 3947 6339 6125 6002 5689 4808 7627 6703 5663 of unproftable institutions 2100 769 2500 529 2785 2337 1188 1818 939 2500 of institutions with earnings gains
Condition Ratios ()
4073 3462 5000 5564 3245 4782 4950 4478 5275 4250
Earning assets to total assets Loss Allowance to
8468 7929 7991 9162 8690 9160 9318 8843 9155 8238
Loans and leases 195 584 236 128 170 165 197 133 122 148 Noncurrent loans and leases
Noncurrent assets plus 8469 24814 10400 9162 7075 5738 21115 14605 9694 8319
other real estate owned to assets 154 173 109 115 192 230 082 028 092 085 Equity capital ratio 963 2086 713 1107 1067 799 915 1955 1120 861 Core capital (leverage) ratio 781 1382 679 1018 803 779 897 1764 1097 684 Tier 1 risk-based capital ratio 979 1309 830 1349 942 1403 1044 3813 1783 971 Total risk-based capital ratio 1254 1560 1218 1455 1190 1501 1251 3903 1892 1263 Net loans and leases to deposits 8976 19328 6853 8431 9898 12074 10008 3152 6891 6944 Net loans to total assets 5771 6930 4178 6702 6882 6849 8222 2315 5596 4304 Domestic deposits to total assets
Structural Changes
5321 3301 3103 7949 6604 5666 8112 6992 8114 4914
New Charters 83 0 0 2 22 2 0 57 0 0 Institutions absorbed by mergers 214 0 2 24 159 12 2 1 8 6 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 0 0 1 10 2 0 0 0 0
Number of institutions 2007 8559 28 4 1634 4739 780 120 376 821 57 2005 8858 29 4 1733 4557 928 125 420 992 70 2003 9236 36 6 1821 4167 1024 166 522 1391 103
Total assets (in billions)2007 $127062 $4235 $26440 $1573 $50544 $14541 $958 $401 $1114 $27255 2005 107007 3599 18389 1430 36674 16771 1092 477 1286 27290 2003 89431 3088 14279 1295 30958 15885 1919 622 1921 19463
Return on assets ()2007 110 381 087 125 109 073 140 237 104 109 2005 131 319 088 132 136 112 170 173 112 136 2003 138 393 105 125 130 144 154 136 109 131
Net charge-offs to loans amp leases () 2007 050 390 065 019 028 029 097 030 017 035 2005 047 427 088 015 022 010 146 029 027 020 2003 078 512 141 024 052 019 142 144 031 056
Noncurrent assets plus OREO to assets () 2007 073 134 051 081 081 109 053 026 064 054 2005 050 136 048 068 048 057 054 025 057 037 2003 077 134 098 095 079 064 088 036 074 061
Equity capital ratio () 2007 1045 2317 778 1132 1086 944 1189 1954 1158 1055 2005 1025 2207 823 1086 1021 1067 958 1926 1083 966 2003 913 1703 727 1081 942 879 749 1592 1057 875
Asset Concentration Group Defnitions (Groups are hierarchical and mutually exclusive) Credit-card Lenders - Institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables International Banks - Banks with assets greater than $10 billion and more than 25 percent of total assets in foreign offces Agricultural Banks - Banks whose agricultural production loans plus real estate loans secured by farmland exceed 25 percent of their total loans and leases Commercial Lenders - Institutions whose commercial and industrial loans plus real estate construction and development loans plus loans secured by commercial real estate properties
exceed 25 percent of total assets Mortgage Lenders - Institutions whose residential mortgage loans plus mortgage-backed securities exceed 50 percent of total assets Consumer Lenders - Institutions whose residential mortgage loans plus credit-card loans plus other loans to individuals exceed 50 percent of total assets Other Specialized lt $1 Billion - Institutions with assets less than $1 billion whose loans and leases are less than 40 percent of total assets All Other lt $1 billion - Institutions with assets less than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset concentrations All Other gt $1 billion - Institutions with assets greater than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset
concentrations
FDIC QUARTERLY 8 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Quarterly Banking Profile Third Quarter 2008
INSURED INSTITUTION PERFORMANCE
n Asset-Quality Problems Continue to Depress Earnings n Net Income of $17 Billion Is Second-Lowest Since 1990 n Loan-Loss Rate Rises to 17-Year High n Net Interest Margins Register Improvement n Nine Failures Are Highest Quarterly Total in 15 Years
More Institutions Report Declining Earnings Quarterly Losses Troubled assets continued to mount at insured commer-cial banks and savings institutions in the third quarter of 2008 placing a growing burden on industry earnings Expenses for credit losses topped $50 billion for a second consecutive quarter absorbing one-third of the industryrsquos net operating revenue (net interest income plus total noninterest income) Third quarter net income totaled $17 billion a decline of $270 billion (940 percent) from the third quarter of 2007 The industryrsquos quarterly return on assets (ROA) fell to 005 percent compared to 092 percent a year earlier This is the second-lowest quarterly ROA reported by the industry in the past 18 years Evidence of a deteriorating operating environment was widespread A majority of institutions (584 percent) reported year-over-year declines in quarterly net income and an even larger proportion (640 percent) had lower quarterly ROAs The erosion in profitability has thus far been greater for larger institutions The median ROA at institutions with assets greater than $1 billion has fallen from 103 percent to 056 percent since the third quarter
of 2007 while at community banks (institutions with assets less than $1 billion) the median ROA has declined from 097 percent to 072 percent Almost one in every four institutions (241 percent) reported a net loss for the quarter the highest percentage in any quarter since the fourth quarter of 1990 and the highest percentage in a third quarter in the 24 years that all insured institutions have reported quarterly earnings
Lower Asset Values Add to the Downward Pressure on Earnings Loan-loss provisions totaled $505 billion in the quarter more than three times the $168 billion of a year earlier Total noninterest income was $905 million (15 percent) lower than in the third quarter of 2007 Securitization income declined by $19 billion (330 percent) as reduced demand in secondary markets limited new secu-ritization activity Gains on sales of assets other than loans declined by $10 billion (787 percent) year-over-year and losses on sales of real estate acquired through foreclosure rose by $518 million (588 percent) Among the few categories of noninterest income that showed
Chart 1 Chart 2
Earnings Weakness Persisted in the Third Quarter $ Billions
Securities and Other GainsLosses Net450 Net Operating Income 400
369 380 381 368 353 356
350 340 332 347 325 326 318 312 310 287300
250
200 193
150
100 48 17
50 06
00
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2004 2005 2006 2007 2008
Almost One in Four Institutions Was Unprofitable in the Third Quarter
Insured Institutions with Third-Quarter Net Losses (Percent) 30
2425 20
20
15
10
5
0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
FDIC QUARTERLY 1 2008 VOLUME 2 NO 4
improvement loan sales produced net gains of $166 million in the third quarter compared to $12 billion in net losses a year earlier and trading revenue was up by $28 billion (1292 percent) Sales of securities and other assets yielded net losses of $76 billion in the third quar-ter compared to gains of $77 million in the third quarter of 2007 Expenses for impairment of goodwill and other intangible asset expenses were $18 billion (586 percent) higher than a year ago
Margin Improvement Provides a Boost to Net Interest Income One of the few relatively bright spots in third quarter results was net interest income which was $44 billion (49 percent) higher than a year ago The average net interest margin (NIM) in the third quarter was 337 percent unchanged from the second quarter but up from 335 percent in the third quarter of 2007 Two out of every three institutions reported margin improvement over second-quarter levels but more than half of all insured institutions (54 percent) reported lower NIMs than in the third quarter of 2007 The year-over-year improvement in the industryrsquos NIM was concentrated among larger institutions Higher margins helped offset sluggish growth in interest-earning assets Earning assets increased by only $523 billion (05 percent) during the quarter after shrinking by $336 billion (03 percent) in the second quarter Over the 12 months ended Septem-ber 30 the industryrsquos interest-earning assets were up by only 42 percent the lowest 12-month growth rate in more than six years
Loan Losses Continue to Mount The industry reported year-over-year growth in net charge-offs for the seventh consecutive quarter Net charge-offs totaled $279 billion in the quarter an increase of $170 billion (1564 percent) from a year earlier Two-thirds of the increase in charge-offs consisted of loans secured by real estate Charge-offs of closed-end first and second lien mortgage loans were $46 billion (423 percent) higher than in the third quar-ter of 2007 while charged-off real estate construction and development (CampD) loans were up by $39 billion (744 percent) Charge-offs of home equity lines of credit were $21 billion (306 percent) higher Charge-offs of loans to commercial and industrial (CampI) borrowers increased by $23 billion (139 percent) credit card loan charge-offs rose by $15 billion (374 percent) and charge-offs of other loans to individuals were $17 billion (764 percent) higher The quarterly net charge-off rate in the third quarter was 142 percent up from 132 percent in the second quarter and 057 percent in the third quarter of 2007 This is the highest quarterly net charge-off rate for the industry since 1991 The failure of Washington Mutual on September 25 meant that a significant amount of charge-off activity was not reflected in the reported industry totals for the quarter1
Growth in Reported Noncurrent Loans Remains High The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased
1 Under purchase accounting rules that apply to bank mergers income and expenses that have been booked by an acquired institution are reset to zero as of the date when a change in ownership occurs Income and expenses that have been incurred prior to that date are reflected in adjust-ments to the assets equity capital and reserves of the acquired institution
Chart 3 Chart 4
Rising Loss Provisions Remain the Most Significant Factor Affecting Industry Earnings
3rd Quarter 2008 vs 3rd Quarter 2007
Community Bank Margins Improved in the Third Quarter
Quarterly Net Interest Margin (Percent)
($ Billions) 40
35
30
25
20
15
10
5
0
-5
-10
338
Negative Factors
38 -09 -77
Increase in Decrease in Decrease in Increase in Loan Loss Noninterest Proceeds Noninterest Provision Income from Expense
Securities Sales
45 Assets lt $1 Billion
4 378
35
332
3 Assets gt $1 Billion
25 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2004 2005 2006 2007 2008
Positive Factor
44
Increase in Net Interest
Income
FDIC QUARTERLY 2 2008 VOLUME 2 NO 4
Quarterly Banking Profile
to $1843 billion at the end of September This is $214 billion (131 percent) more than insured institutions reported as of June 30 and is up by $1012 billion (122 percent) over the past 12 months The percentage of total loans and leases that were noncurrent rose from 204 percent to 231 percent during the quarter and is now at the highest level since the third quarter of 1993 The growth in noncurrent loans during the quarter was led by closed-end first and second lien mortgage loans where noncurrents rose by $96 billion (143 percent) Noncurrent real estate CampD loans increased by $69 billion (181 percent) while noncurrent loans secured by nonfarm nonresidential properties rose by $22 billion (181 percent) Noncurrent CampI loans were up by $18 billion (137 percent) during the quarter
Reserve Coverage of Noncurrent Loans Declines Loan-loss reserves increased by $117 billion (81 percent) during the quarter the smallest quarterly growth in reserves since the third quarter of 2007 The industryrsquos ratio of reserves to total loans and leases increased from 181 percent to 195 percent its highest level since the first quarter of 1995 However reserve growth did not keep pace with the growth in noncurrent loans and the ldquocoverage ratiordquo of reserves to noncurrent loans fell from 89 cents in reserves for every $100 of noncurrent loans to 85 cents This is the tenth consecutive quarter that the industryrsquos coverage ratio has fallen it is now at its lowest level since the first quarter of 1993
Failure-Related Restructuring Contributes to a Decline in Reported Capital Total equity capital fell by $442 billion (33 percent) during the third quarter A $146-billion decline in other
Chart 5
comprehensive income driven primarily by unrealized losses on securities held for sale was a significant factor in the reduction in equity but most of the decline stemmed from the accounting effect of the failure of Washington Mutual Bank (WaMu)2 The WaMu failure had a similar effect on the reported industry totals for tier 1 capital and total risk-based capital which declined by $336 billion and $353 billion respectively Unlike equity capital these regulatory capital amounts are not affected by changes in unrealized gains or losses on available-for-sale securities Almost half of all institutions (485 percent) reported declines in their leverage capital ratios during the quarter and slightly more than half (512 percent) reported declines in their total risk-based capital ratios Many institutions reduced their dividends to preserve capital of the 3761 institutions that paid divi-dends in the third quarter of 2007 more than half (574 percent) paid lower dividends in the third quarter of 2008 including 207 percent that paid no dividends Third quarter dividends totaled $110 billion a $169-billion (607-percent) decline from a year ago
Liquidity Program Provides a Boost to Asset Growth Total assets of insured institutions increased by $2732 billion (21 percent) in the third quarter led by growth in balances at Federal Reserve banks (up $1468 billion or
2 Prior to September 25 2008 Washington Mutual FSB of Park City Utah an insured institution with $46 billion in assets and $29 billion in equity capital was directly owned by Washington Mutual Bank of Henderson Nevada Under accounting rules the subsidiary institutionrsquos assets and liabilities were included in the consolidated financial data reported by the parent institution resulting in double-reporting of some of the subsid-iaryrsquos financial data The direct ownership relationship ended with the failure of the parent institution during the third quarter at which point the subsidiary institutionrsquos financial data were no longer double-reported
Chart 6
Growth in Troubled Loans Remains High $ Billions
55 Quarterly Net Charge-offs Quarterly Change in Noncurrent Loans
45
263 35 163 196 279
25 109
15 270 262 267 89 214
85 5 71 82 153
55 61 64 35 48 38 05-5 -13
1 2 3 4 1 2 3 4 1 2 3 2006 2007 2008
Consumer Loans Account for Two-Thirds of Quarterly Charge-offs
Quarterly Net Charge-offs ($ Billions) 30
Loans to Commercial Borrowers Consumer Loans 25
20
15
10
5
0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008 Consumer loans include residential mortgage loans home equity loans credit card loans and other
loans to individuals
FDIC QUARTERLY 3 2008 VOLUME 2 NO 4
505 percent) and a $746-billion increase in asset-backed commercial paper holdings A number of large banks experienced sizable deposit inflows during the quarter and elected to place a large share of these funds with Federal Reserve banks The increase in holdings of commercial paper was attributable to the creation of a special lending facilitymdashthe Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)mdashby the Federal Reserve aimed at providing liquidity to money market mutual funds (MMFs) by funding bank purchases of asset-backed commercial paper from the MMFs3
Loans in categories experiencing the greatest credit-qual-ity problems shrank in the third quarter Residential mort-gage loans declined by $521 billion (24 percent) while real estate CampD loans fell by $102 billion (16 percent) One of the few loan categories showing significant growth was real estate loans secured by nonfarm nonresidential properties which increased by $244 billion (24 percent) Unused loan commitments declined by $2981 billion (37 percent) during the quarter The decline was led by a reduction in unused credit card lines which fell by $1228 billion (26 percent)
Discount Window Borrowings Fuel a Surge in Nondeposit Liabilities Nondeposit liabilities increased by $1625 billion (48 percent) in the third quarter as insured institutions increased their borrowings from the Federal Reserversquos Discount Window (which was used to fund the AMLF) as well as their advances from Federal Home Loan Banks
3 On September 19 the Federal Reserve instituted the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) to restore liquidity to the market for commercial paper and help money market mutual funds meet redemptions
Chart 7
Securities sold under repurchase agreements registered strong growth rising by $642 billion (112 percent) Total deposits increased by $1548 billion (18 percent) as noninterest-bearing deposits in domestic offices rose by $1757 billion (144 percent) The growth in deposits was concentrated in a few large banks Deposits in foreign offices declined by $38 billion (25 percent)
Nine Failures in Third Quarter Include Washington Mutual Bank The number of insured commercial banks and savings institutions fell to 8384 in the third quarter down from 8451 at midyear During the quarter 73 institutions were absorbed in mergers and 9 institutions failed This is the largest number of failures in a quarter since the third quarter of 1993 when 16 insured institutions failed Among the failures was Washington Mutual Bank an insured savings institution with $307 billion in assets and the largest insured institution to fail in the FDICrsquos 75-year history There were 21 new institutions chartered in the third quarter the smallest number of new charters in a quarter since 17 new charters were added in the first quarter of 2002 Four insured savings institutions with combined assets of $10 billion converted from mutual ownership to stock ownership in the third quarter The number of insured institutions on the FDICrsquos ldquoProblem Listrdquo increased from 117 to 171 and the assets of ldquoproblemrdquo institutions rose from $783 billion to $1156 billion during the quarter This is the first time since the middle of 1994 that assets of ldquoprob-lemrdquo institutions have exceeded $100 billion
Author Ross Waldrop Sr Banking Analyst Division of Insurance and Research (202) 898-3951
Chart 8
Earning Asset Growth Has Slowed Substantially
Quarterly Change in Interest-Bearing Assets ($ Billions) 400
350
300
250
200
150
100
50
0
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008
2008 Is a Record Year for Failed Bank Assets Total Assets of Failed FDIC-Insured Commercial Banks and Savings Institutions by Year 1988 ndash 2008 ($ Billions) 400
348 350
300
250
200 164
152 147 144150
100 90
50 10 2 1 0 0 0 2 0 2 3 1 0 0 0 3
0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Through first nine months of 2008
FDIC QUARTERLY 4 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE I-A Selected Indicators All FDIC-Insured Institutions 2008 2007 2007 2006 2005 2004 2003
Return on assets () 033 110 081 128 128 128 138 Return on equity () 385 1049 775 1230 1243 1320 1505 Core capital (leverage) ratio () 781 814 797 822 825 811 788 Noncurrent assets plus other real estate owned to assets () 154 073 094 054 050 053 075 Net charge-offs to loans () 118 050 059 039 049 056 078 Asset growth rate () 683 810 989 904 763 1137 758 Net interest margin () 333 331 329 331 347 352 373 Net operating income growth () -6287 -921 -2757 853 1143 399 1638 Number of institutions reporting 8384 8559 8534 8680 8833 8976 9181
Commercial banks 7146 7303 7283 7401 7526 7631 7770 Savings institutions 1238 1256 1251 1279 1307 1345 1411
Percentage of unproftable institutions () 2100 1033 1207 793 622 597 599 Number of problem institutions 171 65 76 50 52 80 116 Assets of problem institutions (in billions) $116 $19 $22 $8 $7 $28 $30 Number of failedassisted institutions 13 2 3 0 0 4 3
Excludes insured branches of foreign banks (IBAs) Through September 30 ratios annualized where appropriate Asset growth rates are for 12 months ending September 30
TABLE II-A Aggregate Condition and Income Data All FDIC-Insured Institutions (dollar fgures in millions)
Number of institutions reporting Total employees (full-time equivalent) CONDITION DATA Total assets
Loans secured by real estate 1-4 Family residential mortgages Nonfarm nonresidential Construction and development Home equity lines
Commercial amp industrial loans Loans to individuals
Credit cards Farm loans Other loans amp leases Less Unearned income Total loans amp leases Less Reserve for losses Net loans and leases Securities Other real estate owned Goodwill and other intangibles All other assets
Total liabilities and capital Deposits
Domestic offce deposits Foreign offce deposits
Other borrowed funds Subordinated debt All other liabilities Equity capital
Loans and leases 30-89 days past due Noncurrent loans and leases Restructured loans and leases Direct and indirect investments in real estate Mortgage-backed securities Earning assets FHLB Advances Unused loan commitments Trust assets Assets securitized and sold Notional amount of derivatives
3rd Quarter 2nd Quarter 3rd Quarter Change 2008 2008 2007 07Q3-08Q3
8384 2170671
$13573691 4750985 2102080 1043393
617055 652119
1503737 1082731
411627 59656
595646 2739
7990015 156065
7833950 2025534
22966 484178
3207062
13573691 8727485 7221963 1505522 2732570
176833 629706
1307097
121587 184269
14846 910
1260945 11493605
911465 7860609
19948345 1906828
177103186
8451 2203883
$13300540 4794248 2154173 1018988
627283 646903
1492357 1069479
396045 58284
584210 2513
7996065 144383
7851682 2017391
18902 481438
2931127
13300540 8572643 7029111
1543532 2598234
185078 593306
1351279
110814 162895
14499 972
1322210 11441334
840543 8158701
21750102 1750710
183303064
8559 -20 2220522 -22
$12706161 68 4701346 11 2238180 -61
939556 111 616538 01 591372 103
1388441 83 1013355 68
384506 71 56166 62
546851 89 2237 224
7703922 37 87037 793
7616885 28 1989103 18
9818 1339 461068 50
2629288 220
12706161 68 8180226 67 6739817 72 1440409 45 2454148 113
177469 -04 567141 110
1327177 -15
92558 314 83024 1219
4123 2601 1081 -159
1217755 35 11032330 42
770419 183 8301846 -53
21501132 -72 1663308 146
174574544 14
First Three First Three 3rd Quarter 3rd Quarter Change INCOME DATA Qtrs 2008 Qtrs 2007 Change 2008 2007 07Q3-08Q3 Total interest income $487019 $542106 -102 $159097 $188077 -154 Total interest expense 207949 278586 -254 63787 97215 -344
Net interest income 279070 263520 59 95310 90862 49 Provision for loan and lease losses 124517 37208 2347 50548 16785 2012 Total noninterest income 175521 187130 -62 58218 59123 -15 Total noninterest expense 274323 265254 34 93920 90162 42 Securities gains (losses) -8037 2325 NM -7592 77 NM Applicable income taxes 15679 48084 -674 717 13407 -947 Extraordinary gains net 534 -1917 NM 975 -995 NM
Net income 32569 100513 -676 1726 28714 -940 Net charge-offs 68559 27937 1454 27892 10879 1564 Cash dividends 42592 94397 -549 10979 27914 -607 Retained earnings -10023 6116 NM -9253 800 NM
Net operating income 37457 100869 -629 6135 29678 -793
Call Report flers only NM - Not Meaningful
FDIC QUARTERLY 5 2008 VOLUME 2 NO 4
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial bank 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 1726 451 3702 424 -1677 -3100 165 12 151 1599 Commercial banks 8284 377 3702 423 25 711 145 -19 164 2756 Savings institutions
Performance Ratios (annualized)
-6558 74 0 1 -1703 -3811 21 31 -13 -1157
Yield on earning assets 563 1212 484 636 591 584 680 463 607 441 Cost of funding earning assets 226 284 215 236 227 285 200 157 219 196
Net interest margin 337 928 269 400 364 299 480 307 388 245 Noninterest income to assets 176 673 202 067 144 055 174 1100 098 178 Noninterest expense to assets 283 691 248 266 303 208 305 1178 301 216 Loan and lease loss provision to assets 153 678 137 035 138 236 170 016 030 083 Net operating income to assets 019 023 036 112 014 -110 096 086 100 052 Pretax return on assets 007 063 044 121 -015 -118 143 088 079 050 Return on assets 005 039 049 101 -011 -117 093 013 064 028 Return on equity 053 184 659 921 -103 -1507 999 067 570 317 Net charge-offs to loans and leases Loan and lease loss provision to
142 624 144 041 121 103 200 043 034 111
net charge-offs 18123 14852 22242 12578 16375 32766 10068 15218 15569 16561 Effciency ratio 5798 4545 5816 6069 6116 6153 4869 7911 6596 5401 of unproftable institutions 2408 1923 000 863 3103 2494 1386 2088 1286 3250 of institutions with earnings gains
Structural Changes
4071 2308 5000 5539 3216 5327 4851 4242 5087 3000
New Charters 21 0 0 1 5 1 0 14 0 0 Institutions absorbed by mergers 73 0 2 6 57 3 1 0 1 3 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 0 0 7 2 0 0 0 0
Return on assets () 2007 092 407 069 130 099 031 117 220 107 081 2005 131 316 102 133 139 103 176 178 112 131 2003
Net charge-offs to loans
136 425 102 125 128 133 168 147 106 133
and leases () 2007 057 398 077 026 032 042 104 032 022 042 2005 051 428 119 016 023 010 139 018 020 026 2003 073 480 140 029 047 019 134 247 037 048
See Table IV-A (page 8) for explanations
FDIC QUARTERLY 6 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100
Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than
$10 Billion New York Atlanta Chicago Kansas
City Dallas San
Francisco 8384 3240 4470 560 114 1027 1197 1721 1943 1719 777
Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 1726 128 43 -1924 3479 226 2307 830 1322 361 -3320 Commercial banks 8284 150 301 -434 8267 2093 2437 1413 1340 801 200 Savings institutions
Performance Ratios (annualized)
-6558 -21 -258 -1490 -4788 -1867 -130 -583 -18 -440 -3520
Yield on earning assets 563 628 625 586 549 587 547 489 641 604 609 Cost of funding earning assets 226 230 250 230 221 224 241 214 198 219 236
Net interest margin 337 398 375 356 328 363 307 275 443 386 373 Noninterest income to assets 176 099 106 062 202 191 185 178 220 135 138 Noninterest expense to assets 283 368 329 278 277 293 256 274 383 329 268 Loan and lease loss provision to assets 153 046 074 112 170 145 139 139 142 101 219 Net operating income to assets 019 040 034 -016 021 033 040 007 057 032 -033 Pretax return on assets 007 037 008 -056 016 020 031 001 073 031 -068 Return on assets 005 030 001 -052 014 003 027 011 053 019 -056 Return on equity 053 224 013 -472 142 030 268 120 545 191 -634 Net charge-offs to loans and leases 142 042 069 104 163 149 128 132 160 084 179 Loan and lease loss provision to net charge-offs 18123 17209 14953 15534 18646 17641 17760 19567 13065 18081 19772 Effciency ratio 5798 7915 6999 6549 5529 5541 5582 6042 6185 6454 5674 of unproftable institutions 2408 2475 2309 2661 3158 3165 4027 2005 1482 1576 3964 of institutions with earnings gains
Structural Changes
4071 4519 3926 3000 2281 4021 2297 4567 4838 4602 2677
New Charters 21 16 3 1 1 3 6 1 1 5 5 Institutions absorbed by mergers 73 21 47 3 2 10 18 19 15 9 2 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 4 3 2 0 3 0 1 0 5
Return on assets () 2007 092 079 103 118 087 089 075 090 161 114 088 2005 131 108 127 134 132 124 135 108 173 118 160 2003 136 101 117 134 141 124 140 121 177 134 166
Net charge-offs to loans and leases () 2007 057 026 024 042 066 092 029 044 074 029 076 2005 051 016 018 023 064 097 027 029 054 025 059 2003 073 030 037 049 087 110 050 065 085 038 060
See Table IV-A (page 9) for explanations
FDIC QUARTERLY 7 2008 VOLUME 2 NO 4
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial banks 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 32569 8309 6912 1395 10596 -2295 530 413 625 6083 Commercial banks 38123 7908 6912 1392 11587 1938 317 272 624 7172 Savings institutions
Performance Ratios (annualized)
-5555 401 0 3 -991 -4233 213 141 0 -1089
Yield on earning assets 581 1199 527 648 606 534 694 471 616 480 Cost of funding earning assets 248 305 248 257 247 275 224 173 239 229
Net interest margin 333 894 280 391 359 259 471 297 377 251 Noninterest income to assets 180 869 172 067 152 062 197 1130 096 176 Noninterest expense to assets 281 675 258 262 296 174 309 1098 297 226 Loan and lease loss provision to assets 127 578 113 025 119 150 195 013 023 080 Net operating income to assets 038 210 029 115 032 -028 090 179 099 053 Pretax return on assets 049 376 032 134 038 -022 151 253 109 055 Return on assets 033 243 031 113 024 -029 100 156 089 036 Return on equity 335 1114 416 1015 218 -372 1090 772 787 400 Net charge-offs to loans and leases 118 564 128 028 097 074 181 043 029 088 Loan and lease loss provision to net charge-offs 18162 13896 20412 13553 17661 29078 12777 12377 14423 19658 Effciency ratio 5770 3947 6339 6125 6002 5689 4808 7627 6703 5663 of unproftable institutions 2100 769 2500 529 2785 2337 1188 1818 939 2500 of institutions with earnings gains
Condition Ratios ()
4073 3462 5000 5564 3245 4782 4950 4478 5275 4250
Earning assets to total assets Loss Allowance to
8468 7929 7991 9162 8690 9160 9318 8843 9155 8238
Loans and leases 195 584 236 128 170 165 197 133 122 148 Noncurrent loans and leases
Noncurrent assets plus 8469 24814 10400 9162 7075 5738 21115 14605 9694 8319
other real estate owned to assets 154 173 109 115 192 230 082 028 092 085 Equity capital ratio 963 2086 713 1107 1067 799 915 1955 1120 861 Core capital (leverage) ratio 781 1382 679 1018 803 779 897 1764 1097 684 Tier 1 risk-based capital ratio 979 1309 830 1349 942 1403 1044 3813 1783 971 Total risk-based capital ratio 1254 1560 1218 1455 1190 1501 1251 3903 1892 1263 Net loans and leases to deposits 8976 19328 6853 8431 9898 12074 10008 3152 6891 6944 Net loans to total assets 5771 6930 4178 6702 6882 6849 8222 2315 5596 4304 Domestic deposits to total assets
Structural Changes
5321 3301 3103 7949 6604 5666 8112 6992 8114 4914
New Charters 83 0 0 2 22 2 0 57 0 0 Institutions absorbed by mergers 214 0 2 24 159 12 2 1 8 6 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 0 0 1 10 2 0 0 0 0
Number of institutions 2007 8559 28 4 1634 4739 780 120 376 821 57 2005 8858 29 4 1733 4557 928 125 420 992 70 2003 9236 36 6 1821 4167 1024 166 522 1391 103
Total assets (in billions)2007 $127062 $4235 $26440 $1573 $50544 $14541 $958 $401 $1114 $27255 2005 107007 3599 18389 1430 36674 16771 1092 477 1286 27290 2003 89431 3088 14279 1295 30958 15885 1919 622 1921 19463
Return on assets ()2007 110 381 087 125 109 073 140 237 104 109 2005 131 319 088 132 136 112 170 173 112 136 2003 138 393 105 125 130 144 154 136 109 131
Net charge-offs to loans amp leases () 2007 050 390 065 019 028 029 097 030 017 035 2005 047 427 088 015 022 010 146 029 027 020 2003 078 512 141 024 052 019 142 144 031 056
Noncurrent assets plus OREO to assets () 2007 073 134 051 081 081 109 053 026 064 054 2005 050 136 048 068 048 057 054 025 057 037 2003 077 134 098 095 079 064 088 036 074 061
Equity capital ratio () 2007 1045 2317 778 1132 1086 944 1189 1954 1158 1055 2005 1025 2207 823 1086 1021 1067 958 1926 1083 966 2003 913 1703 727 1081 942 879 749 1592 1057 875
Asset Concentration Group Defnitions (Groups are hierarchical and mutually exclusive) Credit-card Lenders - Institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables International Banks - Banks with assets greater than $10 billion and more than 25 percent of total assets in foreign offces Agricultural Banks - Banks whose agricultural production loans plus real estate loans secured by farmland exceed 25 percent of their total loans and leases Commercial Lenders - Institutions whose commercial and industrial loans plus real estate construction and development loans plus loans secured by commercial real estate properties
exceed 25 percent of total assets Mortgage Lenders - Institutions whose residential mortgage loans plus mortgage-backed securities exceed 50 percent of total assets Consumer Lenders - Institutions whose residential mortgage loans plus credit-card loans plus other loans to individuals exceed 50 percent of total assets Other Specialized lt $1 Billion - Institutions with assets less than $1 billion whose loans and leases are less than 40 percent of total assets All Other lt $1 billion - Institutions with assets less than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset concentrations All Other gt $1 billion - Institutions with assets greater than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset
concentrations
FDIC QUARTERLY 8 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
improvement loan sales produced net gains of $166 million in the third quarter compared to $12 billion in net losses a year earlier and trading revenue was up by $28 billion (1292 percent) Sales of securities and other assets yielded net losses of $76 billion in the third quar-ter compared to gains of $77 million in the third quarter of 2007 Expenses for impairment of goodwill and other intangible asset expenses were $18 billion (586 percent) higher than a year ago
Margin Improvement Provides a Boost to Net Interest Income One of the few relatively bright spots in third quarter results was net interest income which was $44 billion (49 percent) higher than a year ago The average net interest margin (NIM) in the third quarter was 337 percent unchanged from the second quarter but up from 335 percent in the third quarter of 2007 Two out of every three institutions reported margin improvement over second-quarter levels but more than half of all insured institutions (54 percent) reported lower NIMs than in the third quarter of 2007 The year-over-year improvement in the industryrsquos NIM was concentrated among larger institutions Higher margins helped offset sluggish growth in interest-earning assets Earning assets increased by only $523 billion (05 percent) during the quarter after shrinking by $336 billion (03 percent) in the second quarter Over the 12 months ended Septem-ber 30 the industryrsquos interest-earning assets were up by only 42 percent the lowest 12-month growth rate in more than six years
Loan Losses Continue to Mount The industry reported year-over-year growth in net charge-offs for the seventh consecutive quarter Net charge-offs totaled $279 billion in the quarter an increase of $170 billion (1564 percent) from a year earlier Two-thirds of the increase in charge-offs consisted of loans secured by real estate Charge-offs of closed-end first and second lien mortgage loans were $46 billion (423 percent) higher than in the third quar-ter of 2007 while charged-off real estate construction and development (CampD) loans were up by $39 billion (744 percent) Charge-offs of home equity lines of credit were $21 billion (306 percent) higher Charge-offs of loans to commercial and industrial (CampI) borrowers increased by $23 billion (139 percent) credit card loan charge-offs rose by $15 billion (374 percent) and charge-offs of other loans to individuals were $17 billion (764 percent) higher The quarterly net charge-off rate in the third quarter was 142 percent up from 132 percent in the second quarter and 057 percent in the third quarter of 2007 This is the highest quarterly net charge-off rate for the industry since 1991 The failure of Washington Mutual on September 25 meant that a significant amount of charge-off activity was not reflected in the reported industry totals for the quarter1
Growth in Reported Noncurrent Loans Remains High The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) increased
1 Under purchase accounting rules that apply to bank mergers income and expenses that have been booked by an acquired institution are reset to zero as of the date when a change in ownership occurs Income and expenses that have been incurred prior to that date are reflected in adjust-ments to the assets equity capital and reserves of the acquired institution
Chart 3 Chart 4
Rising Loss Provisions Remain the Most Significant Factor Affecting Industry Earnings
3rd Quarter 2008 vs 3rd Quarter 2007
Community Bank Margins Improved in the Third Quarter
Quarterly Net Interest Margin (Percent)
($ Billions) 40
35
30
25
20
15
10
5
0
-5
-10
338
Negative Factors
38 -09 -77
Increase in Decrease in Decrease in Increase in Loan Loss Noninterest Proceeds Noninterest Provision Income from Expense
Securities Sales
45 Assets lt $1 Billion
4 378
35
332
3 Assets gt $1 Billion
25 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2004 2005 2006 2007 2008
Positive Factor
44
Increase in Net Interest
Income
FDIC QUARTERLY 2 2008 VOLUME 2 NO 4
Quarterly Banking Profile
to $1843 billion at the end of September This is $214 billion (131 percent) more than insured institutions reported as of June 30 and is up by $1012 billion (122 percent) over the past 12 months The percentage of total loans and leases that were noncurrent rose from 204 percent to 231 percent during the quarter and is now at the highest level since the third quarter of 1993 The growth in noncurrent loans during the quarter was led by closed-end first and second lien mortgage loans where noncurrents rose by $96 billion (143 percent) Noncurrent real estate CampD loans increased by $69 billion (181 percent) while noncurrent loans secured by nonfarm nonresidential properties rose by $22 billion (181 percent) Noncurrent CampI loans were up by $18 billion (137 percent) during the quarter
Reserve Coverage of Noncurrent Loans Declines Loan-loss reserves increased by $117 billion (81 percent) during the quarter the smallest quarterly growth in reserves since the third quarter of 2007 The industryrsquos ratio of reserves to total loans and leases increased from 181 percent to 195 percent its highest level since the first quarter of 1995 However reserve growth did not keep pace with the growth in noncurrent loans and the ldquocoverage ratiordquo of reserves to noncurrent loans fell from 89 cents in reserves for every $100 of noncurrent loans to 85 cents This is the tenth consecutive quarter that the industryrsquos coverage ratio has fallen it is now at its lowest level since the first quarter of 1993
Failure-Related Restructuring Contributes to a Decline in Reported Capital Total equity capital fell by $442 billion (33 percent) during the third quarter A $146-billion decline in other
Chart 5
comprehensive income driven primarily by unrealized losses on securities held for sale was a significant factor in the reduction in equity but most of the decline stemmed from the accounting effect of the failure of Washington Mutual Bank (WaMu)2 The WaMu failure had a similar effect on the reported industry totals for tier 1 capital and total risk-based capital which declined by $336 billion and $353 billion respectively Unlike equity capital these regulatory capital amounts are not affected by changes in unrealized gains or losses on available-for-sale securities Almost half of all institutions (485 percent) reported declines in their leverage capital ratios during the quarter and slightly more than half (512 percent) reported declines in their total risk-based capital ratios Many institutions reduced their dividends to preserve capital of the 3761 institutions that paid divi-dends in the third quarter of 2007 more than half (574 percent) paid lower dividends in the third quarter of 2008 including 207 percent that paid no dividends Third quarter dividends totaled $110 billion a $169-billion (607-percent) decline from a year ago
Liquidity Program Provides a Boost to Asset Growth Total assets of insured institutions increased by $2732 billion (21 percent) in the third quarter led by growth in balances at Federal Reserve banks (up $1468 billion or
2 Prior to September 25 2008 Washington Mutual FSB of Park City Utah an insured institution with $46 billion in assets and $29 billion in equity capital was directly owned by Washington Mutual Bank of Henderson Nevada Under accounting rules the subsidiary institutionrsquos assets and liabilities were included in the consolidated financial data reported by the parent institution resulting in double-reporting of some of the subsid-iaryrsquos financial data The direct ownership relationship ended with the failure of the parent institution during the third quarter at which point the subsidiary institutionrsquos financial data were no longer double-reported
Chart 6
Growth in Troubled Loans Remains High $ Billions
55 Quarterly Net Charge-offs Quarterly Change in Noncurrent Loans
45
263 35 163 196 279
25 109
15 270 262 267 89 214
85 5 71 82 153
55 61 64 35 48 38 05-5 -13
1 2 3 4 1 2 3 4 1 2 3 2006 2007 2008
Consumer Loans Account for Two-Thirds of Quarterly Charge-offs
Quarterly Net Charge-offs ($ Billions) 30
Loans to Commercial Borrowers Consumer Loans 25
20
15
10
5
0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008 Consumer loans include residential mortgage loans home equity loans credit card loans and other
loans to individuals
FDIC QUARTERLY 3 2008 VOLUME 2 NO 4
505 percent) and a $746-billion increase in asset-backed commercial paper holdings A number of large banks experienced sizable deposit inflows during the quarter and elected to place a large share of these funds with Federal Reserve banks The increase in holdings of commercial paper was attributable to the creation of a special lending facilitymdashthe Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)mdashby the Federal Reserve aimed at providing liquidity to money market mutual funds (MMFs) by funding bank purchases of asset-backed commercial paper from the MMFs3
Loans in categories experiencing the greatest credit-qual-ity problems shrank in the third quarter Residential mort-gage loans declined by $521 billion (24 percent) while real estate CampD loans fell by $102 billion (16 percent) One of the few loan categories showing significant growth was real estate loans secured by nonfarm nonresidential properties which increased by $244 billion (24 percent) Unused loan commitments declined by $2981 billion (37 percent) during the quarter The decline was led by a reduction in unused credit card lines which fell by $1228 billion (26 percent)
Discount Window Borrowings Fuel a Surge in Nondeposit Liabilities Nondeposit liabilities increased by $1625 billion (48 percent) in the third quarter as insured institutions increased their borrowings from the Federal Reserversquos Discount Window (which was used to fund the AMLF) as well as their advances from Federal Home Loan Banks
3 On September 19 the Federal Reserve instituted the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) to restore liquidity to the market for commercial paper and help money market mutual funds meet redemptions
Chart 7
Securities sold under repurchase agreements registered strong growth rising by $642 billion (112 percent) Total deposits increased by $1548 billion (18 percent) as noninterest-bearing deposits in domestic offices rose by $1757 billion (144 percent) The growth in deposits was concentrated in a few large banks Deposits in foreign offices declined by $38 billion (25 percent)
Nine Failures in Third Quarter Include Washington Mutual Bank The number of insured commercial banks and savings institutions fell to 8384 in the third quarter down from 8451 at midyear During the quarter 73 institutions were absorbed in mergers and 9 institutions failed This is the largest number of failures in a quarter since the third quarter of 1993 when 16 insured institutions failed Among the failures was Washington Mutual Bank an insured savings institution with $307 billion in assets and the largest insured institution to fail in the FDICrsquos 75-year history There were 21 new institutions chartered in the third quarter the smallest number of new charters in a quarter since 17 new charters were added in the first quarter of 2002 Four insured savings institutions with combined assets of $10 billion converted from mutual ownership to stock ownership in the third quarter The number of insured institutions on the FDICrsquos ldquoProblem Listrdquo increased from 117 to 171 and the assets of ldquoproblemrdquo institutions rose from $783 billion to $1156 billion during the quarter This is the first time since the middle of 1994 that assets of ldquoprob-lemrdquo institutions have exceeded $100 billion
Author Ross Waldrop Sr Banking Analyst Division of Insurance and Research (202) 898-3951
Chart 8
Earning Asset Growth Has Slowed Substantially
Quarterly Change in Interest-Bearing Assets ($ Billions) 400
350
300
250
200
150
100
50
0
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008
2008 Is a Record Year for Failed Bank Assets Total Assets of Failed FDIC-Insured Commercial Banks and Savings Institutions by Year 1988 ndash 2008 ($ Billions) 400
348 350
300
250
200 164
152 147 144150
100 90
50 10 2 1 0 0 0 2 0 2 3 1 0 0 0 3
0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Through first nine months of 2008
FDIC QUARTERLY 4 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE I-A Selected Indicators All FDIC-Insured Institutions 2008 2007 2007 2006 2005 2004 2003
Return on assets () 033 110 081 128 128 128 138 Return on equity () 385 1049 775 1230 1243 1320 1505 Core capital (leverage) ratio () 781 814 797 822 825 811 788 Noncurrent assets plus other real estate owned to assets () 154 073 094 054 050 053 075 Net charge-offs to loans () 118 050 059 039 049 056 078 Asset growth rate () 683 810 989 904 763 1137 758 Net interest margin () 333 331 329 331 347 352 373 Net operating income growth () -6287 -921 -2757 853 1143 399 1638 Number of institutions reporting 8384 8559 8534 8680 8833 8976 9181
Commercial banks 7146 7303 7283 7401 7526 7631 7770 Savings institutions 1238 1256 1251 1279 1307 1345 1411
Percentage of unproftable institutions () 2100 1033 1207 793 622 597 599 Number of problem institutions 171 65 76 50 52 80 116 Assets of problem institutions (in billions) $116 $19 $22 $8 $7 $28 $30 Number of failedassisted institutions 13 2 3 0 0 4 3
Excludes insured branches of foreign banks (IBAs) Through September 30 ratios annualized where appropriate Asset growth rates are for 12 months ending September 30
TABLE II-A Aggregate Condition and Income Data All FDIC-Insured Institutions (dollar fgures in millions)
Number of institutions reporting Total employees (full-time equivalent) CONDITION DATA Total assets
Loans secured by real estate 1-4 Family residential mortgages Nonfarm nonresidential Construction and development Home equity lines
Commercial amp industrial loans Loans to individuals
Credit cards Farm loans Other loans amp leases Less Unearned income Total loans amp leases Less Reserve for losses Net loans and leases Securities Other real estate owned Goodwill and other intangibles All other assets
Total liabilities and capital Deposits
Domestic offce deposits Foreign offce deposits
Other borrowed funds Subordinated debt All other liabilities Equity capital
Loans and leases 30-89 days past due Noncurrent loans and leases Restructured loans and leases Direct and indirect investments in real estate Mortgage-backed securities Earning assets FHLB Advances Unused loan commitments Trust assets Assets securitized and sold Notional amount of derivatives
3rd Quarter 2nd Quarter 3rd Quarter Change 2008 2008 2007 07Q3-08Q3
8384 2170671
$13573691 4750985 2102080 1043393
617055 652119
1503737 1082731
411627 59656
595646 2739
7990015 156065
7833950 2025534
22966 484178
3207062
13573691 8727485 7221963 1505522 2732570
176833 629706
1307097
121587 184269
14846 910
1260945 11493605
911465 7860609
19948345 1906828
177103186
8451 2203883
$13300540 4794248 2154173 1018988
627283 646903
1492357 1069479
396045 58284
584210 2513
7996065 144383
7851682 2017391
18902 481438
2931127
13300540 8572643 7029111
1543532 2598234
185078 593306
1351279
110814 162895
14499 972
1322210 11441334
840543 8158701
21750102 1750710
183303064
8559 -20 2220522 -22
$12706161 68 4701346 11 2238180 -61
939556 111 616538 01 591372 103
1388441 83 1013355 68
384506 71 56166 62
546851 89 2237 224
7703922 37 87037 793
7616885 28 1989103 18
9818 1339 461068 50
2629288 220
12706161 68 8180226 67 6739817 72 1440409 45 2454148 113
177469 -04 567141 110
1327177 -15
92558 314 83024 1219
4123 2601 1081 -159
1217755 35 11032330 42
770419 183 8301846 -53
21501132 -72 1663308 146
174574544 14
First Three First Three 3rd Quarter 3rd Quarter Change INCOME DATA Qtrs 2008 Qtrs 2007 Change 2008 2007 07Q3-08Q3 Total interest income $487019 $542106 -102 $159097 $188077 -154 Total interest expense 207949 278586 -254 63787 97215 -344
Net interest income 279070 263520 59 95310 90862 49 Provision for loan and lease losses 124517 37208 2347 50548 16785 2012 Total noninterest income 175521 187130 -62 58218 59123 -15 Total noninterest expense 274323 265254 34 93920 90162 42 Securities gains (losses) -8037 2325 NM -7592 77 NM Applicable income taxes 15679 48084 -674 717 13407 -947 Extraordinary gains net 534 -1917 NM 975 -995 NM
Net income 32569 100513 -676 1726 28714 -940 Net charge-offs 68559 27937 1454 27892 10879 1564 Cash dividends 42592 94397 -549 10979 27914 -607 Retained earnings -10023 6116 NM -9253 800 NM
Net operating income 37457 100869 -629 6135 29678 -793
Call Report flers only NM - Not Meaningful
FDIC QUARTERLY 5 2008 VOLUME 2 NO 4
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial bank 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 1726 451 3702 424 -1677 -3100 165 12 151 1599 Commercial banks 8284 377 3702 423 25 711 145 -19 164 2756 Savings institutions
Performance Ratios (annualized)
-6558 74 0 1 -1703 -3811 21 31 -13 -1157
Yield on earning assets 563 1212 484 636 591 584 680 463 607 441 Cost of funding earning assets 226 284 215 236 227 285 200 157 219 196
Net interest margin 337 928 269 400 364 299 480 307 388 245 Noninterest income to assets 176 673 202 067 144 055 174 1100 098 178 Noninterest expense to assets 283 691 248 266 303 208 305 1178 301 216 Loan and lease loss provision to assets 153 678 137 035 138 236 170 016 030 083 Net operating income to assets 019 023 036 112 014 -110 096 086 100 052 Pretax return on assets 007 063 044 121 -015 -118 143 088 079 050 Return on assets 005 039 049 101 -011 -117 093 013 064 028 Return on equity 053 184 659 921 -103 -1507 999 067 570 317 Net charge-offs to loans and leases Loan and lease loss provision to
142 624 144 041 121 103 200 043 034 111
net charge-offs 18123 14852 22242 12578 16375 32766 10068 15218 15569 16561 Effciency ratio 5798 4545 5816 6069 6116 6153 4869 7911 6596 5401 of unproftable institutions 2408 1923 000 863 3103 2494 1386 2088 1286 3250 of institutions with earnings gains
Structural Changes
4071 2308 5000 5539 3216 5327 4851 4242 5087 3000
New Charters 21 0 0 1 5 1 0 14 0 0 Institutions absorbed by mergers 73 0 2 6 57 3 1 0 1 3 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 0 0 7 2 0 0 0 0
Return on assets () 2007 092 407 069 130 099 031 117 220 107 081 2005 131 316 102 133 139 103 176 178 112 131 2003
Net charge-offs to loans
136 425 102 125 128 133 168 147 106 133
and leases () 2007 057 398 077 026 032 042 104 032 022 042 2005 051 428 119 016 023 010 139 018 020 026 2003 073 480 140 029 047 019 134 247 037 048
See Table IV-A (page 8) for explanations
FDIC QUARTERLY 6 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100
Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than
$10 Billion New York Atlanta Chicago Kansas
City Dallas San
Francisco 8384 3240 4470 560 114 1027 1197 1721 1943 1719 777
Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 1726 128 43 -1924 3479 226 2307 830 1322 361 -3320 Commercial banks 8284 150 301 -434 8267 2093 2437 1413 1340 801 200 Savings institutions
Performance Ratios (annualized)
-6558 -21 -258 -1490 -4788 -1867 -130 -583 -18 -440 -3520
Yield on earning assets 563 628 625 586 549 587 547 489 641 604 609 Cost of funding earning assets 226 230 250 230 221 224 241 214 198 219 236
Net interest margin 337 398 375 356 328 363 307 275 443 386 373 Noninterest income to assets 176 099 106 062 202 191 185 178 220 135 138 Noninterest expense to assets 283 368 329 278 277 293 256 274 383 329 268 Loan and lease loss provision to assets 153 046 074 112 170 145 139 139 142 101 219 Net operating income to assets 019 040 034 -016 021 033 040 007 057 032 -033 Pretax return on assets 007 037 008 -056 016 020 031 001 073 031 -068 Return on assets 005 030 001 -052 014 003 027 011 053 019 -056 Return on equity 053 224 013 -472 142 030 268 120 545 191 -634 Net charge-offs to loans and leases 142 042 069 104 163 149 128 132 160 084 179 Loan and lease loss provision to net charge-offs 18123 17209 14953 15534 18646 17641 17760 19567 13065 18081 19772 Effciency ratio 5798 7915 6999 6549 5529 5541 5582 6042 6185 6454 5674 of unproftable institutions 2408 2475 2309 2661 3158 3165 4027 2005 1482 1576 3964 of institutions with earnings gains
Structural Changes
4071 4519 3926 3000 2281 4021 2297 4567 4838 4602 2677
New Charters 21 16 3 1 1 3 6 1 1 5 5 Institutions absorbed by mergers 73 21 47 3 2 10 18 19 15 9 2 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 4 3 2 0 3 0 1 0 5
Return on assets () 2007 092 079 103 118 087 089 075 090 161 114 088 2005 131 108 127 134 132 124 135 108 173 118 160 2003 136 101 117 134 141 124 140 121 177 134 166
Net charge-offs to loans and leases () 2007 057 026 024 042 066 092 029 044 074 029 076 2005 051 016 018 023 064 097 027 029 054 025 059 2003 073 030 037 049 087 110 050 065 085 038 060
See Table IV-A (page 9) for explanations
FDIC QUARTERLY 7 2008 VOLUME 2 NO 4
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial banks 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 32569 8309 6912 1395 10596 -2295 530 413 625 6083 Commercial banks 38123 7908 6912 1392 11587 1938 317 272 624 7172 Savings institutions
Performance Ratios (annualized)
-5555 401 0 3 -991 -4233 213 141 0 -1089
Yield on earning assets 581 1199 527 648 606 534 694 471 616 480 Cost of funding earning assets 248 305 248 257 247 275 224 173 239 229
Net interest margin 333 894 280 391 359 259 471 297 377 251 Noninterest income to assets 180 869 172 067 152 062 197 1130 096 176 Noninterest expense to assets 281 675 258 262 296 174 309 1098 297 226 Loan and lease loss provision to assets 127 578 113 025 119 150 195 013 023 080 Net operating income to assets 038 210 029 115 032 -028 090 179 099 053 Pretax return on assets 049 376 032 134 038 -022 151 253 109 055 Return on assets 033 243 031 113 024 -029 100 156 089 036 Return on equity 335 1114 416 1015 218 -372 1090 772 787 400 Net charge-offs to loans and leases 118 564 128 028 097 074 181 043 029 088 Loan and lease loss provision to net charge-offs 18162 13896 20412 13553 17661 29078 12777 12377 14423 19658 Effciency ratio 5770 3947 6339 6125 6002 5689 4808 7627 6703 5663 of unproftable institutions 2100 769 2500 529 2785 2337 1188 1818 939 2500 of institutions with earnings gains
Condition Ratios ()
4073 3462 5000 5564 3245 4782 4950 4478 5275 4250
Earning assets to total assets Loss Allowance to
8468 7929 7991 9162 8690 9160 9318 8843 9155 8238
Loans and leases 195 584 236 128 170 165 197 133 122 148 Noncurrent loans and leases
Noncurrent assets plus 8469 24814 10400 9162 7075 5738 21115 14605 9694 8319
other real estate owned to assets 154 173 109 115 192 230 082 028 092 085 Equity capital ratio 963 2086 713 1107 1067 799 915 1955 1120 861 Core capital (leverage) ratio 781 1382 679 1018 803 779 897 1764 1097 684 Tier 1 risk-based capital ratio 979 1309 830 1349 942 1403 1044 3813 1783 971 Total risk-based capital ratio 1254 1560 1218 1455 1190 1501 1251 3903 1892 1263 Net loans and leases to deposits 8976 19328 6853 8431 9898 12074 10008 3152 6891 6944 Net loans to total assets 5771 6930 4178 6702 6882 6849 8222 2315 5596 4304 Domestic deposits to total assets
Structural Changes
5321 3301 3103 7949 6604 5666 8112 6992 8114 4914
New Charters 83 0 0 2 22 2 0 57 0 0 Institutions absorbed by mergers 214 0 2 24 159 12 2 1 8 6 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 0 0 1 10 2 0 0 0 0
Number of institutions 2007 8559 28 4 1634 4739 780 120 376 821 57 2005 8858 29 4 1733 4557 928 125 420 992 70 2003 9236 36 6 1821 4167 1024 166 522 1391 103
Total assets (in billions)2007 $127062 $4235 $26440 $1573 $50544 $14541 $958 $401 $1114 $27255 2005 107007 3599 18389 1430 36674 16771 1092 477 1286 27290 2003 89431 3088 14279 1295 30958 15885 1919 622 1921 19463
Return on assets ()2007 110 381 087 125 109 073 140 237 104 109 2005 131 319 088 132 136 112 170 173 112 136 2003 138 393 105 125 130 144 154 136 109 131
Net charge-offs to loans amp leases () 2007 050 390 065 019 028 029 097 030 017 035 2005 047 427 088 015 022 010 146 029 027 020 2003 078 512 141 024 052 019 142 144 031 056
Noncurrent assets plus OREO to assets () 2007 073 134 051 081 081 109 053 026 064 054 2005 050 136 048 068 048 057 054 025 057 037 2003 077 134 098 095 079 064 088 036 074 061
Equity capital ratio () 2007 1045 2317 778 1132 1086 944 1189 1954 1158 1055 2005 1025 2207 823 1086 1021 1067 958 1926 1083 966 2003 913 1703 727 1081 942 879 749 1592 1057 875
Asset Concentration Group Defnitions (Groups are hierarchical and mutually exclusive) Credit-card Lenders - Institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables International Banks - Banks with assets greater than $10 billion and more than 25 percent of total assets in foreign offces Agricultural Banks - Banks whose agricultural production loans plus real estate loans secured by farmland exceed 25 percent of their total loans and leases Commercial Lenders - Institutions whose commercial and industrial loans plus real estate construction and development loans plus loans secured by commercial real estate properties
exceed 25 percent of total assets Mortgage Lenders - Institutions whose residential mortgage loans plus mortgage-backed securities exceed 50 percent of total assets Consumer Lenders - Institutions whose residential mortgage loans plus credit-card loans plus other loans to individuals exceed 50 percent of total assets Other Specialized lt $1 Billion - Institutions with assets less than $1 billion whose loans and leases are less than 40 percent of total assets All Other lt $1 billion - Institutions with assets less than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset concentrations All Other gt $1 billion - Institutions with assets greater than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset
concentrations
FDIC QUARTERLY 8 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Quarterly Banking Profile
to $1843 billion at the end of September This is $214 billion (131 percent) more than insured institutions reported as of June 30 and is up by $1012 billion (122 percent) over the past 12 months The percentage of total loans and leases that were noncurrent rose from 204 percent to 231 percent during the quarter and is now at the highest level since the third quarter of 1993 The growth in noncurrent loans during the quarter was led by closed-end first and second lien mortgage loans where noncurrents rose by $96 billion (143 percent) Noncurrent real estate CampD loans increased by $69 billion (181 percent) while noncurrent loans secured by nonfarm nonresidential properties rose by $22 billion (181 percent) Noncurrent CampI loans were up by $18 billion (137 percent) during the quarter
Reserve Coverage of Noncurrent Loans Declines Loan-loss reserves increased by $117 billion (81 percent) during the quarter the smallest quarterly growth in reserves since the third quarter of 2007 The industryrsquos ratio of reserves to total loans and leases increased from 181 percent to 195 percent its highest level since the first quarter of 1995 However reserve growth did not keep pace with the growth in noncurrent loans and the ldquocoverage ratiordquo of reserves to noncurrent loans fell from 89 cents in reserves for every $100 of noncurrent loans to 85 cents This is the tenth consecutive quarter that the industryrsquos coverage ratio has fallen it is now at its lowest level since the first quarter of 1993
Failure-Related Restructuring Contributes to a Decline in Reported Capital Total equity capital fell by $442 billion (33 percent) during the third quarter A $146-billion decline in other
Chart 5
comprehensive income driven primarily by unrealized losses on securities held for sale was a significant factor in the reduction in equity but most of the decline stemmed from the accounting effect of the failure of Washington Mutual Bank (WaMu)2 The WaMu failure had a similar effect on the reported industry totals for tier 1 capital and total risk-based capital which declined by $336 billion and $353 billion respectively Unlike equity capital these regulatory capital amounts are not affected by changes in unrealized gains or losses on available-for-sale securities Almost half of all institutions (485 percent) reported declines in their leverage capital ratios during the quarter and slightly more than half (512 percent) reported declines in their total risk-based capital ratios Many institutions reduced their dividends to preserve capital of the 3761 institutions that paid divi-dends in the third quarter of 2007 more than half (574 percent) paid lower dividends in the third quarter of 2008 including 207 percent that paid no dividends Third quarter dividends totaled $110 billion a $169-billion (607-percent) decline from a year ago
Liquidity Program Provides a Boost to Asset Growth Total assets of insured institutions increased by $2732 billion (21 percent) in the third quarter led by growth in balances at Federal Reserve banks (up $1468 billion or
2 Prior to September 25 2008 Washington Mutual FSB of Park City Utah an insured institution with $46 billion in assets and $29 billion in equity capital was directly owned by Washington Mutual Bank of Henderson Nevada Under accounting rules the subsidiary institutionrsquos assets and liabilities were included in the consolidated financial data reported by the parent institution resulting in double-reporting of some of the subsid-iaryrsquos financial data The direct ownership relationship ended with the failure of the parent institution during the third quarter at which point the subsidiary institutionrsquos financial data were no longer double-reported
Chart 6
Growth in Troubled Loans Remains High $ Billions
55 Quarterly Net Charge-offs Quarterly Change in Noncurrent Loans
45
263 35 163 196 279
25 109
15 270 262 267 89 214
85 5 71 82 153
55 61 64 35 48 38 05-5 -13
1 2 3 4 1 2 3 4 1 2 3 2006 2007 2008
Consumer Loans Account for Two-Thirds of Quarterly Charge-offs
Quarterly Net Charge-offs ($ Billions) 30
Loans to Commercial Borrowers Consumer Loans 25
20
15
10
5
0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008 Consumer loans include residential mortgage loans home equity loans credit card loans and other
loans to individuals
FDIC QUARTERLY 3 2008 VOLUME 2 NO 4
505 percent) and a $746-billion increase in asset-backed commercial paper holdings A number of large banks experienced sizable deposit inflows during the quarter and elected to place a large share of these funds with Federal Reserve banks The increase in holdings of commercial paper was attributable to the creation of a special lending facilitymdashthe Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)mdashby the Federal Reserve aimed at providing liquidity to money market mutual funds (MMFs) by funding bank purchases of asset-backed commercial paper from the MMFs3
Loans in categories experiencing the greatest credit-qual-ity problems shrank in the third quarter Residential mort-gage loans declined by $521 billion (24 percent) while real estate CampD loans fell by $102 billion (16 percent) One of the few loan categories showing significant growth was real estate loans secured by nonfarm nonresidential properties which increased by $244 billion (24 percent) Unused loan commitments declined by $2981 billion (37 percent) during the quarter The decline was led by a reduction in unused credit card lines which fell by $1228 billion (26 percent)
Discount Window Borrowings Fuel a Surge in Nondeposit Liabilities Nondeposit liabilities increased by $1625 billion (48 percent) in the third quarter as insured institutions increased their borrowings from the Federal Reserversquos Discount Window (which was used to fund the AMLF) as well as their advances from Federal Home Loan Banks
3 On September 19 the Federal Reserve instituted the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) to restore liquidity to the market for commercial paper and help money market mutual funds meet redemptions
Chart 7
Securities sold under repurchase agreements registered strong growth rising by $642 billion (112 percent) Total deposits increased by $1548 billion (18 percent) as noninterest-bearing deposits in domestic offices rose by $1757 billion (144 percent) The growth in deposits was concentrated in a few large banks Deposits in foreign offices declined by $38 billion (25 percent)
Nine Failures in Third Quarter Include Washington Mutual Bank The number of insured commercial banks and savings institutions fell to 8384 in the third quarter down from 8451 at midyear During the quarter 73 institutions were absorbed in mergers and 9 institutions failed This is the largest number of failures in a quarter since the third quarter of 1993 when 16 insured institutions failed Among the failures was Washington Mutual Bank an insured savings institution with $307 billion in assets and the largest insured institution to fail in the FDICrsquos 75-year history There were 21 new institutions chartered in the third quarter the smallest number of new charters in a quarter since 17 new charters were added in the first quarter of 2002 Four insured savings institutions with combined assets of $10 billion converted from mutual ownership to stock ownership in the third quarter The number of insured institutions on the FDICrsquos ldquoProblem Listrdquo increased from 117 to 171 and the assets of ldquoproblemrdquo institutions rose from $783 billion to $1156 billion during the quarter This is the first time since the middle of 1994 that assets of ldquoprob-lemrdquo institutions have exceeded $100 billion
Author Ross Waldrop Sr Banking Analyst Division of Insurance and Research (202) 898-3951
Chart 8
Earning Asset Growth Has Slowed Substantially
Quarterly Change in Interest-Bearing Assets ($ Billions) 400
350
300
250
200
150
100
50
0
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008
2008 Is a Record Year for Failed Bank Assets Total Assets of Failed FDIC-Insured Commercial Banks and Savings Institutions by Year 1988 ndash 2008 ($ Billions) 400
348 350
300
250
200 164
152 147 144150
100 90
50 10 2 1 0 0 0 2 0 2 3 1 0 0 0 3
0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Through first nine months of 2008
FDIC QUARTERLY 4 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE I-A Selected Indicators All FDIC-Insured Institutions 2008 2007 2007 2006 2005 2004 2003
Return on assets () 033 110 081 128 128 128 138 Return on equity () 385 1049 775 1230 1243 1320 1505 Core capital (leverage) ratio () 781 814 797 822 825 811 788 Noncurrent assets plus other real estate owned to assets () 154 073 094 054 050 053 075 Net charge-offs to loans () 118 050 059 039 049 056 078 Asset growth rate () 683 810 989 904 763 1137 758 Net interest margin () 333 331 329 331 347 352 373 Net operating income growth () -6287 -921 -2757 853 1143 399 1638 Number of institutions reporting 8384 8559 8534 8680 8833 8976 9181
Commercial banks 7146 7303 7283 7401 7526 7631 7770 Savings institutions 1238 1256 1251 1279 1307 1345 1411
Percentage of unproftable institutions () 2100 1033 1207 793 622 597 599 Number of problem institutions 171 65 76 50 52 80 116 Assets of problem institutions (in billions) $116 $19 $22 $8 $7 $28 $30 Number of failedassisted institutions 13 2 3 0 0 4 3
Excludes insured branches of foreign banks (IBAs) Through September 30 ratios annualized where appropriate Asset growth rates are for 12 months ending September 30
TABLE II-A Aggregate Condition and Income Data All FDIC-Insured Institutions (dollar fgures in millions)
Number of institutions reporting Total employees (full-time equivalent) CONDITION DATA Total assets
Loans secured by real estate 1-4 Family residential mortgages Nonfarm nonresidential Construction and development Home equity lines
Commercial amp industrial loans Loans to individuals
Credit cards Farm loans Other loans amp leases Less Unearned income Total loans amp leases Less Reserve for losses Net loans and leases Securities Other real estate owned Goodwill and other intangibles All other assets
Total liabilities and capital Deposits
Domestic offce deposits Foreign offce deposits
Other borrowed funds Subordinated debt All other liabilities Equity capital
Loans and leases 30-89 days past due Noncurrent loans and leases Restructured loans and leases Direct and indirect investments in real estate Mortgage-backed securities Earning assets FHLB Advances Unused loan commitments Trust assets Assets securitized and sold Notional amount of derivatives
3rd Quarter 2nd Quarter 3rd Quarter Change 2008 2008 2007 07Q3-08Q3
8384 2170671
$13573691 4750985 2102080 1043393
617055 652119
1503737 1082731
411627 59656
595646 2739
7990015 156065
7833950 2025534
22966 484178
3207062
13573691 8727485 7221963 1505522 2732570
176833 629706
1307097
121587 184269
14846 910
1260945 11493605
911465 7860609
19948345 1906828
177103186
8451 2203883
$13300540 4794248 2154173 1018988
627283 646903
1492357 1069479
396045 58284
584210 2513
7996065 144383
7851682 2017391
18902 481438
2931127
13300540 8572643 7029111
1543532 2598234
185078 593306
1351279
110814 162895
14499 972
1322210 11441334
840543 8158701
21750102 1750710
183303064
8559 -20 2220522 -22
$12706161 68 4701346 11 2238180 -61
939556 111 616538 01 591372 103
1388441 83 1013355 68
384506 71 56166 62
546851 89 2237 224
7703922 37 87037 793
7616885 28 1989103 18
9818 1339 461068 50
2629288 220
12706161 68 8180226 67 6739817 72 1440409 45 2454148 113
177469 -04 567141 110
1327177 -15
92558 314 83024 1219
4123 2601 1081 -159
1217755 35 11032330 42
770419 183 8301846 -53
21501132 -72 1663308 146
174574544 14
First Three First Three 3rd Quarter 3rd Quarter Change INCOME DATA Qtrs 2008 Qtrs 2007 Change 2008 2007 07Q3-08Q3 Total interest income $487019 $542106 -102 $159097 $188077 -154 Total interest expense 207949 278586 -254 63787 97215 -344
Net interest income 279070 263520 59 95310 90862 49 Provision for loan and lease losses 124517 37208 2347 50548 16785 2012 Total noninterest income 175521 187130 -62 58218 59123 -15 Total noninterest expense 274323 265254 34 93920 90162 42 Securities gains (losses) -8037 2325 NM -7592 77 NM Applicable income taxes 15679 48084 -674 717 13407 -947 Extraordinary gains net 534 -1917 NM 975 -995 NM
Net income 32569 100513 -676 1726 28714 -940 Net charge-offs 68559 27937 1454 27892 10879 1564 Cash dividends 42592 94397 -549 10979 27914 -607 Retained earnings -10023 6116 NM -9253 800 NM
Net operating income 37457 100869 -629 6135 29678 -793
Call Report flers only NM - Not Meaningful
FDIC QUARTERLY 5 2008 VOLUME 2 NO 4
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial bank 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 1726 451 3702 424 -1677 -3100 165 12 151 1599 Commercial banks 8284 377 3702 423 25 711 145 -19 164 2756 Savings institutions
Performance Ratios (annualized)
-6558 74 0 1 -1703 -3811 21 31 -13 -1157
Yield on earning assets 563 1212 484 636 591 584 680 463 607 441 Cost of funding earning assets 226 284 215 236 227 285 200 157 219 196
Net interest margin 337 928 269 400 364 299 480 307 388 245 Noninterest income to assets 176 673 202 067 144 055 174 1100 098 178 Noninterest expense to assets 283 691 248 266 303 208 305 1178 301 216 Loan and lease loss provision to assets 153 678 137 035 138 236 170 016 030 083 Net operating income to assets 019 023 036 112 014 -110 096 086 100 052 Pretax return on assets 007 063 044 121 -015 -118 143 088 079 050 Return on assets 005 039 049 101 -011 -117 093 013 064 028 Return on equity 053 184 659 921 -103 -1507 999 067 570 317 Net charge-offs to loans and leases Loan and lease loss provision to
142 624 144 041 121 103 200 043 034 111
net charge-offs 18123 14852 22242 12578 16375 32766 10068 15218 15569 16561 Effciency ratio 5798 4545 5816 6069 6116 6153 4869 7911 6596 5401 of unproftable institutions 2408 1923 000 863 3103 2494 1386 2088 1286 3250 of institutions with earnings gains
Structural Changes
4071 2308 5000 5539 3216 5327 4851 4242 5087 3000
New Charters 21 0 0 1 5 1 0 14 0 0 Institutions absorbed by mergers 73 0 2 6 57 3 1 0 1 3 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 0 0 7 2 0 0 0 0
Return on assets () 2007 092 407 069 130 099 031 117 220 107 081 2005 131 316 102 133 139 103 176 178 112 131 2003
Net charge-offs to loans
136 425 102 125 128 133 168 147 106 133
and leases () 2007 057 398 077 026 032 042 104 032 022 042 2005 051 428 119 016 023 010 139 018 020 026 2003 073 480 140 029 047 019 134 247 037 048
See Table IV-A (page 8) for explanations
FDIC QUARTERLY 6 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100
Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than
$10 Billion New York Atlanta Chicago Kansas
City Dallas San
Francisco 8384 3240 4470 560 114 1027 1197 1721 1943 1719 777
Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 1726 128 43 -1924 3479 226 2307 830 1322 361 -3320 Commercial banks 8284 150 301 -434 8267 2093 2437 1413 1340 801 200 Savings institutions
Performance Ratios (annualized)
-6558 -21 -258 -1490 -4788 -1867 -130 -583 -18 -440 -3520
Yield on earning assets 563 628 625 586 549 587 547 489 641 604 609 Cost of funding earning assets 226 230 250 230 221 224 241 214 198 219 236
Net interest margin 337 398 375 356 328 363 307 275 443 386 373 Noninterest income to assets 176 099 106 062 202 191 185 178 220 135 138 Noninterest expense to assets 283 368 329 278 277 293 256 274 383 329 268 Loan and lease loss provision to assets 153 046 074 112 170 145 139 139 142 101 219 Net operating income to assets 019 040 034 -016 021 033 040 007 057 032 -033 Pretax return on assets 007 037 008 -056 016 020 031 001 073 031 -068 Return on assets 005 030 001 -052 014 003 027 011 053 019 -056 Return on equity 053 224 013 -472 142 030 268 120 545 191 -634 Net charge-offs to loans and leases 142 042 069 104 163 149 128 132 160 084 179 Loan and lease loss provision to net charge-offs 18123 17209 14953 15534 18646 17641 17760 19567 13065 18081 19772 Effciency ratio 5798 7915 6999 6549 5529 5541 5582 6042 6185 6454 5674 of unproftable institutions 2408 2475 2309 2661 3158 3165 4027 2005 1482 1576 3964 of institutions with earnings gains
Structural Changes
4071 4519 3926 3000 2281 4021 2297 4567 4838 4602 2677
New Charters 21 16 3 1 1 3 6 1 1 5 5 Institutions absorbed by mergers 73 21 47 3 2 10 18 19 15 9 2 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 4 3 2 0 3 0 1 0 5
Return on assets () 2007 092 079 103 118 087 089 075 090 161 114 088 2005 131 108 127 134 132 124 135 108 173 118 160 2003 136 101 117 134 141 124 140 121 177 134 166
Net charge-offs to loans and leases () 2007 057 026 024 042 066 092 029 044 074 029 076 2005 051 016 018 023 064 097 027 029 054 025 059 2003 073 030 037 049 087 110 050 065 085 038 060
See Table IV-A (page 9) for explanations
FDIC QUARTERLY 7 2008 VOLUME 2 NO 4
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial banks 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 32569 8309 6912 1395 10596 -2295 530 413 625 6083 Commercial banks 38123 7908 6912 1392 11587 1938 317 272 624 7172 Savings institutions
Performance Ratios (annualized)
-5555 401 0 3 -991 -4233 213 141 0 -1089
Yield on earning assets 581 1199 527 648 606 534 694 471 616 480 Cost of funding earning assets 248 305 248 257 247 275 224 173 239 229
Net interest margin 333 894 280 391 359 259 471 297 377 251 Noninterest income to assets 180 869 172 067 152 062 197 1130 096 176 Noninterest expense to assets 281 675 258 262 296 174 309 1098 297 226 Loan and lease loss provision to assets 127 578 113 025 119 150 195 013 023 080 Net operating income to assets 038 210 029 115 032 -028 090 179 099 053 Pretax return on assets 049 376 032 134 038 -022 151 253 109 055 Return on assets 033 243 031 113 024 -029 100 156 089 036 Return on equity 335 1114 416 1015 218 -372 1090 772 787 400 Net charge-offs to loans and leases 118 564 128 028 097 074 181 043 029 088 Loan and lease loss provision to net charge-offs 18162 13896 20412 13553 17661 29078 12777 12377 14423 19658 Effciency ratio 5770 3947 6339 6125 6002 5689 4808 7627 6703 5663 of unproftable institutions 2100 769 2500 529 2785 2337 1188 1818 939 2500 of institutions with earnings gains
Condition Ratios ()
4073 3462 5000 5564 3245 4782 4950 4478 5275 4250
Earning assets to total assets Loss Allowance to
8468 7929 7991 9162 8690 9160 9318 8843 9155 8238
Loans and leases 195 584 236 128 170 165 197 133 122 148 Noncurrent loans and leases
Noncurrent assets plus 8469 24814 10400 9162 7075 5738 21115 14605 9694 8319
other real estate owned to assets 154 173 109 115 192 230 082 028 092 085 Equity capital ratio 963 2086 713 1107 1067 799 915 1955 1120 861 Core capital (leverage) ratio 781 1382 679 1018 803 779 897 1764 1097 684 Tier 1 risk-based capital ratio 979 1309 830 1349 942 1403 1044 3813 1783 971 Total risk-based capital ratio 1254 1560 1218 1455 1190 1501 1251 3903 1892 1263 Net loans and leases to deposits 8976 19328 6853 8431 9898 12074 10008 3152 6891 6944 Net loans to total assets 5771 6930 4178 6702 6882 6849 8222 2315 5596 4304 Domestic deposits to total assets
Structural Changes
5321 3301 3103 7949 6604 5666 8112 6992 8114 4914
New Charters 83 0 0 2 22 2 0 57 0 0 Institutions absorbed by mergers 214 0 2 24 159 12 2 1 8 6 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 0 0 1 10 2 0 0 0 0
Number of institutions 2007 8559 28 4 1634 4739 780 120 376 821 57 2005 8858 29 4 1733 4557 928 125 420 992 70 2003 9236 36 6 1821 4167 1024 166 522 1391 103
Total assets (in billions)2007 $127062 $4235 $26440 $1573 $50544 $14541 $958 $401 $1114 $27255 2005 107007 3599 18389 1430 36674 16771 1092 477 1286 27290 2003 89431 3088 14279 1295 30958 15885 1919 622 1921 19463
Return on assets ()2007 110 381 087 125 109 073 140 237 104 109 2005 131 319 088 132 136 112 170 173 112 136 2003 138 393 105 125 130 144 154 136 109 131
Net charge-offs to loans amp leases () 2007 050 390 065 019 028 029 097 030 017 035 2005 047 427 088 015 022 010 146 029 027 020 2003 078 512 141 024 052 019 142 144 031 056
Noncurrent assets plus OREO to assets () 2007 073 134 051 081 081 109 053 026 064 054 2005 050 136 048 068 048 057 054 025 057 037 2003 077 134 098 095 079 064 088 036 074 061
Equity capital ratio () 2007 1045 2317 778 1132 1086 944 1189 1954 1158 1055 2005 1025 2207 823 1086 1021 1067 958 1926 1083 966 2003 913 1703 727 1081 942 879 749 1592 1057 875
Asset Concentration Group Defnitions (Groups are hierarchical and mutually exclusive) Credit-card Lenders - Institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables International Banks - Banks with assets greater than $10 billion and more than 25 percent of total assets in foreign offces Agricultural Banks - Banks whose agricultural production loans plus real estate loans secured by farmland exceed 25 percent of their total loans and leases Commercial Lenders - Institutions whose commercial and industrial loans plus real estate construction and development loans plus loans secured by commercial real estate properties
exceed 25 percent of total assets Mortgage Lenders - Institutions whose residential mortgage loans plus mortgage-backed securities exceed 50 percent of total assets Consumer Lenders - Institutions whose residential mortgage loans plus credit-card loans plus other loans to individuals exceed 50 percent of total assets Other Specialized lt $1 Billion - Institutions with assets less than $1 billion whose loans and leases are less than 40 percent of total assets All Other lt $1 billion - Institutions with assets less than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset concentrations All Other gt $1 billion - Institutions with assets greater than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset
concentrations
FDIC QUARTERLY 8 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
505 percent) and a $746-billion increase in asset-backed commercial paper holdings A number of large banks experienced sizable deposit inflows during the quarter and elected to place a large share of these funds with Federal Reserve banks The increase in holdings of commercial paper was attributable to the creation of a special lending facilitymdashthe Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)mdashby the Federal Reserve aimed at providing liquidity to money market mutual funds (MMFs) by funding bank purchases of asset-backed commercial paper from the MMFs3
Loans in categories experiencing the greatest credit-qual-ity problems shrank in the third quarter Residential mort-gage loans declined by $521 billion (24 percent) while real estate CampD loans fell by $102 billion (16 percent) One of the few loan categories showing significant growth was real estate loans secured by nonfarm nonresidential properties which increased by $244 billion (24 percent) Unused loan commitments declined by $2981 billion (37 percent) during the quarter The decline was led by a reduction in unused credit card lines which fell by $1228 billion (26 percent)
Discount Window Borrowings Fuel a Surge in Nondeposit Liabilities Nondeposit liabilities increased by $1625 billion (48 percent) in the third quarter as insured institutions increased their borrowings from the Federal Reserversquos Discount Window (which was used to fund the AMLF) as well as their advances from Federal Home Loan Banks
3 On September 19 the Federal Reserve instituted the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) to restore liquidity to the market for commercial paper and help money market mutual funds meet redemptions
Chart 7
Securities sold under repurchase agreements registered strong growth rising by $642 billion (112 percent) Total deposits increased by $1548 billion (18 percent) as noninterest-bearing deposits in domestic offices rose by $1757 billion (144 percent) The growth in deposits was concentrated in a few large banks Deposits in foreign offices declined by $38 billion (25 percent)
Nine Failures in Third Quarter Include Washington Mutual Bank The number of insured commercial banks and savings institutions fell to 8384 in the third quarter down from 8451 at midyear During the quarter 73 institutions were absorbed in mergers and 9 institutions failed This is the largest number of failures in a quarter since the third quarter of 1993 when 16 insured institutions failed Among the failures was Washington Mutual Bank an insured savings institution with $307 billion in assets and the largest insured institution to fail in the FDICrsquos 75-year history There were 21 new institutions chartered in the third quarter the smallest number of new charters in a quarter since 17 new charters were added in the first quarter of 2002 Four insured savings institutions with combined assets of $10 billion converted from mutual ownership to stock ownership in the third quarter The number of insured institutions on the FDICrsquos ldquoProblem Listrdquo increased from 117 to 171 and the assets of ldquoproblemrdquo institutions rose from $783 billion to $1156 billion during the quarter This is the first time since the middle of 1994 that assets of ldquoprob-lemrdquo institutions have exceeded $100 billion
Author Ross Waldrop Sr Banking Analyst Division of Insurance and Research (202) 898-3951
Chart 8
Earning Asset Growth Has Slowed Substantially
Quarterly Change in Interest-Bearing Assets ($ Billions) 400
350
300
250
200
150
100
50
0
-50 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3
2000 2001 2002 2003 2004 2005 2006 2007 2008
2008 Is a Record Year for Failed Bank Assets Total Assets of Failed FDIC-Insured Commercial Banks and Savings Institutions by Year 1988 ndash 2008 ($ Billions) 400
348 350
300
250
200 164
152 147 144150
100 90
50 10 2 1 0 0 0 2 0 2 3 1 0 0 0 3
0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Through first nine months of 2008
FDIC QUARTERLY 4 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE I-A Selected Indicators All FDIC-Insured Institutions 2008 2007 2007 2006 2005 2004 2003
Return on assets () 033 110 081 128 128 128 138 Return on equity () 385 1049 775 1230 1243 1320 1505 Core capital (leverage) ratio () 781 814 797 822 825 811 788 Noncurrent assets plus other real estate owned to assets () 154 073 094 054 050 053 075 Net charge-offs to loans () 118 050 059 039 049 056 078 Asset growth rate () 683 810 989 904 763 1137 758 Net interest margin () 333 331 329 331 347 352 373 Net operating income growth () -6287 -921 -2757 853 1143 399 1638 Number of institutions reporting 8384 8559 8534 8680 8833 8976 9181
Commercial banks 7146 7303 7283 7401 7526 7631 7770 Savings institutions 1238 1256 1251 1279 1307 1345 1411
Percentage of unproftable institutions () 2100 1033 1207 793 622 597 599 Number of problem institutions 171 65 76 50 52 80 116 Assets of problem institutions (in billions) $116 $19 $22 $8 $7 $28 $30 Number of failedassisted institutions 13 2 3 0 0 4 3
Excludes insured branches of foreign banks (IBAs) Through September 30 ratios annualized where appropriate Asset growth rates are for 12 months ending September 30
TABLE II-A Aggregate Condition and Income Data All FDIC-Insured Institutions (dollar fgures in millions)
Number of institutions reporting Total employees (full-time equivalent) CONDITION DATA Total assets
Loans secured by real estate 1-4 Family residential mortgages Nonfarm nonresidential Construction and development Home equity lines
Commercial amp industrial loans Loans to individuals
Credit cards Farm loans Other loans amp leases Less Unearned income Total loans amp leases Less Reserve for losses Net loans and leases Securities Other real estate owned Goodwill and other intangibles All other assets
Total liabilities and capital Deposits
Domestic offce deposits Foreign offce deposits
Other borrowed funds Subordinated debt All other liabilities Equity capital
Loans and leases 30-89 days past due Noncurrent loans and leases Restructured loans and leases Direct and indirect investments in real estate Mortgage-backed securities Earning assets FHLB Advances Unused loan commitments Trust assets Assets securitized and sold Notional amount of derivatives
3rd Quarter 2nd Quarter 3rd Quarter Change 2008 2008 2007 07Q3-08Q3
8384 2170671
$13573691 4750985 2102080 1043393
617055 652119
1503737 1082731
411627 59656
595646 2739
7990015 156065
7833950 2025534
22966 484178
3207062
13573691 8727485 7221963 1505522 2732570
176833 629706
1307097
121587 184269
14846 910
1260945 11493605
911465 7860609
19948345 1906828
177103186
8451 2203883
$13300540 4794248 2154173 1018988
627283 646903
1492357 1069479
396045 58284
584210 2513
7996065 144383
7851682 2017391
18902 481438
2931127
13300540 8572643 7029111
1543532 2598234
185078 593306
1351279
110814 162895
14499 972
1322210 11441334
840543 8158701
21750102 1750710
183303064
8559 -20 2220522 -22
$12706161 68 4701346 11 2238180 -61
939556 111 616538 01 591372 103
1388441 83 1013355 68
384506 71 56166 62
546851 89 2237 224
7703922 37 87037 793
7616885 28 1989103 18
9818 1339 461068 50
2629288 220
12706161 68 8180226 67 6739817 72 1440409 45 2454148 113
177469 -04 567141 110
1327177 -15
92558 314 83024 1219
4123 2601 1081 -159
1217755 35 11032330 42
770419 183 8301846 -53
21501132 -72 1663308 146
174574544 14
First Three First Three 3rd Quarter 3rd Quarter Change INCOME DATA Qtrs 2008 Qtrs 2007 Change 2008 2007 07Q3-08Q3 Total interest income $487019 $542106 -102 $159097 $188077 -154 Total interest expense 207949 278586 -254 63787 97215 -344
Net interest income 279070 263520 59 95310 90862 49 Provision for loan and lease losses 124517 37208 2347 50548 16785 2012 Total noninterest income 175521 187130 -62 58218 59123 -15 Total noninterest expense 274323 265254 34 93920 90162 42 Securities gains (losses) -8037 2325 NM -7592 77 NM Applicable income taxes 15679 48084 -674 717 13407 -947 Extraordinary gains net 534 -1917 NM 975 -995 NM
Net income 32569 100513 -676 1726 28714 -940 Net charge-offs 68559 27937 1454 27892 10879 1564 Cash dividends 42592 94397 -549 10979 27914 -607 Retained earnings -10023 6116 NM -9253 800 NM
Net operating income 37457 100869 -629 6135 29678 -793
Call Report flers only NM - Not Meaningful
FDIC QUARTERLY 5 2008 VOLUME 2 NO 4
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial bank 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 1726 451 3702 424 -1677 -3100 165 12 151 1599 Commercial banks 8284 377 3702 423 25 711 145 -19 164 2756 Savings institutions
Performance Ratios (annualized)
-6558 74 0 1 -1703 -3811 21 31 -13 -1157
Yield on earning assets 563 1212 484 636 591 584 680 463 607 441 Cost of funding earning assets 226 284 215 236 227 285 200 157 219 196
Net interest margin 337 928 269 400 364 299 480 307 388 245 Noninterest income to assets 176 673 202 067 144 055 174 1100 098 178 Noninterest expense to assets 283 691 248 266 303 208 305 1178 301 216 Loan and lease loss provision to assets 153 678 137 035 138 236 170 016 030 083 Net operating income to assets 019 023 036 112 014 -110 096 086 100 052 Pretax return on assets 007 063 044 121 -015 -118 143 088 079 050 Return on assets 005 039 049 101 -011 -117 093 013 064 028 Return on equity 053 184 659 921 -103 -1507 999 067 570 317 Net charge-offs to loans and leases Loan and lease loss provision to
142 624 144 041 121 103 200 043 034 111
net charge-offs 18123 14852 22242 12578 16375 32766 10068 15218 15569 16561 Effciency ratio 5798 4545 5816 6069 6116 6153 4869 7911 6596 5401 of unproftable institutions 2408 1923 000 863 3103 2494 1386 2088 1286 3250 of institutions with earnings gains
Structural Changes
4071 2308 5000 5539 3216 5327 4851 4242 5087 3000
New Charters 21 0 0 1 5 1 0 14 0 0 Institutions absorbed by mergers 73 0 2 6 57 3 1 0 1 3 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 0 0 7 2 0 0 0 0
Return on assets () 2007 092 407 069 130 099 031 117 220 107 081 2005 131 316 102 133 139 103 176 178 112 131 2003
Net charge-offs to loans
136 425 102 125 128 133 168 147 106 133
and leases () 2007 057 398 077 026 032 042 104 032 022 042 2005 051 428 119 016 023 010 139 018 020 026 2003 073 480 140 029 047 019 134 247 037 048
See Table IV-A (page 8) for explanations
FDIC QUARTERLY 6 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100
Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than
$10 Billion New York Atlanta Chicago Kansas
City Dallas San
Francisco 8384 3240 4470 560 114 1027 1197 1721 1943 1719 777
Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 1726 128 43 -1924 3479 226 2307 830 1322 361 -3320 Commercial banks 8284 150 301 -434 8267 2093 2437 1413 1340 801 200 Savings institutions
Performance Ratios (annualized)
-6558 -21 -258 -1490 -4788 -1867 -130 -583 -18 -440 -3520
Yield on earning assets 563 628 625 586 549 587 547 489 641 604 609 Cost of funding earning assets 226 230 250 230 221 224 241 214 198 219 236
Net interest margin 337 398 375 356 328 363 307 275 443 386 373 Noninterest income to assets 176 099 106 062 202 191 185 178 220 135 138 Noninterest expense to assets 283 368 329 278 277 293 256 274 383 329 268 Loan and lease loss provision to assets 153 046 074 112 170 145 139 139 142 101 219 Net operating income to assets 019 040 034 -016 021 033 040 007 057 032 -033 Pretax return on assets 007 037 008 -056 016 020 031 001 073 031 -068 Return on assets 005 030 001 -052 014 003 027 011 053 019 -056 Return on equity 053 224 013 -472 142 030 268 120 545 191 -634 Net charge-offs to loans and leases 142 042 069 104 163 149 128 132 160 084 179 Loan and lease loss provision to net charge-offs 18123 17209 14953 15534 18646 17641 17760 19567 13065 18081 19772 Effciency ratio 5798 7915 6999 6549 5529 5541 5582 6042 6185 6454 5674 of unproftable institutions 2408 2475 2309 2661 3158 3165 4027 2005 1482 1576 3964 of institutions with earnings gains
Structural Changes
4071 4519 3926 3000 2281 4021 2297 4567 4838 4602 2677
New Charters 21 16 3 1 1 3 6 1 1 5 5 Institutions absorbed by mergers 73 21 47 3 2 10 18 19 15 9 2 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 4 3 2 0 3 0 1 0 5
Return on assets () 2007 092 079 103 118 087 089 075 090 161 114 088 2005 131 108 127 134 132 124 135 108 173 118 160 2003 136 101 117 134 141 124 140 121 177 134 166
Net charge-offs to loans and leases () 2007 057 026 024 042 066 092 029 044 074 029 076 2005 051 016 018 023 064 097 027 029 054 025 059 2003 073 030 037 049 087 110 050 065 085 038 060
See Table IV-A (page 9) for explanations
FDIC QUARTERLY 7 2008 VOLUME 2 NO 4
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial banks 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 32569 8309 6912 1395 10596 -2295 530 413 625 6083 Commercial banks 38123 7908 6912 1392 11587 1938 317 272 624 7172 Savings institutions
Performance Ratios (annualized)
-5555 401 0 3 -991 -4233 213 141 0 -1089
Yield on earning assets 581 1199 527 648 606 534 694 471 616 480 Cost of funding earning assets 248 305 248 257 247 275 224 173 239 229
Net interest margin 333 894 280 391 359 259 471 297 377 251 Noninterest income to assets 180 869 172 067 152 062 197 1130 096 176 Noninterest expense to assets 281 675 258 262 296 174 309 1098 297 226 Loan and lease loss provision to assets 127 578 113 025 119 150 195 013 023 080 Net operating income to assets 038 210 029 115 032 -028 090 179 099 053 Pretax return on assets 049 376 032 134 038 -022 151 253 109 055 Return on assets 033 243 031 113 024 -029 100 156 089 036 Return on equity 335 1114 416 1015 218 -372 1090 772 787 400 Net charge-offs to loans and leases 118 564 128 028 097 074 181 043 029 088 Loan and lease loss provision to net charge-offs 18162 13896 20412 13553 17661 29078 12777 12377 14423 19658 Effciency ratio 5770 3947 6339 6125 6002 5689 4808 7627 6703 5663 of unproftable institutions 2100 769 2500 529 2785 2337 1188 1818 939 2500 of institutions with earnings gains
Condition Ratios ()
4073 3462 5000 5564 3245 4782 4950 4478 5275 4250
Earning assets to total assets Loss Allowance to
8468 7929 7991 9162 8690 9160 9318 8843 9155 8238
Loans and leases 195 584 236 128 170 165 197 133 122 148 Noncurrent loans and leases
Noncurrent assets plus 8469 24814 10400 9162 7075 5738 21115 14605 9694 8319
other real estate owned to assets 154 173 109 115 192 230 082 028 092 085 Equity capital ratio 963 2086 713 1107 1067 799 915 1955 1120 861 Core capital (leverage) ratio 781 1382 679 1018 803 779 897 1764 1097 684 Tier 1 risk-based capital ratio 979 1309 830 1349 942 1403 1044 3813 1783 971 Total risk-based capital ratio 1254 1560 1218 1455 1190 1501 1251 3903 1892 1263 Net loans and leases to deposits 8976 19328 6853 8431 9898 12074 10008 3152 6891 6944 Net loans to total assets 5771 6930 4178 6702 6882 6849 8222 2315 5596 4304 Domestic deposits to total assets
Structural Changes
5321 3301 3103 7949 6604 5666 8112 6992 8114 4914
New Charters 83 0 0 2 22 2 0 57 0 0 Institutions absorbed by mergers 214 0 2 24 159 12 2 1 8 6 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 0 0 1 10 2 0 0 0 0
Number of institutions 2007 8559 28 4 1634 4739 780 120 376 821 57 2005 8858 29 4 1733 4557 928 125 420 992 70 2003 9236 36 6 1821 4167 1024 166 522 1391 103
Total assets (in billions)2007 $127062 $4235 $26440 $1573 $50544 $14541 $958 $401 $1114 $27255 2005 107007 3599 18389 1430 36674 16771 1092 477 1286 27290 2003 89431 3088 14279 1295 30958 15885 1919 622 1921 19463
Return on assets ()2007 110 381 087 125 109 073 140 237 104 109 2005 131 319 088 132 136 112 170 173 112 136 2003 138 393 105 125 130 144 154 136 109 131
Net charge-offs to loans amp leases () 2007 050 390 065 019 028 029 097 030 017 035 2005 047 427 088 015 022 010 146 029 027 020 2003 078 512 141 024 052 019 142 144 031 056
Noncurrent assets plus OREO to assets () 2007 073 134 051 081 081 109 053 026 064 054 2005 050 136 048 068 048 057 054 025 057 037 2003 077 134 098 095 079 064 088 036 074 061
Equity capital ratio () 2007 1045 2317 778 1132 1086 944 1189 1954 1158 1055 2005 1025 2207 823 1086 1021 1067 958 1926 1083 966 2003 913 1703 727 1081 942 879 749 1592 1057 875
Asset Concentration Group Defnitions (Groups are hierarchical and mutually exclusive) Credit-card Lenders - Institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables International Banks - Banks with assets greater than $10 billion and more than 25 percent of total assets in foreign offces Agricultural Banks - Banks whose agricultural production loans plus real estate loans secured by farmland exceed 25 percent of their total loans and leases Commercial Lenders - Institutions whose commercial and industrial loans plus real estate construction and development loans plus loans secured by commercial real estate properties
exceed 25 percent of total assets Mortgage Lenders - Institutions whose residential mortgage loans plus mortgage-backed securities exceed 50 percent of total assets Consumer Lenders - Institutions whose residential mortgage loans plus credit-card loans plus other loans to individuals exceed 50 percent of total assets Other Specialized lt $1 Billion - Institutions with assets less than $1 billion whose loans and leases are less than 40 percent of total assets All Other lt $1 billion - Institutions with assets less than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset concentrations All Other gt $1 billion - Institutions with assets greater than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset
concentrations
FDIC QUARTERLY 8 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Quarterly Banking Profile
TABLE I-A Selected Indicators All FDIC-Insured Institutions 2008 2007 2007 2006 2005 2004 2003
Return on assets () 033 110 081 128 128 128 138 Return on equity () 385 1049 775 1230 1243 1320 1505 Core capital (leverage) ratio () 781 814 797 822 825 811 788 Noncurrent assets plus other real estate owned to assets () 154 073 094 054 050 053 075 Net charge-offs to loans () 118 050 059 039 049 056 078 Asset growth rate () 683 810 989 904 763 1137 758 Net interest margin () 333 331 329 331 347 352 373 Net operating income growth () -6287 -921 -2757 853 1143 399 1638 Number of institutions reporting 8384 8559 8534 8680 8833 8976 9181
Commercial banks 7146 7303 7283 7401 7526 7631 7770 Savings institutions 1238 1256 1251 1279 1307 1345 1411
Percentage of unproftable institutions () 2100 1033 1207 793 622 597 599 Number of problem institutions 171 65 76 50 52 80 116 Assets of problem institutions (in billions) $116 $19 $22 $8 $7 $28 $30 Number of failedassisted institutions 13 2 3 0 0 4 3
Excludes insured branches of foreign banks (IBAs) Through September 30 ratios annualized where appropriate Asset growth rates are for 12 months ending September 30
TABLE II-A Aggregate Condition and Income Data All FDIC-Insured Institutions (dollar fgures in millions)
Number of institutions reporting Total employees (full-time equivalent) CONDITION DATA Total assets
Loans secured by real estate 1-4 Family residential mortgages Nonfarm nonresidential Construction and development Home equity lines
Commercial amp industrial loans Loans to individuals
Credit cards Farm loans Other loans amp leases Less Unearned income Total loans amp leases Less Reserve for losses Net loans and leases Securities Other real estate owned Goodwill and other intangibles All other assets
Total liabilities and capital Deposits
Domestic offce deposits Foreign offce deposits
Other borrowed funds Subordinated debt All other liabilities Equity capital
Loans and leases 30-89 days past due Noncurrent loans and leases Restructured loans and leases Direct and indirect investments in real estate Mortgage-backed securities Earning assets FHLB Advances Unused loan commitments Trust assets Assets securitized and sold Notional amount of derivatives
3rd Quarter 2nd Quarter 3rd Quarter Change 2008 2008 2007 07Q3-08Q3
8384 2170671
$13573691 4750985 2102080 1043393
617055 652119
1503737 1082731
411627 59656
595646 2739
7990015 156065
7833950 2025534
22966 484178
3207062
13573691 8727485 7221963 1505522 2732570
176833 629706
1307097
121587 184269
14846 910
1260945 11493605
911465 7860609
19948345 1906828
177103186
8451 2203883
$13300540 4794248 2154173 1018988
627283 646903
1492357 1069479
396045 58284
584210 2513
7996065 144383
7851682 2017391
18902 481438
2931127
13300540 8572643 7029111
1543532 2598234
185078 593306
1351279
110814 162895
14499 972
1322210 11441334
840543 8158701
21750102 1750710
183303064
8559 -20 2220522 -22
$12706161 68 4701346 11 2238180 -61
939556 111 616538 01 591372 103
1388441 83 1013355 68
384506 71 56166 62
546851 89 2237 224
7703922 37 87037 793
7616885 28 1989103 18
9818 1339 461068 50
2629288 220
12706161 68 8180226 67 6739817 72 1440409 45 2454148 113
177469 -04 567141 110
1327177 -15
92558 314 83024 1219
4123 2601 1081 -159
1217755 35 11032330 42
770419 183 8301846 -53
21501132 -72 1663308 146
174574544 14
First Three First Three 3rd Quarter 3rd Quarter Change INCOME DATA Qtrs 2008 Qtrs 2007 Change 2008 2007 07Q3-08Q3 Total interest income $487019 $542106 -102 $159097 $188077 -154 Total interest expense 207949 278586 -254 63787 97215 -344
Net interest income 279070 263520 59 95310 90862 49 Provision for loan and lease losses 124517 37208 2347 50548 16785 2012 Total noninterest income 175521 187130 -62 58218 59123 -15 Total noninterest expense 274323 265254 34 93920 90162 42 Securities gains (losses) -8037 2325 NM -7592 77 NM Applicable income taxes 15679 48084 -674 717 13407 -947 Extraordinary gains net 534 -1917 NM 975 -995 NM
Net income 32569 100513 -676 1726 28714 -940 Net charge-offs 68559 27937 1454 27892 10879 1564 Cash dividends 42592 94397 -549 10979 27914 -607 Retained earnings -10023 6116 NM -9253 800 NM
Net operating income 37457 100869 -629 6135 29678 -793
Call Report flers only NM - Not Meaningful
FDIC QUARTERLY 5 2008 VOLUME 2 NO 4
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial bank 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 1726 451 3702 424 -1677 -3100 165 12 151 1599 Commercial banks 8284 377 3702 423 25 711 145 -19 164 2756 Savings institutions
Performance Ratios (annualized)
-6558 74 0 1 -1703 -3811 21 31 -13 -1157
Yield on earning assets 563 1212 484 636 591 584 680 463 607 441 Cost of funding earning assets 226 284 215 236 227 285 200 157 219 196
Net interest margin 337 928 269 400 364 299 480 307 388 245 Noninterest income to assets 176 673 202 067 144 055 174 1100 098 178 Noninterest expense to assets 283 691 248 266 303 208 305 1178 301 216 Loan and lease loss provision to assets 153 678 137 035 138 236 170 016 030 083 Net operating income to assets 019 023 036 112 014 -110 096 086 100 052 Pretax return on assets 007 063 044 121 -015 -118 143 088 079 050 Return on assets 005 039 049 101 -011 -117 093 013 064 028 Return on equity 053 184 659 921 -103 -1507 999 067 570 317 Net charge-offs to loans and leases Loan and lease loss provision to
142 624 144 041 121 103 200 043 034 111
net charge-offs 18123 14852 22242 12578 16375 32766 10068 15218 15569 16561 Effciency ratio 5798 4545 5816 6069 6116 6153 4869 7911 6596 5401 of unproftable institutions 2408 1923 000 863 3103 2494 1386 2088 1286 3250 of institutions with earnings gains
Structural Changes
4071 2308 5000 5539 3216 5327 4851 4242 5087 3000
New Charters 21 0 0 1 5 1 0 14 0 0 Institutions absorbed by mergers 73 0 2 6 57 3 1 0 1 3 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 0 0 7 2 0 0 0 0
Return on assets () 2007 092 407 069 130 099 031 117 220 107 081 2005 131 316 102 133 139 103 176 178 112 131 2003
Net charge-offs to loans
136 425 102 125 128 133 168 147 106 133
and leases () 2007 057 398 077 026 032 042 104 032 022 042 2005 051 428 119 016 023 010 139 018 020 026 2003 073 480 140 029 047 019 134 247 037 048
See Table IV-A (page 8) for explanations
FDIC QUARTERLY 6 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100
Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than
$10 Billion New York Atlanta Chicago Kansas
City Dallas San
Francisco 8384 3240 4470 560 114 1027 1197 1721 1943 1719 777
Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 1726 128 43 -1924 3479 226 2307 830 1322 361 -3320 Commercial banks 8284 150 301 -434 8267 2093 2437 1413 1340 801 200 Savings institutions
Performance Ratios (annualized)
-6558 -21 -258 -1490 -4788 -1867 -130 -583 -18 -440 -3520
Yield on earning assets 563 628 625 586 549 587 547 489 641 604 609 Cost of funding earning assets 226 230 250 230 221 224 241 214 198 219 236
Net interest margin 337 398 375 356 328 363 307 275 443 386 373 Noninterest income to assets 176 099 106 062 202 191 185 178 220 135 138 Noninterest expense to assets 283 368 329 278 277 293 256 274 383 329 268 Loan and lease loss provision to assets 153 046 074 112 170 145 139 139 142 101 219 Net operating income to assets 019 040 034 -016 021 033 040 007 057 032 -033 Pretax return on assets 007 037 008 -056 016 020 031 001 073 031 -068 Return on assets 005 030 001 -052 014 003 027 011 053 019 -056 Return on equity 053 224 013 -472 142 030 268 120 545 191 -634 Net charge-offs to loans and leases 142 042 069 104 163 149 128 132 160 084 179 Loan and lease loss provision to net charge-offs 18123 17209 14953 15534 18646 17641 17760 19567 13065 18081 19772 Effciency ratio 5798 7915 6999 6549 5529 5541 5582 6042 6185 6454 5674 of unproftable institutions 2408 2475 2309 2661 3158 3165 4027 2005 1482 1576 3964 of institutions with earnings gains
Structural Changes
4071 4519 3926 3000 2281 4021 2297 4567 4838 4602 2677
New Charters 21 16 3 1 1 3 6 1 1 5 5 Institutions absorbed by mergers 73 21 47 3 2 10 18 19 15 9 2 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 4 3 2 0 3 0 1 0 5
Return on assets () 2007 092 079 103 118 087 089 075 090 161 114 088 2005 131 108 127 134 132 124 135 108 173 118 160 2003 136 101 117 134 141 124 140 121 177 134 166
Net charge-offs to loans and leases () 2007 057 026 024 042 066 092 029 044 074 029 076 2005 051 016 018 023 064 097 027 029 054 025 059 2003 073 030 037 049 087 110 050 065 085 038 060
See Table IV-A (page 9) for explanations
FDIC QUARTERLY 7 2008 VOLUME 2 NO 4
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial banks 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 32569 8309 6912 1395 10596 -2295 530 413 625 6083 Commercial banks 38123 7908 6912 1392 11587 1938 317 272 624 7172 Savings institutions
Performance Ratios (annualized)
-5555 401 0 3 -991 -4233 213 141 0 -1089
Yield on earning assets 581 1199 527 648 606 534 694 471 616 480 Cost of funding earning assets 248 305 248 257 247 275 224 173 239 229
Net interest margin 333 894 280 391 359 259 471 297 377 251 Noninterest income to assets 180 869 172 067 152 062 197 1130 096 176 Noninterest expense to assets 281 675 258 262 296 174 309 1098 297 226 Loan and lease loss provision to assets 127 578 113 025 119 150 195 013 023 080 Net operating income to assets 038 210 029 115 032 -028 090 179 099 053 Pretax return on assets 049 376 032 134 038 -022 151 253 109 055 Return on assets 033 243 031 113 024 -029 100 156 089 036 Return on equity 335 1114 416 1015 218 -372 1090 772 787 400 Net charge-offs to loans and leases 118 564 128 028 097 074 181 043 029 088 Loan and lease loss provision to net charge-offs 18162 13896 20412 13553 17661 29078 12777 12377 14423 19658 Effciency ratio 5770 3947 6339 6125 6002 5689 4808 7627 6703 5663 of unproftable institutions 2100 769 2500 529 2785 2337 1188 1818 939 2500 of institutions with earnings gains
Condition Ratios ()
4073 3462 5000 5564 3245 4782 4950 4478 5275 4250
Earning assets to total assets Loss Allowance to
8468 7929 7991 9162 8690 9160 9318 8843 9155 8238
Loans and leases 195 584 236 128 170 165 197 133 122 148 Noncurrent loans and leases
Noncurrent assets plus 8469 24814 10400 9162 7075 5738 21115 14605 9694 8319
other real estate owned to assets 154 173 109 115 192 230 082 028 092 085 Equity capital ratio 963 2086 713 1107 1067 799 915 1955 1120 861 Core capital (leverage) ratio 781 1382 679 1018 803 779 897 1764 1097 684 Tier 1 risk-based capital ratio 979 1309 830 1349 942 1403 1044 3813 1783 971 Total risk-based capital ratio 1254 1560 1218 1455 1190 1501 1251 3903 1892 1263 Net loans and leases to deposits 8976 19328 6853 8431 9898 12074 10008 3152 6891 6944 Net loans to total assets 5771 6930 4178 6702 6882 6849 8222 2315 5596 4304 Domestic deposits to total assets
Structural Changes
5321 3301 3103 7949 6604 5666 8112 6992 8114 4914
New Charters 83 0 0 2 22 2 0 57 0 0 Institutions absorbed by mergers 214 0 2 24 159 12 2 1 8 6 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 0 0 1 10 2 0 0 0 0
Number of institutions 2007 8559 28 4 1634 4739 780 120 376 821 57 2005 8858 29 4 1733 4557 928 125 420 992 70 2003 9236 36 6 1821 4167 1024 166 522 1391 103
Total assets (in billions)2007 $127062 $4235 $26440 $1573 $50544 $14541 $958 $401 $1114 $27255 2005 107007 3599 18389 1430 36674 16771 1092 477 1286 27290 2003 89431 3088 14279 1295 30958 15885 1919 622 1921 19463
Return on assets ()2007 110 381 087 125 109 073 140 237 104 109 2005 131 319 088 132 136 112 170 173 112 136 2003 138 393 105 125 130 144 154 136 109 131
Net charge-offs to loans amp leases () 2007 050 390 065 019 028 029 097 030 017 035 2005 047 427 088 015 022 010 146 029 027 020 2003 078 512 141 024 052 019 142 144 031 056
Noncurrent assets plus OREO to assets () 2007 073 134 051 081 081 109 053 026 064 054 2005 050 136 048 068 048 057 054 025 057 037 2003 077 134 098 095 079 064 088 036 074 061
Equity capital ratio () 2007 1045 2317 778 1132 1086 944 1189 1954 1158 1055 2005 1025 2207 823 1086 1021 1067 958 1926 1083 966 2003 913 1703 727 1081 942 879 749 1592 1057 875
Asset Concentration Group Defnitions (Groups are hierarchical and mutually exclusive) Credit-card Lenders - Institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables International Banks - Banks with assets greater than $10 billion and more than 25 percent of total assets in foreign offces Agricultural Banks - Banks whose agricultural production loans plus real estate loans secured by farmland exceed 25 percent of their total loans and leases Commercial Lenders - Institutions whose commercial and industrial loans plus real estate construction and development loans plus loans secured by commercial real estate properties
exceed 25 percent of total assets Mortgage Lenders - Institutions whose residential mortgage loans plus mortgage-backed securities exceed 50 percent of total assets Consumer Lenders - Institutions whose residential mortgage loans plus credit-card loans plus other loans to individuals exceed 50 percent of total assets Other Specialized lt $1 Billion - Institutions with assets less than $1 billion whose loans and leases are less than 40 percent of total assets All Other lt $1 billion - Institutions with assets less than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset concentrations All Other gt $1 billion - Institutions with assets greater than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset
concentrations
FDIC QUARTERLY 8 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial bank 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 1726 451 3702 424 -1677 -3100 165 12 151 1599 Commercial banks 8284 377 3702 423 25 711 145 -19 164 2756 Savings institutions
Performance Ratios (annualized)
-6558 74 0 1 -1703 -3811 21 31 -13 -1157
Yield on earning assets 563 1212 484 636 591 584 680 463 607 441 Cost of funding earning assets 226 284 215 236 227 285 200 157 219 196
Net interest margin 337 928 269 400 364 299 480 307 388 245 Noninterest income to assets 176 673 202 067 144 055 174 1100 098 178 Noninterest expense to assets 283 691 248 266 303 208 305 1178 301 216 Loan and lease loss provision to assets 153 678 137 035 138 236 170 016 030 083 Net operating income to assets 019 023 036 112 014 -110 096 086 100 052 Pretax return on assets 007 063 044 121 -015 -118 143 088 079 050 Return on assets 005 039 049 101 -011 -117 093 013 064 028 Return on equity 053 184 659 921 -103 -1507 999 067 570 317 Net charge-offs to loans and leases Loan and lease loss provision to
142 624 144 041 121 103 200 043 034 111
net charge-offs 18123 14852 22242 12578 16375 32766 10068 15218 15569 16561 Effciency ratio 5798 4545 5816 6069 6116 6153 4869 7911 6596 5401 of unproftable institutions 2408 1923 000 863 3103 2494 1386 2088 1286 3250 of institutions with earnings gains
Structural Changes
4071 2308 5000 5539 3216 5327 4851 4242 5087 3000
New Charters 21 0 0 1 5 1 0 14 0 0 Institutions absorbed by mergers 73 0 2 6 57 3 1 0 1 3 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 0 0 7 2 0 0 0 0
Return on assets () 2007 092 407 069 130 099 031 117 220 107 081 2005 131 316 102 133 139 103 176 178 112 131 2003
Net charge-offs to loans
136 425 102 125 128 133 168 147 106 133
and leases () 2007 057 398 077 026 032 042 104 032 022 042 2005 051 428 119 016 023 010 139 018 020 026 2003 073 480 140 029 047 019 134 247 037 048
See Table IV-A (page 8) for explanations
FDIC QUARTERLY 6 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100
Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than
$10 Billion New York Atlanta Chicago Kansas
City Dallas San
Francisco 8384 3240 4470 560 114 1027 1197 1721 1943 1719 777
Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 1726 128 43 -1924 3479 226 2307 830 1322 361 -3320 Commercial banks 8284 150 301 -434 8267 2093 2437 1413 1340 801 200 Savings institutions
Performance Ratios (annualized)
-6558 -21 -258 -1490 -4788 -1867 -130 -583 -18 -440 -3520
Yield on earning assets 563 628 625 586 549 587 547 489 641 604 609 Cost of funding earning assets 226 230 250 230 221 224 241 214 198 219 236
Net interest margin 337 398 375 356 328 363 307 275 443 386 373 Noninterest income to assets 176 099 106 062 202 191 185 178 220 135 138 Noninterest expense to assets 283 368 329 278 277 293 256 274 383 329 268 Loan and lease loss provision to assets 153 046 074 112 170 145 139 139 142 101 219 Net operating income to assets 019 040 034 -016 021 033 040 007 057 032 -033 Pretax return on assets 007 037 008 -056 016 020 031 001 073 031 -068 Return on assets 005 030 001 -052 014 003 027 011 053 019 -056 Return on equity 053 224 013 -472 142 030 268 120 545 191 -634 Net charge-offs to loans and leases 142 042 069 104 163 149 128 132 160 084 179 Loan and lease loss provision to net charge-offs 18123 17209 14953 15534 18646 17641 17760 19567 13065 18081 19772 Effciency ratio 5798 7915 6999 6549 5529 5541 5582 6042 6185 6454 5674 of unproftable institutions 2408 2475 2309 2661 3158 3165 4027 2005 1482 1576 3964 of institutions with earnings gains
Structural Changes
4071 4519 3926 3000 2281 4021 2297 4567 4838 4602 2677
New Charters 21 16 3 1 1 3 6 1 1 5 5 Institutions absorbed by mergers 73 21 47 3 2 10 18 19 15 9 2 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 4 3 2 0 3 0 1 0 5
Return on assets () 2007 092 079 103 118 087 089 075 090 161 114 088 2005 131 108 127 134 132 124 135 108 173 118 160 2003 136 101 117 134 141 124 140 121 177 134 166
Net charge-offs to loans and leases () 2007 057 026 024 042 066 092 029 044 074 029 076 2005 051 016 018 023 064 097 027 029 054 025 059 2003 073 030 037 049 087 110 050 065 085 038 060
See Table IV-A (page 9) for explanations
FDIC QUARTERLY 7 2008 VOLUME 2 NO 4
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial banks 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 32569 8309 6912 1395 10596 -2295 530 413 625 6083 Commercial banks 38123 7908 6912 1392 11587 1938 317 272 624 7172 Savings institutions
Performance Ratios (annualized)
-5555 401 0 3 -991 -4233 213 141 0 -1089
Yield on earning assets 581 1199 527 648 606 534 694 471 616 480 Cost of funding earning assets 248 305 248 257 247 275 224 173 239 229
Net interest margin 333 894 280 391 359 259 471 297 377 251 Noninterest income to assets 180 869 172 067 152 062 197 1130 096 176 Noninterest expense to assets 281 675 258 262 296 174 309 1098 297 226 Loan and lease loss provision to assets 127 578 113 025 119 150 195 013 023 080 Net operating income to assets 038 210 029 115 032 -028 090 179 099 053 Pretax return on assets 049 376 032 134 038 -022 151 253 109 055 Return on assets 033 243 031 113 024 -029 100 156 089 036 Return on equity 335 1114 416 1015 218 -372 1090 772 787 400 Net charge-offs to loans and leases 118 564 128 028 097 074 181 043 029 088 Loan and lease loss provision to net charge-offs 18162 13896 20412 13553 17661 29078 12777 12377 14423 19658 Effciency ratio 5770 3947 6339 6125 6002 5689 4808 7627 6703 5663 of unproftable institutions 2100 769 2500 529 2785 2337 1188 1818 939 2500 of institutions with earnings gains
Condition Ratios ()
4073 3462 5000 5564 3245 4782 4950 4478 5275 4250
Earning assets to total assets Loss Allowance to
8468 7929 7991 9162 8690 9160 9318 8843 9155 8238
Loans and leases 195 584 236 128 170 165 197 133 122 148 Noncurrent loans and leases
Noncurrent assets plus 8469 24814 10400 9162 7075 5738 21115 14605 9694 8319
other real estate owned to assets 154 173 109 115 192 230 082 028 092 085 Equity capital ratio 963 2086 713 1107 1067 799 915 1955 1120 861 Core capital (leverage) ratio 781 1382 679 1018 803 779 897 1764 1097 684 Tier 1 risk-based capital ratio 979 1309 830 1349 942 1403 1044 3813 1783 971 Total risk-based capital ratio 1254 1560 1218 1455 1190 1501 1251 3903 1892 1263 Net loans and leases to deposits 8976 19328 6853 8431 9898 12074 10008 3152 6891 6944 Net loans to total assets 5771 6930 4178 6702 6882 6849 8222 2315 5596 4304 Domestic deposits to total assets
Structural Changes
5321 3301 3103 7949 6604 5666 8112 6992 8114 4914
New Charters 83 0 0 2 22 2 0 57 0 0 Institutions absorbed by mergers 214 0 2 24 159 12 2 1 8 6 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 0 0 1 10 2 0 0 0 0
Number of institutions 2007 8559 28 4 1634 4739 780 120 376 821 57 2005 8858 29 4 1733 4557 928 125 420 992 70 2003 9236 36 6 1821 4167 1024 166 522 1391 103
Total assets (in billions)2007 $127062 $4235 $26440 $1573 $50544 $14541 $958 $401 $1114 $27255 2005 107007 3599 18389 1430 36674 16771 1092 477 1286 27290 2003 89431 3088 14279 1295 30958 15885 1919 622 1921 19463
Return on assets ()2007 110 381 087 125 109 073 140 237 104 109 2005 131 319 088 132 136 112 170 173 112 136 2003 138 393 105 125 130 144 154 136 109 131
Net charge-offs to loans amp leases () 2007 050 390 065 019 028 029 097 030 017 035 2005 047 427 088 015 022 010 146 029 027 020 2003 078 512 141 024 052 019 142 144 031 056
Noncurrent assets plus OREO to assets () 2007 073 134 051 081 081 109 053 026 064 054 2005 050 136 048 068 048 057 054 025 057 037 2003 077 134 098 095 079 064 088 036 074 061
Equity capital ratio () 2007 1045 2317 778 1132 1086 944 1189 1954 1158 1055 2005 1025 2207 823 1086 1021 1067 958 1926 1083 966 2003 913 1703 727 1081 942 879 749 1592 1057 875
Asset Concentration Group Defnitions (Groups are hierarchical and mutually exclusive) Credit-card Lenders - Institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables International Banks - Banks with assets greater than $10 billion and more than 25 percent of total assets in foreign offces Agricultural Banks - Banks whose agricultural production loans plus real estate loans secured by farmland exceed 25 percent of their total loans and leases Commercial Lenders - Institutions whose commercial and industrial loans plus real estate construction and development loans plus loans secured by commercial real estate properties
exceed 25 percent of total assets Mortgage Lenders - Institutions whose residential mortgage loans plus mortgage-backed securities exceed 50 percent of total assets Consumer Lenders - Institutions whose residential mortgage loans plus credit-card loans plus other loans to individuals exceed 50 percent of total assets Other Specialized lt $1 Billion - Institutions with assets less than $1 billion whose loans and leases are less than 40 percent of total assets All Other lt $1 billion - Institutions with assets less than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset concentrations All Other gt $1 billion - Institutions with assets greater than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset
concentrations
FDIC QUARTERLY 8 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Quarterly Banking Profile
TABLE III-A Third Quarter 2008 All FDIC-Insured Institutions
THIRD QUARTER (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100
Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than
$10 Billion New York Atlanta Chicago Kansas
City Dallas San
Francisco 8384 3240 4470 560 114 1027 1197 1721 1943 1719 777
Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 1726 128 43 -1924 3479 226 2307 830 1322 361 -3320 Commercial banks 8284 150 301 -434 8267 2093 2437 1413 1340 801 200 Savings institutions
Performance Ratios (annualized)
-6558 -21 -258 -1490 -4788 -1867 -130 -583 -18 -440 -3520
Yield on earning assets 563 628 625 586 549 587 547 489 641 604 609 Cost of funding earning assets 226 230 250 230 221 224 241 214 198 219 236
Net interest margin 337 398 375 356 328 363 307 275 443 386 373 Noninterest income to assets 176 099 106 062 202 191 185 178 220 135 138 Noninterest expense to assets 283 368 329 278 277 293 256 274 383 329 268 Loan and lease loss provision to assets 153 046 074 112 170 145 139 139 142 101 219 Net operating income to assets 019 040 034 -016 021 033 040 007 057 032 -033 Pretax return on assets 007 037 008 -056 016 020 031 001 073 031 -068 Return on assets 005 030 001 -052 014 003 027 011 053 019 -056 Return on equity 053 224 013 -472 142 030 268 120 545 191 -634 Net charge-offs to loans and leases 142 042 069 104 163 149 128 132 160 084 179 Loan and lease loss provision to net charge-offs 18123 17209 14953 15534 18646 17641 17760 19567 13065 18081 19772 Effciency ratio 5798 7915 6999 6549 5529 5541 5582 6042 6185 6454 5674 of unproftable institutions 2408 2475 2309 2661 3158 3165 4027 2005 1482 1576 3964 of institutions with earnings gains
Structural Changes
4071 4519 3926 3000 2281 4021 2297 4567 4838 4602 2677
New Charters 21 16 3 1 1 3 6 1 1 5 5 Institutions absorbed by mergers 73 21 47 3 2 10 18 19 15 9 2 Failed Institutions
PRIOR THIRD QUARTERS (The way it was)
9 0 4 3 2 0 3 0 1 0 5
Return on assets () 2007 092 079 103 118 087 089 075 090 161 114 088 2005 131 108 127 134 132 124 135 108 173 118 160 2003 136 101 117 134 141 124 140 121 177 134 166
Net charge-offs to loans and leases () 2007 057 026 024 042 066 092 029 044 074 029 076 2005 051 016 018 023 064 097 027 029 054 025 059 2003 073 030 037 049 087 110 050 065 085 038 060
See Table IV-A (page 9) for explanations
FDIC QUARTERLY 7 2008 VOLUME 2 NO 4
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial banks 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 32569 8309 6912 1395 10596 -2295 530 413 625 6083 Commercial banks 38123 7908 6912 1392 11587 1938 317 272 624 7172 Savings institutions
Performance Ratios (annualized)
-5555 401 0 3 -991 -4233 213 141 0 -1089
Yield on earning assets 581 1199 527 648 606 534 694 471 616 480 Cost of funding earning assets 248 305 248 257 247 275 224 173 239 229
Net interest margin 333 894 280 391 359 259 471 297 377 251 Noninterest income to assets 180 869 172 067 152 062 197 1130 096 176 Noninterest expense to assets 281 675 258 262 296 174 309 1098 297 226 Loan and lease loss provision to assets 127 578 113 025 119 150 195 013 023 080 Net operating income to assets 038 210 029 115 032 -028 090 179 099 053 Pretax return on assets 049 376 032 134 038 -022 151 253 109 055 Return on assets 033 243 031 113 024 -029 100 156 089 036 Return on equity 335 1114 416 1015 218 -372 1090 772 787 400 Net charge-offs to loans and leases 118 564 128 028 097 074 181 043 029 088 Loan and lease loss provision to net charge-offs 18162 13896 20412 13553 17661 29078 12777 12377 14423 19658 Effciency ratio 5770 3947 6339 6125 6002 5689 4808 7627 6703 5663 of unproftable institutions 2100 769 2500 529 2785 2337 1188 1818 939 2500 of institutions with earnings gains
Condition Ratios ()
4073 3462 5000 5564 3245 4782 4950 4478 5275 4250
Earning assets to total assets Loss Allowance to
8468 7929 7991 9162 8690 9160 9318 8843 9155 8238
Loans and leases 195 584 236 128 170 165 197 133 122 148 Noncurrent loans and leases
Noncurrent assets plus 8469 24814 10400 9162 7075 5738 21115 14605 9694 8319
other real estate owned to assets 154 173 109 115 192 230 082 028 092 085 Equity capital ratio 963 2086 713 1107 1067 799 915 1955 1120 861 Core capital (leverage) ratio 781 1382 679 1018 803 779 897 1764 1097 684 Tier 1 risk-based capital ratio 979 1309 830 1349 942 1403 1044 3813 1783 971 Total risk-based capital ratio 1254 1560 1218 1455 1190 1501 1251 3903 1892 1263 Net loans and leases to deposits 8976 19328 6853 8431 9898 12074 10008 3152 6891 6944 Net loans to total assets 5771 6930 4178 6702 6882 6849 8222 2315 5596 4304 Domestic deposits to total assets
Structural Changes
5321 3301 3103 7949 6604 5666 8112 6992 8114 4914
New Charters 83 0 0 2 22 2 0 57 0 0 Institutions absorbed by mergers 214 0 2 24 159 12 2 1 8 6 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 0 0 1 10 2 0 0 0 0
Number of institutions 2007 8559 28 4 1634 4739 780 120 376 821 57 2005 8858 29 4 1733 4557 928 125 420 992 70 2003 9236 36 6 1821 4167 1024 166 522 1391 103
Total assets (in billions)2007 $127062 $4235 $26440 $1573 $50544 $14541 $958 $401 $1114 $27255 2005 107007 3599 18389 1430 36674 16771 1092 477 1286 27290 2003 89431 3088 14279 1295 30958 15885 1919 622 1921 19463
Return on assets ()2007 110 381 087 125 109 073 140 237 104 109 2005 131 319 088 132 136 112 170 173 112 136 2003 138 393 105 125 130 144 154 136 109 131
Net charge-offs to loans amp leases () 2007 050 390 065 019 028 029 097 030 017 035 2005 047 427 088 015 022 010 146 029 027 020 2003 078 512 141 024 052 019 142 144 031 056
Noncurrent assets plus OREO to assets () 2007 073 134 051 081 081 109 053 026 064 054 2005 050 136 048 068 048 057 054 025 057 037 2003 077 134 098 095 079 064 088 036 074 061
Equity capital ratio () 2007 1045 2317 778 1132 1086 944 1189 1954 1158 1055 2005 1025 2207 823 1086 1021 1067 958 1926 1083 966 2003 913 1703 727 1081 942 879 749 1592 1057 875
Asset Concentration Group Defnitions (Groups are hierarchical and mutually exclusive) Credit-card Lenders - Institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables International Banks - Banks with assets greater than $10 billion and more than 25 percent of total assets in foreign offces Agricultural Banks - Banks whose agricultural production loans plus real estate loans secured by farmland exceed 25 percent of their total loans and leases Commercial Lenders - Institutions whose commercial and industrial loans plus real estate construction and development loans plus loans secured by commercial real estate properties
exceed 25 percent of total assets Mortgage Lenders - Institutions whose residential mortgage loans plus mortgage-backed securities exceed 50 percent of total assets Consumer Lenders - Institutions whose residential mortgage loans plus credit-card loans plus other loans to individuals exceed 50 percent of total assets Other Specialized lt $1 Billion - Institutions with assets less than $1 billion whose loans and leases are less than 40 percent of total assets All Other lt $1 billion - Institutions with assets less than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset concentrations All Other gt $1 billion - Institutions with assets greater than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset
concentrations
FDIC QUARTERLY 8 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Concentration Groups
Credit Card
Banks International
Banks Agricultural
Banks Commercial
Lenders Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1 Billion
All Other gt$1 Billion
8384 26 4 1587 4811 826 101 297 692 40 Commercial banks 7146 22 4 1582 4300 213 81 271 643 30 Savings institutions 1238 4 0 5 511 613 20 26 49 10
Total assets (in billions) $135737 $4679 $32633 $1680 $60782 $10586 $724 $359 $948 $23346 Commercial banks 120504 4484 32633 1675 55607 2257 343 303 832 22369 Savings institutions 15233 195 00 05 5175 8329 381 56 116 977
Total deposits (in billions) 87275 1678 19894 1335 42265 6004 595 264 770 14470 Commercial banks 77785 1588 19894 1332 38946 882 275 226 680 13963 Savings institutions 9490 89 00 04 3319 5122 320 38 90 507
Net income (in millions) 32569 8309 6912 1395 10596 -2295 530 413 625 6083 Commercial banks 38123 7908 6912 1392 11587 1938 317 272 624 7172 Savings institutions
Performance Ratios (annualized)
-5555 401 0 3 -991 -4233 213 141 0 -1089
Yield on earning assets 581 1199 527 648 606 534 694 471 616 480 Cost of funding earning assets 248 305 248 257 247 275 224 173 239 229
Net interest margin 333 894 280 391 359 259 471 297 377 251 Noninterest income to assets 180 869 172 067 152 062 197 1130 096 176 Noninterest expense to assets 281 675 258 262 296 174 309 1098 297 226 Loan and lease loss provision to assets 127 578 113 025 119 150 195 013 023 080 Net operating income to assets 038 210 029 115 032 -028 090 179 099 053 Pretax return on assets 049 376 032 134 038 -022 151 253 109 055 Return on assets 033 243 031 113 024 -029 100 156 089 036 Return on equity 335 1114 416 1015 218 -372 1090 772 787 400 Net charge-offs to loans and leases 118 564 128 028 097 074 181 043 029 088 Loan and lease loss provision to net charge-offs 18162 13896 20412 13553 17661 29078 12777 12377 14423 19658 Effciency ratio 5770 3947 6339 6125 6002 5689 4808 7627 6703 5663 of unproftable institutions 2100 769 2500 529 2785 2337 1188 1818 939 2500 of institutions with earnings gains
Condition Ratios ()
4073 3462 5000 5564 3245 4782 4950 4478 5275 4250
Earning assets to total assets Loss Allowance to
8468 7929 7991 9162 8690 9160 9318 8843 9155 8238
Loans and leases 195 584 236 128 170 165 197 133 122 148 Noncurrent loans and leases
Noncurrent assets plus 8469 24814 10400 9162 7075 5738 21115 14605 9694 8319
other real estate owned to assets 154 173 109 115 192 230 082 028 092 085 Equity capital ratio 963 2086 713 1107 1067 799 915 1955 1120 861 Core capital (leverage) ratio 781 1382 679 1018 803 779 897 1764 1097 684 Tier 1 risk-based capital ratio 979 1309 830 1349 942 1403 1044 3813 1783 971 Total risk-based capital ratio 1254 1560 1218 1455 1190 1501 1251 3903 1892 1263 Net loans and leases to deposits 8976 19328 6853 8431 9898 12074 10008 3152 6891 6944 Net loans to total assets 5771 6930 4178 6702 6882 6849 8222 2315 5596 4304 Domestic deposits to total assets
Structural Changes
5321 3301 3103 7949 6604 5666 8112 6992 8114 4914
New Charters 83 0 0 2 22 2 0 57 0 0 Institutions absorbed by mergers 214 0 2 24 159 12 2 1 8 6 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 0 0 1 10 2 0 0 0 0
Number of institutions 2007 8559 28 4 1634 4739 780 120 376 821 57 2005 8858 29 4 1733 4557 928 125 420 992 70 2003 9236 36 6 1821 4167 1024 166 522 1391 103
Total assets (in billions)2007 $127062 $4235 $26440 $1573 $50544 $14541 $958 $401 $1114 $27255 2005 107007 3599 18389 1430 36674 16771 1092 477 1286 27290 2003 89431 3088 14279 1295 30958 15885 1919 622 1921 19463
Return on assets ()2007 110 381 087 125 109 073 140 237 104 109 2005 131 319 088 132 136 112 170 173 112 136 2003 138 393 105 125 130 144 154 136 109 131
Net charge-offs to loans amp leases () 2007 050 390 065 019 028 029 097 030 017 035 2005 047 427 088 015 022 010 146 029 027 020 2003 078 512 141 024 052 019 142 144 031 056
Noncurrent assets plus OREO to assets () 2007 073 134 051 081 081 109 053 026 064 054 2005 050 136 048 068 048 057 054 025 057 037 2003 077 134 098 095 079 064 088 036 074 061
Equity capital ratio () 2007 1045 2317 778 1132 1086 944 1189 1954 1158 1055 2005 1025 2207 823 1086 1021 1067 958 1926 1083 966 2003 913 1703 727 1081 942 879 749 1592 1057 875
Asset Concentration Group Defnitions (Groups are hierarchical and mutually exclusive) Credit-card Lenders - Institutions whose credit-card loans plus securitized receivables exceed 50 percent of total assets plus securitized receivables International Banks - Banks with assets greater than $10 billion and more than 25 percent of total assets in foreign offces Agricultural Banks - Banks whose agricultural production loans plus real estate loans secured by farmland exceed 25 percent of their total loans and leases Commercial Lenders - Institutions whose commercial and industrial loans plus real estate construction and development loans plus loans secured by commercial real estate properties
exceed 25 percent of total assets Mortgage Lenders - Institutions whose residential mortgage loans plus mortgage-backed securities exceed 50 percent of total assets Consumer Lenders - Institutions whose residential mortgage loans plus credit-card loans plus other loans to individuals exceed 50 percent of total assets Other Specialized lt $1 Billion - Institutions with assets less than $1 billion whose loans and leases are less than 40 percent of total assets All Other lt $1 billion - Institutions with assets less than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset concentrations All Other gt $1 billion - Institutions with assets greater than $1 billion that do not meet any of the defnitions above they have signifcant lending activity with no identifed asset
concentrations
FDIC QUARTERLY 8 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Quarterly Banking Profile
TABLE IV-A First Three Quarters 2008 All FDIC-Insured Institutions
FIRST THREE QUARTERS (The way it is)
Number of institutions reporting
All Insured Institutions
Asset Size Distribution Geographic Regions
Less than $100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
8384 3240 4470 560 114 1027 1197 1721 1943 1719 777 Commercial banks 7146 2882 3755 425 84 535 1056 1419 1837 1592 707 Savings institutions 1238 358 715 135 30 492 141 302 106 127 70
Total assets (in billions) $135737 $1749 $13383 $14750 $105855 $26896 $34278 $33247 $10092 $7708 $23515 Commercial banks 120504 1564 10883 11371 96687 19940 31641 31780 9645 6360 21137 Savings institutions 15233 185 2501 3379 9168 6956 2637 1467 447 1348 2378
Total deposits (in billions) 87275 1417 10533 10471 64853 16524 22356 21050 7087 5510 14748 Commercial banks 77785 1276 8692 8128 59688 11972 20760 20013 6779 4730 13531 Savings institutions 9490 141 1841 2343 5164 4552 1597 1037 307 780 1216
Net income (in millions) 32569 616 4395 2335 25222 11278 7931 7061 6889 3188 -3779 Commercial banks 38123 644 4178 3265 30037 11463 8269 7454 6913 3588 437 Savings institutions
Performance Ratios (annualized)
-5555 -28 217 -930 -4815 -185 -338 -392 -25 -399 -4216
Yield on earning assets 581 636 640 614 567 608 547 518 653 618 640 Cost of funding earning assets 248 248 270 257 244 253 251 241 222 242 261
Net interest margin 333 389 370 357 323 355 296 277 432 376 379 Noninterest income to assets 180 104 110 122 198 210 164 192 286 142 122 Noninterest expense to assets 281 363 322 297 272 290 246 269 383 322 281 Loan and lease loss provision to assets 127 034 055 092 144 116 119 120 140 080 171 Net operating income to assets 038 050 055 032 037 068 037 026 092 057 -004 Pretax return on assets 049 061 061 040 049 096 043 045 138 077 -030 Return on assets 033 048 045 021 033 060 031 031 094 057 -021 Return on equity 335 358 430 190 345 509 304 347 954 575 -237 Net charge-offs to loans and leases Loan and lease loss provision to net
118 030 049 085 137 131 098 114 136 065 148
charge-offs 18162 17788 15847 15747 18564 15779 19751 19639 15117 18524 18659 Effciency ratio 5770 7865 6981 6113 5538 5380 5723 5874 5657 6437 6020 of unproftable institutions 2100 2290 1942 2143 2719 2814 3642 1755 1173 1297 3642 of institutions with earnings gains
Condition Ratios ()
4073 4426 3951 3357 2368 4021 2314 4393 4843 4759 2703
Earning assets to total assets Loss Allowance to
8468 9185 9173 9021 8289 8290 8435 8470 8630 8989 8473
Loans and leases 195 132 128 154 215 193 176 201 188 147 239 Noncurrent loans and leases
Noncurrent assets plus other real estate 8469 7921 6459 6219 9176 11498 7364 7944 7746 7169 9295
owned to assets 154 140 181 204 143 098 167 156 190 163 175 Equity capital ratio 963 1315 1019 1089 933 1092 1015 856 967 987 880 Core capital (leverage) ratio 781 1299 979 924 723 871 693 776 802 883 778 Tier 1 risk-based capital ratio 979 1868 1295 1162 898 1181 892 882 944 1124 1012 Total risk-based capital ratio 1254 1973 1407 1300 1216 1387 1188 1186 1212 1299 1318 Net loans and leases to deposits 8976 7875 8959 9812 8868 8634 9180 8335 9517 9204 9621 Net loans to total assets 5771 6381 7052 6966 5433 5304 5987 5277 6683 6579 6034 Domestic deposits to total assets
Structural Changes
5321 8103 7858 7023 4717 5305 5813 5011 6426 7071 4011
New Charters 83 77 4 1 1 18 28 1 4 14 18 Institutions absorbed by mergers 214 78 109 22 5 28 53 44 44 37 8 Failed Institutions
PRIOR FIRST THREE QUARTERS (The way it was)
13 3 4 4 2 0 3 0 4 1 5
Number of institutions 2007 8559 3513 4391 539 116 1046 1215 1793 1990 1740 775 2005 8858 3943 4294 503 118 1113 1219 1890 2074 1806 756 2003 9236 4464 4190 469 113 1188 1231 2027 2141 1878 771
Total assets (in billions) 2007 $127062 $1861 $12967 $14082 $98152 $23821 $31959 $27964 $9315 $6594 $27409 2005 107007 2058 12257 13659 79032 27559 26353 24945 7841 5850 14458 2003 89431 2291 11598 12896 62647 30390 18586 16538 4453 5926 13539
Return on assets () 2007 110 084 106 109 112 100 105 101 163 115 116 2005 131 108 124 134 132 127 138 101 165 125 162 2003 138 097 120 135 143 125 138 131 162 139 165
Net charge-offs to loans amp leases () 2007 050 018 019 035 059 086 025 037 066 023 064 2005 047 016 018 022 058 081 022 029 054 023 061 2003
Noncurrent assets plus OREO to
078 026 032 052 095 117 056 066 097 038 064
assets () 2007 073 087 089 083 069 066 054 078 119 078 080 2005 050 071 054 050 049 046 031 054 080 073 058 2003 077 091 073 064 081 084 060 096 074 078 064
Equity capital ratio () 2007 1045 1368 1057 1138 1023 1243 1014 909 1013 1039 1058 2005 1025 1226 1026 1057 1014 1063 986 918 1067 957 1212 2003 913 1144 1003 1048 860 896 883 864 1079 964 974
Regions New York - Connecticut Delaware District of Columbia Maine Maryland Massachusetts New Hampshire New Jersey New York Pennsylvania Puerto Rico Rhode Island Vermont
US Virgin Islands Atlanta - Alabama Florida Georgia North Carolina South Carolina Virginia West Virginia Chicago - Illinois Indiana Kentucky Michigan Ohio Wisconsin Kansas City - Iowa Kansas Minnesota Missouri Nebraska North Dakota South Dakota Dallas - Arkansas Colorado Louisiana Mississippi New Mexico Oklahoma Tennessee Texas San Francisco - Alaska Arizona California Hawaii Idaho Montana Nevada Oregon Pacifc Islands Utah Washington Wyoming
FDIC QUARTERLY 9 2008 VOLUME 2 NO 4
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008
Asset Concentration Groups
All Insured Institutions
Credit Card
Banks
International Banks
Agricultural Banks
Commercial Lenders
Mortgage Lenders
Consumer Lenders
Other Specialized lt$1 Billion
All Other lt$1
Billion
All Other gt$1
Billion Percent of Loans 30-89 Days Past Due All loans secured by real estate 178 323 255 128 153 202 113 104 168 196
Construction and development 234 000 172 272 239 446 134 105 175 091 Nonfarm nonresidential 078 000 057 123 078 079 125 071 138 067 Multifamily residential real estate 076 000 028 170 091 088 1049 027 124 040 Home equity loans 117 348 136 086 090 157 090 033 064 145 Other 1-4 family residential 245 138 371 175 212 207 125 134 199 276
Commercial and industrial loans 069 363 032 160 072 076 150 111 161 050 Loans to individuals 222 266 206 203 224 134 187 163 229 172
Credit card loans 250 252 255 149 237 270 138 201 258 273 Other loans to individual 204 360 182 206 223 100 204 160 228 150
All other loans and leases (including farm) 040 011 023 050 063 048 013 110 076 025 Total loans and leases
Percent of Loans Noncurrent
152 260 163 119 136 195 156 116 168 140
All real estate loans 312 222 354 169 319 304 090 097 135 274 Construction and development 730 000 381 691 734 1125 415 216 312 643 Nonfarm nonresidential 136 000 056 168 139 142 130 095 153 130 Multifamily residential real estate 147 000 056 119 180 115 336 240 213 104 Home equity loans 119 242 137 040 096 116 053 058 048 163 Other 1-4 family residential 364 062 536 119 358 309 104 082 117 322
Commercial and industrial loans 101 310 055 175 109 083 071 154 158 095 Loans to individuals 150 244 185 076 093 070 100 049 075 067
Credit card loans 235 236 255 147 207 244 126 105 126 250 Other loans to individuals 098 298 151 071 076 027 092 043 073 028
All other loans and leases (including farm) 071 003 135 064 048 040 010 029 073 021 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 235 227 140 240 288 093 091 125 178
All real estate loans 091 315 149 022 087 071 061 017 013 096 Construction and development 204 000 095 129 204 415 015 038 036 163 Nonfarm nonresidential 016 000 003 018 017 013 014 012 010 014 Multifamily residential real estate 026 000 002 051 031 028 011 004 012 010 Home equity loans 155 338 162 022 130 177 089 008 024 209 Other 1-4 family residential 086 134 193 012 079 052 040 019 013 074
Commercial and industrial loans 086 791 039 058 084 032 424 005 042 048 Loans to individuals 329 579 303 075 231 187 233 119 086 176
Credit card loan 524 556 406 453 542 635 347 613 381 569 Other loans to individuals 211 729 256 050 183 074 195 031 075 091
All other loans and leases (including farm) 034 001 012 000 055 078 022 111 050 037 Total loans and leases
Loans Outstanding (in billions)
118 564 128 028 097 074 181 043 029 088
All real estate loans $47510 $18 $6380 $646 $27531 $6861 $210 $50 $373 $5440 Construction and development 6171 00 142 61 5373 188 05 04 27 371 Nonfarm nonresidential 10434 00 338 180 8730 309 11 15 88 763 Multifamily residential real estate 2052 00 406 12 1371 132 01 01 07 121 Home equity loans 6521 16 1432 12 3167 564 101 01 14 1213 Other 1-4 family residential 21021 02 3536 170 8413 5659 91 27 210 2914
Commercial and industrial loans 15037 353 3005 158 8959 165 33 12 55 2297 Loans to individuals 10827 2848 2424 68 3536 291 352 15 69 1226
Credit card loans 4116 2473 807 04 469 58 88 01 02 214 Other loans to individuals 6711 375 1617 63 3067 233 264 14 66 1012
All other loans and leases (including farm) 6553 225 2161 269 2545 55 14 07 41 1236 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 3444 13971 1141 42571 7372 609 84 537 10199
All other real estate owned 229664 -203 36109 3370 144948 31670 241 205 2023 11301 Construction and development 66309 00 50 1326 59375 4120 34 37 414 952 Nonfarm nonresidential 24069 02 400 936 20071 491 53 64 558 1495 Multifamily residential real estate 7346 00 190 152 5905 403 00 03 235 459 1-4 family residential 115008 28 29349 707 49275 26308 149 98 764 8330 Farmland 771 00 00 244 464 04 06 07 45 00 GNMA properties 14744 00 4300 04 9791 576 00 00 08 65
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 10 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Quarterly Banking Profile
TABLE V-A Loan Performance All FDIC-Insured Institutions
September 30 2008 All Insured Institutions
Asset Size Distribution Geographic Regions Less than
$100 Million
$100 Million to $1 Billion
$1 Billion to $10 Billion
Greater than $10 Billion New York Atlanta Chicago
Kansas City Dallas
San Francisco
Percent of Loans 30ndash89 Days Past Due All loans secured by real estate 178 158 139 129 200 117 190 196 133 154 232
Construction and development 234 213 240 228 236 189 184 301 255 180 336 Nonfarm nonresidential 078 120 098 074 067 092 066 099 072 068 063 Multifamily residential real estate 076 104 116 099 059 054 093 085 064 087 080 Home equity loans 117 079 081 080 122 066 147 110 101 069 125 Other 1-4 family residential 245 203 146 143 277 129 270 274 177 264 321
Commercial and industrial loans 069 155 118 092 059 109 047 069 093 064 058 Loans to individuals 222 246 194 206 224 250 230 197 279 162 188
Credit card loans 250 206 256 245 250 256 277 245 248 133 243 Other loans to individuals 204 247 190 187 206 239 224 177 304 169 156
All other loans and leases (including farm) 040 050 051 059 038 043 023 053 055 060 031 Total loans and leases
Percent of Loans Noncurrent
152 152 135 127 159 137 154 156 138 132 174
All real estate loans 312 188 224 301 338 179 331 365 352 263 352 Construction and development 730 507 626 796 749 586 714 874 573 489 1018 Nonfarm nonresidential 136 178 135 132 137 161 131 184 118 099 088 Multifamily residential real estate 147 193 173 247 105 076 216 192 134 260 088 Home equity loans 119 072 071 083 125 071 145 123 119 043 097 Other 1-4 family residential 364 139 136 217 425 152 372 458 700 323 407
Commercial and industrial loans 101 181 138 109 095 135 089 104 115 102 082 Loans to individuals 150 096 069 105 158 203 087 104 161 059 185
Credit card loans 235 123 153 213 237 251 229 179 207 116 263 Other loans to individuals 098 096 062 053 105 121 067 073 121 045 139
All other loans and leases (including farm) 071 061 057 057 073 050 020 065 037 063 195 Total loans and leases
Percent of Loans Charged-off (net YTD)
231 167 198 247 234 168 239 253 242 205 257
All real estate loans 091 022 040 069 110 031 096 130 084 059 117 Construction and development 204 073 135 205 239 101 191 281 147 132 313 Nonfarm nonresidential 016 016 013 013 020 019 015 029 013 011 005 Multifamily residential real estate 026 029 024 039 021 009 040 047 013 038 018 Home equity loans 155 031 034 061 172 066 191 124 197 071 187 Other 1-4 family residential 086 015 020 044 103 023 075 152 057 051 128
Commercial and industrial loans 086 063 069 079 089 147 067 055 137 063 090 Loans to individuals 329 070 132 263 346 449 209 220 403 131 364
Credit card loans 524 247 751 508 523 538 574 454 599 325 502 Other loans to individuals 211 068 084 151 229 301 160 137 244 085 282
All other loans and leases (including farm) 034 011 036 065 032 022 049 035 033 042 024 Total loans and leases
Loans Outstanding (in billions)
118 030 049 085 137 131 098 114 136 065 148
All real estate loans $47510 $770 $7439 $7631 $31670 $8438 $13414 $10460 $3736 $3471 $7990 Construction and development 6171 96 1395 1606 3074 687 2000 1242 519 877 846 Nonfarm nonresidential 10434 229 2602 2589 5014 2004 2683 2079 1011 1145 1511 Multifamily residential real estate 2052 19 301 452 1280 529 340 622 104 82 374 Home equity loans 6521 27 372 487 5635 676 2123 2039 793 239 651 Other 1-4 family residential 21021 310 2474 2345 15892 4493 6075 4297 1108 1017 4030
Commercial and industrial loans 15037 159 1261 1641 11976 2112 3860 3724 1406 1052 2883 Loans to individuals 10827 83 472 792 9479 2900 2002 1977 1007 403 2538
Credit card loans 4116 01 33 258 3824 1816 247 584 463 78 929 Other loans to individuals 6711 82 439 534 5656 1084 1754 1394 544 325 1610
All other loans and leases (including farm) 6553 119 392 378 5665 1101 1622 1744 725 224 1137 Total loans and leases
Memo Other Real Estate Owned (in millions)
79928 1131 9564 10442 58790 14551 20898 17906 6874 5149 14549
All other real estate owned 229664 5553 52972 41507 129632 16138 68599 63848 25144 19959 35976 Construction and development 66309 1468 27376 20358 17107 4425 23393 10978 7572 8245 11697 Nonfarm nonresidential 24069 1590 9635 5261 7583 2323 6615 6606 3500 3704 1321 Multifamily residential real estate 7346 183 1925 2531 2707 608 1874 2767 676 548 874 1-4 family residential 115008 2154 13652 13092 86110 8411 36165 36207 7323 6723 20178 Farmland 771 152 392 113 113 107 114 97 115 317 22 GNMA properties 14744 11 09 160 14564 177 558 7204 5975 424 406
See Table IV-A (page 8) for explanations Noncurrent loan rates represent the percentage of loans in each category that are past due 90 days or more or that are in nonaccrual status
FDIC QUARTERLY 11 2008 VOLUME 2 NO 4
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
TABLE VI-A Derivatives All FDIC-Insured Commercial Banks and State-Chartered Savings Banks
(dollar fgures in millions notional amounts unless otherwise indicated)
3rd Quarter 2nd Quarter 1st Quarter 4th Quarter 3rd Quarter Change 2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution
Less Than $100 $1 Billion $100 Million To To $10 Greater Than
Million $1 Billion Billion $10 Billion ALL DERIVATIVE HOLDERS Number of institutions reporting derivatives 1066 1065 1099 1045 1026 39 81 640 266 79 Total assets of institutions reporting derivatives $10713332 $10102137 $10194206 $9827098 $9459618 133 $5802 $278136 $853648 $9575746 Total deposits of institutions reporting derivatives 6795048 6449005 6471046 6324979 6030658 127 4570 216179 609402 5964897 Total derivatives
Derivative Contracts by Underlying Risk Exposure
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Interest rate 137205229 144933428 141879217 129490988 138720387 -11 150 16813 69307 137118960 Foreign exchange 19729818 19418964 19738204 17174167 16696571 182 5 34 10092 19719686 Equity 2785996 2344339 2410959 2522430 2745807 15 12 157 1029 2784798 Commodity amp other (excluding credit derivatives) 1233751 1137524 1129869 1066704 1015444 215 0 194 339 1233218 Credit 16148392 15468809 16441421 15862846 15396335 49 0 191 242 16147960 Total
Derivative Contracts by Transaction Type
177103186 183303064 181599670 166117135 174574544 14 167 17389 81009 177004621
Swaps 108289172 114178240 112564785 103102442 111396480 -28 14 10386 50269 108228502 Futures amp forwards 24483661 23582769 22361892 18866619 17126206 430 67 2162 16024 24465407 Purchased options 13485926 14501116 14285549 13770867 14547038 -73 10 2081 7082 13476753 Written options 13450076 14414797 14705284 13954396 15022184 -105 71 2546 7010 13440449 Total
Fair Value of Derivative Contracts
159708834 166676922 163917510 149694325 158091908 10 162 17176 80385 159611111
Interest rate contracts 27297 75935 62573 20075 30716 -111 1 15 660 26622 Foreign exchange contracts 15054 32017 9670 7980 3119 3827 0 0 1 15054 Equity contracts 3742 -3878 -2426 9485 -20872 NM 0 2 21 3719 Commodity amp other (excluding credit derivatives) 3175 5063 3346 1785 1664 908 0 100 1 3075 Credit derivatives as guarantor -566034 -398893 -474045 -212447 -104120 4436 0 0 -26 -566008 Credit derivatives as benefciary
Derivative Contracts by Maturity
603935 428844 501034 222426 110905 4446 0 1 -1 603934
Interest rate contracts lt 1 year 40399684 44995175 42621752 39085340 48918972 -174 63 2509 15701 40381411 1-5 years 37760921 39521394 39752478 37222363 36311048 40 12 8156 25065 37727688 gt 5 years 28784955 29704342 30105716 27724625 27877687 33 0 3397 21292 28760266
Foreign exchange contracts lt 1 year 12664219 12345486 12524601 11591807 10094603 255 0 10 7502 12656707 1-5 years 1787926 1929554 1924840 1604898 1831220 -24 0 3 26 1787897 gt 5 years 676656 734305 714707 618960 718390 -58 0 0 10 676646
Equity contracts lt 1 year 508748 504258 509709 473413 464820 95 1 41 126 508580 1-5 years 332908 207513 287805 297459 330227 08 4 42 422 332439 gt 5 years 81967 76283 39960 70485 70134 169 0 0 19 81948
Commodity amp other contracts lt 1 year 294036 315202 369747 284837 267197 100 0 0 263 293773 1-5 years 288860 267344 277956 333631 304544 -51 0 65 22 288773 gt 5 years
Risk-Based Capital Credit Equivalent Amount
88822 28367 33492 28282 31483 1821 0 0 0 88822
Total current exposure to tier 1 capital () 604 577 672 454 380 01 04 18 695
Total potential future exposure to tier 1 capital ()
Total exposure (credit equivalent amount) to
1225 1185 1227 1101 1147 01 04 08 1413
tier 1 capital () 1829 1762 1899 1555 1527 02 08 25 2108
Credit losses on derivatives
HELD FOR TRADING
2270 1350 150 1560 1250 816 00 10 00 2260
Number of institutions reporting derivatives 182 181 170 166 158 152 8 58 62 54 Total assets of institutions reporting derivatives 9226469 8596550 8622322 8306873 7976927 157 531 27332 288951 8909655 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
5850572 5501876 5465449 5354982 5081807 151 386 21361 207048 5621777
Interest rate 134667695 142264570 139169279 127128959 136071674 -10 7 773 28482 134638433 Foreign exchange 18396293 18166799 18413342 16483116 15489462 188 0 0 9400 18386893 Equity 2773712 2333148 2402414 2515192 2729758 16 0 3 303 2773406 Commodity amp other 1230649 1134781 1128387 1065818 1014757 213 0 0 228 1230421 Total
Trading Revenues Cash amp Derivative Instruments
157068350 163899297 161113422 147193085 155305652 11 7 777 38413 157029153
Interest rate 950 1503 1724 -2531 1624 -415 0 -1 9 942 Foreign exchange 3090 2096 2084 1880 1936 596 0 0 17 3073 Equity -923 185 -18 217 -98 8418 0 0 0 -923 Commodity amp other (including credit derivatives) 3305 -1944 -2791 -10145 -803 NM 0 0 1 3304 Total trading revenues
Share of Revenue
6422 1839 998 -10579 2659 1415 0 -1 27 6396
Trading revenues to gross revenues () 46 13 07 -77 18 00 -02 06 48 Trading revenues to net operating revenues ()
HELD FOR PURPOSES OTHER THAN TRADING
663 248 97 -2780 149 00 -15 99 683
Number of institutions reporting derivatives 968 973 1011 965 951 18 72 585 238 73 Total assets of institutions reporting derivatives 10394145 9804368 9912089 9660650 9299269 118 5214 251908 747924 9389099 Total deposits of institutions reporting derivatives
Derivative Contracts by Underlying Risk Exposure
6587322 6254425 6286953 6210106 5922180 112 4139 195425 532895 5854862
Interest rate 2537534 2668858 2709938 2362029 2648713 -42 143 16039 40825 2480527 Foreign exchange 87565 94832 84124 131087 120808 -275 0 12 311 87243 Equity 12284 11191 8545 7238 16048 -235 12 154 725 11392 Commodity amp other 3101 2743 1482 886 687 3514 0 194 111 2797 Total notional amount 2640484 2777625 2804088 2501240 2786256 -52 155 16400 41972 2581958
All line items are reported on a quarterly basis NM - Not Meaningful Include spot foreign exchange contracts All other references to foreign exchange contracts in which notional values or fair values are reported exclude spot foreign exchange contracts Derivative contracts subject to the risk-based capital requirements for derivatives The reporting of credit losses on derivatives is applicable to all banks fling the FFIEC 031 report form and to those banks fling the FFIEC 041 report form that have $300 million or more in total assets
FDIC QUARTERLY 12 2008 VOLUME 2 NO 4
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Quarterly Banking Profile
TABLE VII-A Servicing Securitization and Asset Sales Activities (All FDIC-Insured Commercial Banks and State-Chartered Savings Banks)
(dollar fgures in millions)
3rd 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter Quarter Change
2008 2008 2008 2007 2007 07Q3-08Q3
Asset Size Distribution Less Than $100 $1 Billion Greater
$100 Million To To $10 Than $10 Million $1 Billion Billion Billion
Assets Securitized and Sold with Servicing Retained or with Recourse or Other Seller-Provided Credit Enhancements Number of institutions reporting securitization activities Outstanding Principal Balance by Asset Type
133 135 134 127 125 64 15 57 24 37
1-4 family residential loans $1217806 $1087331 $1068703 $1056363 $1033487 178 $64 $452 $1856 $1215435 Home equity loans 6880 7822 8341 9353 9894 -305 0 0 210 6670 Credit card receivables 417832 409883 402171 390035 379662 101 0 3308 11953 402570 Auto loans 13742 6224 7495 8285 9755 409 0 0 218 13524 Other consumer loans 28090 28870 27787 28542 29386 -44 0 0 0 28090 Commercial and industrial loans 11080 12491 12555 14469 16183 -315 0 4 4892 6184 All other loans leases and other assets 211398 198089 197091 193875 184941 143 43 48 296 211010
Total securitized and sold
Maximum Credit Exposure by Asset Type
1906828 1750710 1724143 1700921 1663308 146 107 3812 19425 1883483
1-4 family residential loans 7515 7121 7019 6913 6874 93 3 74 11 7426 Home equity loans 1347 1527 1752 2000 2336 -423 0 0 6 1341 Credit card receivables 24039 23129 21412 19629 19120 257 0 370 1038 22630 Auto loans 447 352 405 380 426 49 0 0 13 434 Other consumer loans 1428 1417 1406 1379 2114 -325 0 0 0 1428 Commercial and industrial loans 170 311 276 603 720 -764 1 27 73 69 All other loans leases and other assets 954 2161 3228 3733 4578 -792 12 255 9 679
Total credit exposure 35901 36017 35499 34636 36169 -07 16 727 1151 34008 Total unused liquidity commitments provided to institutionrsquos own securitizations
Securitized Loans Leases and Other Assets 30-89 Days Past Due ()
1273 1902 2944 4686 5095 -750 0 0 0 1273
1-4 family residential loans 38 28 25 28 29 07 00 13 38 Home equity loans 13 06 07 08 07 00 00 23 13 Credit card receivables 25 21 22 22 21 00 15 17 25 Auto loans 21 22 19 24 19 00 00 11 21 Other consumer loans 32 27 25 31 28 00 00 00 32 Commercial and industrial loans 16 13 12 10 09 00 00 34 02 All other loans leases and other assets 02 03 01 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets 90 Days or More Past Due ()
30 23 22 24 24 04 13 21 31
1-4 family residential loans 32 20 20 16 13 12 00 07 32 Home equity loans 07 07 07 05 04 00 00 12 07 Credit card receivables 21 21 21 19 17 00 12 14 22 Auto loans 02 03 03 04 02 00 00 01 02 Other consumer loans 29 24 23 24 21 00 00 00 29 Commercial and industrial loans 15 13 11 09 07 00 00 30 02 All other loans leases and other assets 02 02 02 01 01 00 00 00 02
Total loans leases and other assets Securitized Loans Leases and Other Assets Charged-Off (net YTD annualized )
26 18 18 15 13 07 10 17 26
1-4 family residential loans 03 01 00 01 00 00 00 01 03 Home equity loans 04 02 01 02 01 00 00 11 03 Credit card receivables 44 28 14 44 33 00 29 30 44 Auto loans 13 09 04 13 08 00 00 03 13 Other consumer loans 06 04 02 13 11 00 00 00 06 Commercial and industrial loans 36 19 08 20 12 00 00 79 02 All other loans leases and other assets 00 00 00 00 00 00 00 01 00
Total loans leases and other assets
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Loans
12 07 04 11 08 00 25 38 12
Home equity loans 166 435 282 347 494 -664 0 0 0 166 Credit card receivables 98826 82604 73418 86748 77451 276 0 223 4230 94373 Commercial and industrial loans
Sellerrsquos Interests in Institutionrsquos Own SecuritizationsmdashCarried as Securities 636 3506 3263 7671 6018 -894 0 0 594 42
Home equity loans 6 7 9 9 10 -400 0 0 0 6 Credit card receivables 623 403 377 436 374 666 0 7 617 0 Commercial and industrial loans
Assets Sold with Recourse and Not Securitized
15 1 1 2 6 1500 0 0 0 15
Number of institutions reporting asset sales Outstanding Principal Balance by Asset Type
784 771 759 759 747 50 150 479 109 46
1-4 family residential loans 68676 65952 60386 57612 57400 196 1037 8629 3431 55580 Home equity credit card receivables auto and other consumer loans 1606 1718 1886 637 775 1072 1 30 62 1513 Commercial and industrial loans 7314 4794 4579 4728 5053 447 0 174 14 7125 All other loans leases and other assets 41501 28358 26105 24082 21509 929 0 79 457 40966
Total sold and not securitized
Maximum Credit Exposure by Asset Type
119097 100822 92956 87059 84737 405 1038 8912 3963 105183
1-4 family residential loans 15702 14674 14070 14780 15885 -12 130 1436 1958 12179 Home equity credit card receivables auto and other consumer loans 198 171 165 604 742 -733 1 11 60 126 Commercial and industrial loans 6180 3614 3335 3393 3422 806 0 155 14 6011 All other loans leases and other assets 11517 7508 7180 6968 6299 828 0 13 99 11405
Total credit exposure
Support for Securitization Facilities Sponsored by Other Institutions
33597 25967 24750 25745 26348 275 131 1615 2131 29721
Number of institutions reporting securitization facilities sponsored by others 50 48 49 49 50 00 24 18 3 5 Total credit exposure 18464 12668 6825 2843 1478 11493 9 72 48 18335
Total unused liquidity commitments
Other
3531 5492 6778 10314 8242 -572 0 0 0 3531
Assets serviced for others Asset-backed commercial paper conduits
5528813 3921890 3813285 3798682 3648511 515 3587 66084 107977 5351164
Credit exposure to conduits sponsored by institutions and others 20830 21083 22332 22226 22592 -78 2 1 236 20591 Unused liquidity commitments to conduits sponsored by institutions and
others 293183 320507 345968 372709 365850 -199 0 27 0 293156
Net servicing income (for the quarter) 4110 7280 3532 2718 3635 131 7 183 225 3695 Net securitization income (for the quarter) 3892 3836 5137 5008 5812 -330 0 60 213 3619 Total credit exposure to Tier 1 capital () 900 730 660 640 650 070 190 250 1180
Line item titled ldquoAll other loans and all leasesrdquo for quarters prior to March 31 2006 The amount of fnancial assets serviced for others other than closed-end 1-4 family residential mortgages is reported when these assets are greater than $10 million Total credit exposure includes the sum of the three line items titled ldquoTotal credit exposurerdquo reported above
FDIC QUARTERLY 13 2008 VOLUME 2 NO 4
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
INSURANCE FUND INDICATORS
n Insured Deposits Grow by 18 Percent Up from the Prior Quarterrsquos 06 Percent Growth Rate
n DIF Reserve Ratio Declines 25 Basis Points to 076 Percent n Nine Institutions Failed During the Third Quarter n Changes Proposed for Risk-Based Assessments
Total assets of the nationrsquos 8384 FDIC-insured commercial banks and savings institutions increased by $2732 billion (21 percent) during the third quar-ter of 2008 Fifty-seven percent of the quarterrsquos asset growth was funded by deposits as noninterest-bearing deposits increased by 137 percent ($1768 billion) while interest-bearing deposits decreased by 03 percent ($219 billion) Domestic office deposits of banks and thrifts increased by 27 percent ($1929 billion) and foreign office deposits decreased by 25 percent ($380 billion)
Estimated insured deposits rose by 18 percent ($786 billion) in the third quarter of 2008 and by 71 percent over the past four quarters The third-quarter increase was up from the previous quarterrsquos 06 percent growth rate For institutions existing as of June 30 2008 and September 30 2008 insured deposits increased during the third quarter at 4820 institutions (58 percent) decreased at 3508 institutions (42 percent) and remained unchanged at 35 institutions
The Deposit Insurance Fund (DIF) decreased by 235 percent ($106 billion) during the third quarter to $34588 million (unaudited) Accrued assessment income increased the fund by $881 million Interest earned combined with realized and unrealized gains (losses) on securities added $653 million to the insur-ance fund Operating and other expenses net of other revenue reduced the fund by $233 million The reduction in the DIF was primarily due to an $119 billion increase in loss provisions for bank failures The DIFrsquos reserve ratio equaled 076 percent on September 30 2008 down from 101 percent at June 30 2008 and 122 percent one year ago The Septem-ber figure is the lowest reserve ratio for the combined bank and thrift insurance fund since June 30 1994 when the reserve ratio was 074 percent Nine FDIC-insured institutions with combined assets of $346 billion failed during the third quarter of 2008 the largest number of quarterly failures since the third quarter of 1993 when 16 insured institutions failed
The failure of Washington Mutual Bank on Septem-ber 25 2008 which reported assets of $307 billion on its last quarterly financial report was the largest single failure in the FDICrsquos history For 2008 through September 30 thirteen insured institutions with combined assets of $348 billion failed at an estimated current cost to the DIF of $110 billion
Restoration Plan Recent bank failures significantly increased the Deposit Insurance Fundrsquos losses resulting in a decline in the reserve ratio As of September 30 2008 the reserve ratio stood at 076 percent down from 101 percent at June 30 and 119 percent at March 31 The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) requires that the FDICrsquos Board of Direc-tors adopt a restoration plan when the Deposit Insur-ance Fund reserve ratio falls below 115 percent or is expected to within six months Absent extraordinary circumstances the restoration plan must provide that the reserve ratio increase to at least 115 percent no later than five years after the planrsquos establishment The FDIC Board adopted a restoration plan on October 7
As part of the restoration plan and in conjunction with it the FDIC Board also authorized publication of a notice of proposed rule making (NPR) that would raise assessment rates and make other changes to the assessment system The other changes are primarily to ensure that riskier institutions will bear a greater share of the proposed increase in assessments
Rates for the First Quarter of 2009 The FDIC proposed raising the current assessment rates uniformly by 7 basis points for the first quarter 2009 assessment period Assessment rates for the first quarter of 2009 would range from 12 to 50 basis points Institu-tions in the lowest risk categorymdashRisk Category Imdashwould pay between 12 and 14 basis points
FDIC QUARTERLY 14 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Quarterly Banking Profile
Changes to Risk-Based Assessments Effective the Second Quarter of 2009 Range of assessment rates
Currently risk-based assessment rates range between 5 and 43 basis pointsmdash5 to 7 basis points for Risk Category I Effective April 1 2009 the proposal would widen the range of rates overall and within Risk Category I Initial base assessment rates would range between 10 and 45 basis pointsmdash10 to 14 basis points for Risk Category I The initial base rates for risk categories II III and IV would be 20 30 and 45 basis points respectively An institutionrsquos total base assessment rate may be less than or greater than its initial base rate as a result of additional proposed risk adjustments (discussed below)
Large Risk Category I institutions
Under the current rules the pricing method for most large institutions (generally those with more than $10 billion in assets) in Risk Category I relies on average CAMELS component ratings and long-term debt issuer ratings from credit agencies Under the proposal effec-tive April 1 2009 the assessment rate for a large insti-tution would depend on (1) long-term debt ratings (2) the weighted average CAMELS component rating and (3) the rate determined from the financial ratios method the method used for smaller banks Each of the three components would receive a one-third weight
Brokered deposits
For institutions in Risk Category I the financial ratios method would include a new financial ratio that may increase the rate of an institution relying significantly on brokered deposits to fund rapid asset growth This would only apply to institutions with brokered depos-its of more than 10 percent of domestic deposits and cumulative asset growth of more than 20 percent over the last four years adjusted for mergers and acquisi-tions Like the other financial ratios used to determine rates in Risk Category I a small change in the value of the new ratio may lead to only a small rate change and it would not cause an institutionrsquos rate to fall outside of the 10-14 basis point initial range
For institutions in risk categories II III or IV the FDIC proposes to increase an institutionrsquos assessment rate above its initial rate if its ratio of brokered depos-its to domestic deposits is greater than 10 percent regardless of the rate of asset growth Such an increase would be capped at 10 basis points
Secured liabilities
For institutions in any risk category assessment rates would rise above initial rates for institutions relying significantly on secured liabilities Assessment rates would increase for institutions with a ratio of secured liabilities to domestic deposits of greater than 15 percent with a maximum increase of 50 percent above the rate before such adjustment
Secured liabilities generally include repurchase agree-ments Federal Home Loan Bank advances secured Federal Funds purchased and other secured borrowings
Unsecured debt and Tier I capital
Institutions would receive a lower rate if they have long-term unsecured debt including senior unsecured and subordinated debt with a remaining maturity of one year or more
For a large institution the rate reduction would be determined by multiplying the institutionrsquos long-term unsecured debt as a percentage of domestic deposits by 20 basis points The maximum allowable rate reduction would be 2 basis points
For a small institution this adjustment would treat a certain amount of Tier 1 capital similarly to unsecured debt The amount of qualifying Tier 1 capital would be the sum of one-half of the amount between 10 percent and 15 percent of adjusted average assets and the full amount of Tier 1 capital exceeding 15 percent of adjusted average assets
Summary of base rate determination
The minimum and maximum initial base assessment rates range of possible rate adjustments and minimum and maximum total base rates are as follows
FDIC QUARTERLY 15 2008 VOLUME 2 NO 4
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Risk Category I Risk Category II Risk Category III Risk Category IV
Initial base assessment rate
Unsecured debt adjustment
Secured liability adjustment
Brokered deposit adjustment
Total base assessment rate
10 ndash 14
-2 ndash 0
0 ndash 7
8 ndash 21
20
-2 ndash 0
0 ndash 10
0 ndash 10
18 ndash 40
30
-2 ndash 0
0 ndash 15
0 ndash 10
28 ndash 55
45
-2 ndash 0
0 ndash 225
0 ndash 10
43 ndash 775
Base rates and actual rates
The NPR recommended that actual rates equal the proposed base rates The FDIC would continue to have the authority to adopt actual rates that were higher or lower than total base assessment rates without the necessity of further notice-and-comment rulemaking provided that (1) the Board could not increase or decrease rates from one quarter to the next by more
than 3 basis points without further notice-and-comment rulemaking and (2) cumulative increases and decreases could not be more than 3 basis points higher or lower than the total base rates without further notice-and-comment rulemaking
Author Kevin Brown Sr Financial Analyst Division of Insurance and Research (202) 898-6817
FDIC QUARTERLY 16 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Quarterly Banking Profile
Table I-B Insurance Fund Balances and Selected Indicators
(dollar fgures in millions)
Deposit Insurance Fund 3rd
Quarter 2008
2nd Quarter
2008
1st Quarter
2008
4th Quarter
2007
3rd Quarter
2007
2nd Quarter
2007
1st Quarter
2007
4th Quarter
2006
3rd Quarter
2006
2nd Quarter
2006
1st Quarter
2006
Beginning Fund Balance $45217 $52843 $52413 $51754 $51227 $50745 $50165 $49992 $49564 $49193 $48597
Changes in Fund Balance Assessments earned Interest earned on investment
881 640 448 239 170 140 94 10 10 7 5
securities 526 651 618 585 640 748 567 476 622 665 478 Realized gains on sale of investments 473 0 0 0 0 0 0 0 0 0 0 Operating expenses 249 256 238 262 243 248 239 248 237 242 224 Provision for insurance losses 11930 10221 525 39 132 -3 -73 49 -50 -6 -45 All other income net of expenses Unrealized gain(loss) on
16 1 0 -2 24 1 4 5 1 12 349
available-for-sale securities -346 1559 127 138 68 -162 81 -21 -18 -77 -57 Total fund balance change -10629 -7626 430 659 527 482 580 173 428 371 596
Ending Fund Balance Percent change from four quarters
34588 45217 52843 52413 51754 51227 50745 50165 49992 49564 49193
earlier -3317 -1173 413 448 352 336 315 323 335 321 331
Reserve Ratio () 076 101 119 122 122 121 120 121 122 123 123
Estimated Insured Deposits Percent change from four quarters
4543752 4465139 4437034 4291700 4242607 4235044 4245267 4153786 4100013 4404353 4001906
earlier 710 543 452 332 348 482 608 676 702 752 850
Domestic Deposits Percent change from four quarters
7230058 7036217 7076691 6921656 6747998 6698886 6702598 6640105 6484372 6446868 6340783
earlier 714 504 558 424 407 391 571 659 676 868 870
Number of institutions reporting 8394 8462 8505 8545 8570 8625 8661 8692 8755 8790 8803
Deposit Insurance Fund Balance DIF Reserve Ratios and Insured Deposits Percent of Insured Deposits ($ Millions)
DIF-DIF Insured 129 128 126 125 123 123 122 121 120 121 122 122 119 Balance Deposits
305 47617 3688562 101 605 48023 3757728
905 48373 3830950 1205 48597 3890941 076 306 49193 4001906
606 49564 4040353 906 49992 4100013
1206 50165 4153786 307 50745 4245267 607 51227 4235044 907 51754 4242607
1207 52413 4291700 308 52843 4437034 608 45217 4465139
305 905 306 906 307 907 308 908 908 34588 4543752
Table II-B Problem Institutions and FailedAssisted Institutions (dollar fgures in millions) 2008 2007 2007 2006 2005 2004 2003 Problem Institutions
Number of institutions 171 65 76 50 52 80 116 Total assets $115639 $18515 $22189 $8265 $6607 $28250 $29917
FailedAssisted Institutions Number of institutions 13 2 3 0 0 4 3 Total assets $347569 $2490 $2615 $0 $0 $170 $947
Prior to 2006 amounts represent sum of separate BIF and SAIF amounts First Quarter 2006 includes previously escrowed revenue from SAIF-member exit fees The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250000 in setting assessments Therefore we do not include
the additional insured deposits in calculating the fund reserve ratio which guides our assessment planning If Congress were to decide to leave the $250000 coverage level in place indefnitely however it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund
Domestic deposits differ from Table II-A due to inclusion of insured branches of foreign banks Through September 30
FDIC QUARTERLY 17 2008 VOLUME 2 NO 4
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Table III-B Estimated FDIC-Insured Deposits by Type of Institution (dollar fgures in millions)
September 30 2008 Number of Institutions
Total Assets
Domestic Deposits
Est Insured Deposits
Commercial Banks and Savings Institutions FDIC-Insured Commercial Banks 7146 $12050414 $6273276 $3777203
FDIC-Supervised 4715 1911907 1397631 1000214
OCC-Supervised 1556 8334895 3882905 2257327
Federal Reserve-Supervised 875 1803611 992740 519662
FDIC-Insured Savings Institutions 1238 1523277 948687 761547
OTS-Supervised Savings Institutions 819 1217637 740193 595575
FDIC-Supervised State Savings Banks 419 305640 208494 165972
Total Commercial Banks and Savings Institutions 8384 13573691 7221963 4538750
Other FDIC-Insured Institutions
US Branches of Foreign Banks 10 39459 8095 5002
Total FDIC-Insured Institutions 8394 13613150 7230058 4543752
Excludes $151 trillion in foreign offce deposits which are uninsured
Table IV-B Distribution of Institutions and Domestic Deposits Among Risk Categories Quarter Ending June 30 2008 (dollar fgures in billions)
Risk Category
Annual Rate in
Basis Points Number of Institutions
Percent of Total
Institutions Domestic Deposits
Percent of Total
Assessment Base
I - Minimum 5 2038 241 2684 382
I - Middle 501- 600 2633 311 2192 312
I - Middle 601- 699 1587 188 702 100
I - Maximum 7 1478 175 504 72
II 10 590 70 897 127
III 28 122 14 27 04
IV 43 14 02 29 04
Note Institutions are categorized based on supervisory ratings debt ratings and fnancial data as of June 30 2008 Rates do not refect the application of assessment credits See notes to users for further information on risk categories and rates
FDIC QUARTERLY 18 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Quarterly Banking Profile
Notes To Users This publication contains financial data and other informa-tion for depository institutions insured by the Federal Deposit Insurance Corporation (FDIC) These notes are an integral part of this publication and provide information regarding the comparability of source data and reporting differences over time
Tables I-A through VIII-A The information presented in Tables I-A through V-A of the FDIC Quarterly Banking Profile is aggregated for all FDIC-insured institutions both commercial banks and savings insti-tutions Tables VI-A (Derivatives) and VII-A (Servicing Securitization and Asset Sales Activities) aggregate informa-tion only for insured commercial banks and state-chartered savings banks that file quarterly Call Reports Table VIII-A (Trust Services) aggregates Trust asset and income informa-tion collected annually from all FDIC-insured institutions Some tables are arrayed by groups of FDIC-insured institutions based on predominant types of asset concentration while other tables aggregate institutions by asset size and geographic region Quarterly and full-year data are provided for selected indicators including aggregate condition and income data performance ratios condition ratios and structural changes as well as past due noncurrent and charge-off information for loans outstanding and other assets
Tables I-B through IV-B A separate set of tables (Tables I-B through IV-B) provides comparative quarterly data related to the Deposit Insurance Fund (DIF) problem institutions failedassisted institutions estimated FDIC-insured deposits as well as assessment rate information Depository institutions that are not insured by the FDIC through the DIF are not included in the FDIC Quarterly Banking Profile US branches of institutions head-quartered in foreign countries and non-deposit trust companies are not included unless otherwise indicated Efforts are made to obtain financial reports for all active institutions However in some cases final financial reports are not available for institutions that have closed or converted their charters
DATA SOURCES The financial information appearing in this publication is obtained primarily from the Federal Financial Institutions Examination Council (FFIEC) Call Reports and the OTS Thrift Financial Reports submitted by all FDIC-insured deposi-tory institutions This information is stored on and retrieved from the FDICrsquos Research Information System (RIS) data base
COMPUTATION METHODOLOGY Parent institutions are required to file consolidated reports while their subsidiary financial institutions are still required to file separate reports Data from subsidiary institution reports are included in the Quarterly Banking Profile tables which can lead to double-counting No adjustments are made for any double-counting of subsidiary data Additionally certain adjustments are made to the OTS Thrift Financial Reports to provide closer conformance with the reporting and accounting requirements of the FFIEC Call Reports All asset and liability figures used in calculating performance ratios represent average amounts for the period (beginning-of-
period amount plus end-of-period amount plus any interim periods divided by the total number of periods) For ldquopooling-of-interestrdquo mergers the assets of the acquired institution(s) are included in average assets since the year-to-date income includes the results of all merged institutions No adjustments are made for ldquopurchase accountingrdquo mergers Growth rates represent the percentage change over a 12-month period in totals for institutions in the base period to totals for institu-tions in the current period All data are collected and presented based on the location of each reporting institutionrsquos main office Reported data may include assets and liabilities located outside of the reporting institutionrsquos home state In addition institutions may relocate across state lines or change their charters resulting in an inter-regional or inter-industry migration eg institutions can move their home offices between regions and savings institu-tions can convert to commercial banks or commercial banks may convert to savings institutions
ACCOUNTING CHANGES FASB Statement No 157 Fair Value Measurements issued in September 2006 and FASB Statement No 159 The Fair Value Option for Financial Assets and Financial Liabilities issued in February 2007mdashboth are effective in 2008 with early adoption permitted in 2007 FAS 157 clarifies fair value and establishes a framework for developing fair value estimates for the fair value measurements that are already required or permitted under other standards Fair value continues to be used for derivatives trading securities and available-for-sale securities Changes in fair value go through earnings for the derivatives and trading securities Changes in the fair value of available-for-sale securities are reported in other comprehensive income Available-for-sale securities and held-to-maturity debt securities are written down to fair value through earn-ings if impairment is other than temporary and mortgage loans held for sale are reported at the lower of cost or fair value Loans held for investment are also subject to impair-ment but are written down based on the present value of dis-counted cash flows FAS 159 allows banks to elect a fair value option when assets are recognized on the balance sheet and to report certain financial assets and liabilities at fair value with subsequent changes in fair value included in earnings Existing eligible items can be fair-valued as early as January 2007 under FAS 159 if a bank adopts FAS 157 FASB Statement No 158 Employersrsquo Accounting for Defined Benefit Pension and Other Postretirement Plansmdashissued in September 2006 requires a bank to recognize in 2007 and subsequently the funded status of its postretirement plans on its balance sheet An overfunded plan is recognized as an asset and an underfunded plan is recognized as a liability An adjustment is made to equity as accumulated other compre-hensive income (AOCI) upon application of FAS 158 and AOCI is adjusted in subsequent periods as net periodic benefit costs are recognized in earnings FASB Statement No 156 Accounting for Servicing of Financial Assetsmdashissued in March 2006 and effective in 2007 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and allows a bank the option to subsequently adjust that value by periodic revaluation and recognition of earnings or by periodic amortization to earnings
FDIC QUARTERLY 19 2008 VOLUME 2 NO 4
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
FASB Statement No 155 Accounting for Certain Hybrid Financial Instrumentsmdashissued in February 2006 requires bifurcation of certain derivatives embedded in interests in securitized finan-cial assets and permits fair value measurement (ie a fair value option) for any hybrid financial instrument that contains an embedded derivative that would otherwise require bifurca-tion under FASB Statement No 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133) In addition FAS 155 clarifies which interest-only and principal-only strips are not subject to FAS 133 Purchased Impaired Loans and Debt SecuritiesmdashStatement of Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer The SOP applies to loans and debt securities acquired in fiscal years beginning after December 15 2004 In general this Statement of Position applies to ldquopurchased impaired loans and debt securitiesrdquo (ie loans and debt securities that a bank has purchased including those acquired in a purchase business combination when it is prob-able at the purchase date that the bank will be unable to collect all contractually required payments receivable) Banks must follow Statement of Position 03-3 for Call Report pur-poses The SOP does not apply to the loans that a bank has originated prohibits ldquocarrying overrdquo or creation of valuation allowances in the initial accounting and any sub-sequent valuation allowances reflect only those losses incurred by the investor after acquisition GNMA Buy-back OptionmdashIf an issuer of GNMA securities has the option to buy back the loans that collateralize the GNMA securities when certain delinquency criteria are met FASB Statement No 140 requires that loans with this buy-back option must be brought back on the issuerrsquos books as assets The rebooking of GNMA loans is required regardless of whether the issuer intends to exercise the buy-back option The banking agencies clarified in May 2005 that all GNMA loans that are rebooked because of delinquency should be reported as past due according to their contractual terms FASB Interpretation No 46mdashThe FASB issued Interpretation No 46 Consolidation of Variable Interest Entities in January 2003 and revised it in December 2003 Generally banks with variable interests in variable interest entities created after December 31 2003 must consolidate them The timing of consolidation varies with certain situations with application as late as 2005 The assets and liabilities of a consolidated vari-able interest entity are reported on a line-by-line basis accord-ing to the asset and liability categories shown on the bankrsquos balance sheet as well as related income items Most small banks are unlikely to have any ldquovariable interestsrdquo in variable interest entities
FASB Interpretation No 48 on Uncertain Tax PositionsmdashFASB Interpretation No 48 Accounting for Uncertainty in Income Taxes (FIN 48) was issued in June 2006 as an interpretation of FASB Statement No 109 Accounting for Income Taxes Under FIN 48 the term ldquotax positionrdquo refers to ldquoa position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilitiesrdquo FIN 48 further states that a ldquotax position can result in a permanent reduction of income taxes payable a deferral of income taxes otherwise currently payable to future years or a change in the expected realizability of deferred tax assetsrdquo As originally issued FIN 48 was effective for fiscal years beginning after December 15 2006 Banks must adopt FIN 48 for Call Report purposes in
accordance with the interpretationrsquos effective date except as follows On January 23 2008 the FASB decided to defer the effective date of FIN 48 for eligible nonpublic enterprises and to require those enterprises to adopt FIN 48 for annual periods beginning after December 15 2007 FASB Statement No 123 (Revised 2004) and Share-Based Paymentsmdashrequires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments (eg stock options and restricted stock granted to employees) As of January 2006 all banks must adopt FAS 123(R) The compensation cost is typically recognized over the vesting period with a corresponding credit to equity The recording of the compensation cost also gives rise to a deferred tax asset FASB Statement No 133 Accounting for Derivative Instruments and Hedging ActivitiesmdashAll banks must recognize derivatives as either assets or liabilities on the balance sheet measured at fair value A derivative may be specifically designated as a ldquofair value hedgerdquo a ldquocash flow hedgerdquo or a hedge of a foreign currency exposure The accounting for changes in the value of a derivative (gains and losses) depends on the intended use of the derivative its resulting designation and the effectiveness of the hedge Derivatives held for purposes other than trading are reported as ldquoother assetsrdquo (positive fair values) or ldquoother liabilitiesrdquo (negative fair values) For a fair value hedge the gain or loss is recognized in earnings and ldquoeffectivelyrdquo offsets loss or gain on the hedged item attribut-able to the risk being hedged Any ineffectiveness of the hedge could result in a net gain or loss on the income state-ment Accumulated net gains (losses) on cash flow hedges are recorded on the balance sheet as ldquoaccumulated other compre-hensive incomerdquo and the periodic change in the accumulated net gains (losses) for cash flow hedges is reflected directly in equity as the value of the derivative changes FASB Statement No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities provides guidance on the circumstances in which a loan commitment must be accounted for as a derivative Under Statement No 149 loan commitments that relate to the origination of mort-gage loans that will be held for sale commonly referred to as interest rate lock commitments must be accounted for as derivatives on the balance sheet by the issuer of the commitment
DEFINITIONS (in alphabetical order) All other assetsmdashtotal cash balances due from depository insti-tutions premises fixed assets direct investments in real estate investment in unconsolidated subsidiaries customersrsquo liability on acceptances outstanding assets held in trading accounts federal funds sold securities purchased with agree-ments to resell fair market value of derivatives and other assets All other liabilitiesmdashbankrsquos liability on acceptances limited-life preferred stock allowance for estimated off-balance-sheet credit losses fair market value of derivatives and other liabilities Assessment basemdashassessable deposits consist of DIF deposits (deposits insured by the FDIC Deposit Insurance Fund) in banksrsquo domestic offices with certain adjustments Assets securitized and soldmdashtotal outstanding principal balance of assets securitized and sold with servicing retained or other seller-provided credit enhancements
FDIC QUARTERLY 20 2008 VOLUME 2 NO 4
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Quarterly Banking Profile
Construction and development loansmdashincludes loans for all property types under construction as well as loans for land acquisition and development Core capitalmdashcommon equity capital plus noncumulative per-petual preferred stock plus minority interest in consolidated subsidiaries less goodwill and other ineligible intangible assets The amount of eligible intangibles (including servicing rights) included in core capital is limited in accordance with supervi-sory capital regulations Cost of funding earning assetsmdashtotal interest expense paid on deposits and other borrowed money as a percentage of average earning assets Credit enhancementsmdashtechniques whereby a company attempts to reduce the credit risk of its obligations Credit enhancement may be provided by a third party (external credit enhance-ment) or by the originator (internal credit enhancement) and more than one type of enhancement may be associated with a given issuance Deposit Insurance Fund (DIF)mdashThe Bank (BIF) and Savings Association (SAIF) Insurance Funds were merged in 2006 by the Federal Deposit Insurance Reform Act to form the DIF Derivatives notional amountmdashThe notional or contractual amounts of derivatives represent the level of involvement in the types of derivatives transactions and are not a quantifica-tion of market risk or credit risk Notional amounts represent the amounts used to calculate contractual cash flows to be exchanged Derivatives credit equivalent amountmdashthe fair value of the deriv-ative plus an additional amount for potential future credit exposure based on the notional amount the remaining matu-rity and type of the contract Derivatives transaction types
Futures and forward contractsmdashcontracts in which the buyer agrees to purchase and the seller agrees to sell at a specified future date a specific quantity of an underlying variable or index at a specified price or yield These contracts exist for a variety of variables or indices (traditional agricultural or physical commodities as well as currencies and interest rates) Futures contracts are standardized and are traded on organized exchanges which set limits on counterparty credit exposure Forward contracts do not have standardized terms and are traded over the counter Option contractsmdashcontracts in which the buyer acquires the right to buy from or sell to another party some specified amount of an underlying variable or index at a stated price (strike price) during a period or on a specified future date in return for compensation (such as a fee or premium) The seller is obligated to purchase or sell the variable or index at the discretion of the buyer of the contract Swapsmdashobligations between two parties to exchange a series of cash flows at periodic intervals (settlement dates) for a specified period The cash flows of a swap are either fixed or determined for each settlement date by multiplying the quantity (notional principal) of the underlying variable or index by specified reference rates or prices Except for cur-rency swaps the notional principal is used to calculate each payment but is not exchanged
Derivatives underlying risk exposuremdashthe potential exposure characterized by the level of banksrsquo concentration in particular underlying instruments in general Exposure can result from
market risk credit risk and operational risk as well as inter-est rate risk Domestic deposits to total assetsmdashtotal domestic office deposits as a percent of total assets on a consolidated basis Earning assetsmdashall loans and other investments that earn interest or dividend income Efficiency ratiomdashNoninterest expense less amortization of intangible assets as a percent of net interest income plus non-interest income This ratio measures the proportion of net operating revenues that are absorbed by overhead expenses so that a lower value indicates greater efficiency Estimated insured depositsmdashin general insured deposits are total domestic deposits minus estimated uninsured deposits Beginning March 31 2008 for institutions that file Call reports insured deposits are total assessable deposits minus estimated uninsured deposits Failedassisted institutionsmdashan institution fails when regula-tors take control of the institution placing the assets and liabilities into a bridge bank conservatorship receivership or another healthy institution This action may require the FDIC to provide funds to cover losses An institution is defined as ldquoassistedrdquo when the institution remains open and receives some insurance funds in order to continue operating FHLB advancesmdashall borrowings by FDIC insured institutions from the Federal Home Loan Bank System (FHLB) as report-ed by Call Report filers and by TFR filers Goodwill and other intangiblesmdashintangible assets include ser-vicing rights purchased credit card relationships and other identifiable intangible assets Goodwill is the excess of the purchase price over the fair market value of the net assets acquired less subsequent impairment adjustments Other intangible assets are recorded at fair value less subsequent quarterly amortization and impairment adjustments Loans secured by real estatemdashincludes home equity loans junior liens secured by 1-4 family residential properties and all other loans secured by real estate Loans to individualsmdashincludes outstanding credit card balances and other secured and unsecured consumer loans Long-term assets (5+ years)mdashloans and debt securities with remaining maturities or repricing intervals of over five years Maximum credit exposuremdashthe maximum contractual credit exposure remaining under recourse arrangements and other seller-provided credit enhancements provided by the reporting bank to securitizations Mortgage-backed securitiesmdashcertificates of participation in pools of residential mortgages and collateralized mortgage obli-gations issued or guaranteed by government-sponsored or pri-vate enterprises Also see ldquoSecuritiesrdquo below Net charge-offsmdashtotal loans and leases charged off (removed from balance sheet because of uncollectibility) less amounts recovered on loans and leases previously charged off Net interest marginmdashthe difference between interest and divi-dends earned on interest-bearing assets and interest paid to depositors and other creditors expressed as a percentage of average earning assets No adjustments are made for interest income that is tax exempt
FDIC QUARTERLY 21 2008 VOLUME 2 NO 4
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Net loans to total assetsmdashloans and lease financing receivables net of unearned income allowance and reserves as a percent of total assets on a consolidated basis Net operating incomemdashincome excluding discretionary transac-tions such as gains (or losses) on the sale of investment securi-ties and extraordinary items Income taxes subtracted from operating income have been adjusted to exclude the portion applicable to securities gains (or losses) Noncurrent assetsmdashthe sum of loans leases debt securities and other assets that are 90 days or more past due or in non-accrual status Noncurrent loans amp leasesmdashthe sum of loans and leases 90 days or more past due and loans and leases in nonaccrual status Number of institutions reportingmdashthe number of institutions that actually filed a financial report Other borrowed fundsmdashfederal funds purchased securities sold with agreements to repurchase demand notes issued to the US Treasury FHLB advances other borrowed money mort-gage indebtedness obligations under capitalized leases and trading liabilities less revaluation losses on assets held in trad-ing accounts Other real estate ownedmdashprimarily foreclosed property Direct and indirect investments in real estate ventures are excluded The amount is reflected net of valuation allowances For institutions that file a Thrift Financial Report (TFR) the val-uation allowance subtracted also includes allowances for other repossessed assets Also for TFR filers the components of other real estate owned are reported gross of valuation allowances Percent of institutions with earnings gainsmdashthe percent of insti-tutions that increased their net income (or decreased their losses) compared to the same period a year earlier ldquoProblemrdquo institutionsmdashfederal regulators assign a composite rating to each financial institution 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 ldquoProblemrdquo institutions are those institutions with financial operational or managerial weaknesses that threaten their con-tinued financial viability Depending upon the degree of risk and supervisory concern they are rated either a ldquo4rdquo or ldquo5rdquo The number and assets of ldquoproblemrdquo institutions are based on FDIC composite ratings Prior to March 31 2008 for institu-tions whose primary federal regulator was the OTS the OTS composite rating was used Recoursemdashan arrangement in which a bank retains in form or in substance any credit risk directly or indirectly associated with an asset it has sold (in accordance with generally accept-ed accounting principles) that exceeds a pro rata share of the bankrsquos claim on the asset If a bank has no claim on an asset it has sold then the retention of any credit risk is recourse Reserves for lossesmdashthe allowance for loan and lease losses on a consolidated basis Restructured loans and leasesmdashloan and lease financing receiv-ables with terms restructured from the original contract Excludes restructured loans and leases that are not in compli-ance with the modified terms Retained earningsmdashnet income less cash dividends on common and preferred stock for the reporting period
Return on assetsmdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total assets The basic yardstick of bank profitability Return on equitymdashnet income (including gains or losses on securities and extraordinary items) as a percentage of average total equity capital Risk-based capital groupsmdashdefinition
Total Tier 1 Risk-Based Risk-Based Tier 1 Tangible
(Percent) Capital Capital Leverage Equity
Well-Capitalized ge10 and ge6 and ge5 ndash Adequately
capitalized ge8 and ge4 and ge4 ndash Undercapitalized ge6 and ge3 and ge3 ndash Significantly
undercapitalized lt6 or lt3 or lt3 and gt2 Critically
undercapitalized ndash ndash ndash le2 As a percentage of risk-weighted assets
Risk Categories and Assessment Rate SchedulemdashThe current risk categories and assessment rate schedule became effective January 1 2007 Capital ratios and supervisory ratings distinguish one risk category from another The following table shows the relationship of risk categories (I II III IV) to capital and supervisory groups as well as the assessment rates (in basis points) for each risk category Supervisory Group A generally includes institutions with CAMELS composite ratings of 1 or 2 Supervisory Group B generally includes institutions with a CAMELS composite rating of 3 and Supervisory Group C generally includes institutions with CAMELS composite ratings of 4 or 5 For purposes of risk-based assessment capital groups undercapitalized includes institutions that are significantly or critically undercapitalized
Supervisory Group
Capital Group A B C
I 1 Well Capitalized 5ndash7 bps IIIII
28 bps 10 bps 2 Adequately Capitalized
IVIII3 Undercapitalized 43 bps 28 bps
Assessment rates are 3 basis points above the base rate sched-ule The FDIC may adjust rates up or down by 3 basis points from the base rate schedule without notice and comment pro-vided that any single adjustment from one quarter to the next cannot move rates more than 3 basis points
For most institutions in Risk Category I the assessment rate assigned will be based on a combination of financial ratios and CAMELS component ratings For large institutions in Risk Category I (generally those with at least $10 billion in assets) that have long-term debt issuer ratings assessment rates will be determined by weight-ing CAMELS component ratings 50 percent and long-term debt issuer ratings 50 percent For all large Risk Category I institutions additional risk factors will be considered to deter-mine whether assessment rates should be adjusted
FDIC QUARTERLY 22 2008 VOLUME 2 NO 4
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Quarterly Banking Profile
This additional information includes market data financial performance measures considerations of the ability of an institution to withstand financial stress and loss severity indi-cators Any adjustment will be limited to no more than frac12 basis point Beginning in 2007 each institution is assigned a risk-based rate for a quarterly assessment period near the end of the quarter following the assessment period Payment will general-ly be due on the 30th day of the last month of the quarter fol-lowing the assessment period Supervisory rating changes will be effective for assessment purposes as of the examination transmittal date For institutions with long-term debt issuer ratings changes in ratings will be effective for assessment pur-poses as of the date the change was announced Risk-weighted assetsmdashassets adjusted for risk-based capital definitions which include on-balance-sheet as well as off-balance-sheet items multiplied by risk-weights that range from zero to 200 percent A conversion factor is used to assign a balance sheet equivalent amount for selected off-balance-sheet accounts Securitiesmdashexcludes securities held in trading accounts Banksrsquo securities portfolios consist of securities designated as ldquoheld-to-maturityrdquo which are reported at amortized cost (book value) and securities designated as ldquoavailable-for-salerdquo reported at fair (market) value Securities gains (losses)mdashrealized gains (losses) on held-to-maturity and available-for-sale securities before adjustments for income taxes Thrift Financial Report (TFR) filers also include gains (losses) on the sales of assets held for sale Sellerrsquos interest in institutionrsquos own securitizationsmdashthe report-ing bankrsquos ownership interest in loans and other assets that have been securitized except an interest that is a form of recourse or other seller-provided credit enhancement Sellerrsquos interests differ from the securities issued to investors by the securitization structure The principal amount of a sellerrsquos
interest is generally equal to the total principal amount of the pool of assets included in the securitization structure less the principal amount of those assets attributable to investors ie in the form of securities issued to investors Subchapter S Corporationmdasha subchapter S corporation is treat-ed as a pass-through entity similar to a partnership for feder-al income tax purposes It is generally not subject to any federal income taxes at the corporate level This can have the effect of reducing institutionsrsquo reported taxes and increasing their after-tax earnings Trust assetsmdashmarket value or other reasonably available value of fiduciary and related assets to include marketable securi-ties and other financial and physical assets Common physical assets held in fiduciary accounts include real estate equip-ment collectibles and household goods Such fiduciary assets are not included in the assets of the financial institution Unearned income amp contra accountsmdashunearned income for Call Report filers only Unused loan commitmentsmdashincludes credit card lines home equity lines commitments to make loans for construction loans secured by commercial real estate and unused commit-ments to originate or purchase loans (Excluded are commit-ments after June 2003 for originated mortgage loans held for sale which are accounted for as derivatives on the balance sheet) Volatile liabilitiesmdashthe sum of large-denomination time depos-its foreign-office deposits federal funds purchased securities sold under agreements to repurchase and other borrowings Yield on earning assetsmdashtotal interest dividend and fee income earned on loans and investments as a percentage of average earning assets
FDIC QUARTERLY 23 2008 VOLUME 2 NO 4
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Feature Article
Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
The agricultural crisis of the early 1980s remains a vivid memory for many in the farming community Hundreds of farm banks failed during that period and thousands of families lost their farms Several factors came together to create the crisis however the massive run-up in farm-land prices in the late 1970s followed by the sharp decline in land prices between 1981 and 1992 signifi-cantly contributed to the adverse effects on farmers and their lenders Today farmland values are rising at a pace reminiscent of the 1970s raising concerns that another agricultural crisis may occur if land prices decline This article briefly discusses some of the reasons for the recent farmland price increases and analyzes their potential effect on FDIC-insured institutions
Farmland Booms Preceded Hardships for Farmers and Their Lenders Two significant boom-bust cycles in farmland prices occurred in the 20th century one in the first two decades of the century and the other in the 1970s In the first instance strong population growth improvement in railroads and shipping that allowed the opening of export markets and increased productivity through the rapid adoption of tractor power all contributed to rising farm incomes1 By 1920 crop prices had more than doubled in only five years and high farmland prices followed2
Farmland values were similarly inflated by skyrocketing farm income in the 1970s Strong export demandmdash due in part to rising incomes and growing populations in importing countries and a weak US dollarmdashfueled rapid increases in farm incomes during this period3 In addition negative real interest rates caused by high infla-tion spurred massive borrowing for farmland purchases
In both instances strong export demand and growing income levels convinced farmers they were experiencing
1 R Douglas Hurt American AgriculturemdashA Brief History rev ed (West Lafayette IN Purdue University Press 2002) p 221 2 Willard Cochrane The Development of AgriculturemdashA Historical Perspective (Minneapolis University of Minnesota Press 1993) p 100 3 John Anderlik and Jeff Walser ldquoAgricultural Sector Under Stress The 1980s and Todayrdquo FDIC Regional Outlook third quarter (1999) p 18
a new era in agriculture that would continue indefi-nitely However the unprecedented demand for US farm commodities proved only temporary In the 1920s the end of World War I precipitated the decline in export demand while in the 1970s falling demand was due to greater global competition and a stronger dollar4
In addition more restrictive monetary policy reduced the annual inflation rate from more than 13 percent in 1980 to less than 2 percent in 1986 further dampening farmland prices5 The distress led to thousands of farm bankruptcies hundreds of farm bank failures and a sustained decline in farmland prices6
Farmland Values Have Escalated Sharply Reaching New Peaks Farmland values have risen dramatically across the United States during the past several years Between 1993 and 2003 inflation-adjusted farmland prices were quite stable increasing by 30 percent per year (see Chart 1) Since 2004 however prices have jumped by
Chart 1
0
500
1000
1500
2000
2500
In 2008 Dollars Present Farmland Prices Exceed the Two Price Booms of the 20th Century
Source USDA National Agricultural Statistics Service
$947 1914
$1940 1981
$2350 2008
Farmland Price Per Acre (2008 Dollars)
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
4 Hurt p 221 US farm exports fell by more than half between 1980 and 1986 Anderlik and Walser p 22 5 Anderlik and Walser p 21 After increasing 80 percent in inflation-adjusted terms from 1971 to 1981 farmland values rapidly declined to near their pre-1970s level 6 Anderlik and Walser p 18 There were 297 farm bank failures between 1977 and 1993
FDIC QUARTERLY 24 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Record Farmland Prices
Chart 2
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Recent Farm Income and Exports Are the Highest since the 1970s
Farm Exports
Net Farm Income
Dollars in Billions (2008 Dollars)
Source USDA Economic Research Service
an average of 11 percent annually7 At $2350 per acre average farmland values are more than 20 percent higher than their historic peak of $1940 recorded in 1981
While it would be difficult to quantify the causes of higher farmland prices on a local level several factors are driving them on a regional and national scale Fore-most among these is strong farm income primarily in corn- soybean- and wheat-producing regions Other contributing factors include the spillover effects of the national housing boom especially on the coasts and a low interest-rate environment
Farmers have experienced strong farm income in three of the past four years (see Chart 2) In 2008 forecasted net farm income is $957 billion second only to the record $1313 billion (after adjusting for inflation) set in 1973 Export demand for all US agricultural products during the past four years has also been strong with 2008 exports forecast to be the highest on record8
While strong export demand is bolstering commodity prices significant domestic demand for corn-based etha-nol is pushing corn and soybean prices even higher The corn ethanol industry which was virtually dormant for more than two decades following the energy crisis of the
7 All farmland prices discussed in this article have been inflation-adjusted to the equivalent in 2008 dollars 8 US Department of Agriculture (USDA) Economic Research Service Net Farm Income Forecast httpwwwersusdagovBriefing FarmIncomenationalestimateshtm Farm Income Data Files Net Value Added (With Net Farm Income) 1910ndash2007 httpwwwers usdagovDataFarmIncomeFinfidmuXlshtm and Value of US Agri-cultural Trade by Fiscal Year httpwwwersusdagovDataFATUS DATAXMS1935fyxls
1970s has mushroomed since 2000 Record-breaking oil prices and federal legislation supportive of the industry have contributed to the growth of ethanol as a lower-cost fuel alternative The proportion of the US corn crop used by the ethanol industry grew from 11 percent in the 2002 crop year to nearly 33 percent in 20089 The result has been extremely high corn prices which have spilled over into higher soybean prices as farmers have converted millions of acres of soybean plantings into corn Consequently land prices in the nationrsquos largest corn- and soybean-producing states have increased rapidly (see Table 1)
The housing boom during the first half of this decade has also contributed to rising farmland values especially on the coasts (see Table 1) Earlier this decade devel-opers bought or acquired options for tens of thousands of acres of farmland for the incipient housing boom providing a significant nonagricultural source of demand for farmland Florida for example where housing development was very strong ranked first among the states in farmland price growth from 2004 to 2007 aver-aging 305 percent annually10
Further the recent escalation in farmland values occurred during a period of low long-term mortgage rates In this environment financing became much cheaper resulting in lower capitalization rates and higher property values In addition this period saw the global devaluation of the US dollar that increased global demand for US agricultural exports11
Several Factors Could Derail the Recent Run-Up in Farmland Values The two US farmland price booms of the 20th century grew on expectations that strong farm income and exports would continue indefinitely which raises the question Will the drivers of todayrsquos high farmland values prove more enduring The basic assumption behind growing or high farmland values is that farm income will also grow or remain high these expecta-tions are then capitalized into farmland values If agri-cultural export demand remains strong keeping crop
9 USDA World Agricultural Outlook Board World Agricultural Demand and Supply Estimates December 10 2004 p 10 and October 10 2008 p 10 10 USDA National Agricultural Statistical Service Farmland Value and Cash Rents Reports various 11 Craig Elwell Weak Dollar Strong Dollar Causes and Conse-quences Congressional Research Service Report June 13 2005 pp 13 and 17 Nora Brooks and Ernest Carter Outlook for US Agricul-tural Trade Economic Research Service USDA August 28 2008 p 2
FDIC QUARTERLY 25 2008 VOLUME 2 NO 4
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Table 1
Sharp Increases in Real Farmland Values Continue in Corn-Producing States
Top 5 Corn Producers Iowa Illinois Indiana Minnesota Nebraska
Average Annual Growth Rate (Percent)
Selected Coastal States
Average Annual Growth Rate (Percent)
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
10-year 1993ndash2003
3-year 2004ndash2007
1-year 2007ndash2008
27 21 38 33 17
121 148
96 121 107
133 112
71 74
143
California Florida
Georgia
United States
25 11 43
30
129 305 204
131
43 (33) (37)
48 Source USDA National Agricultural Statistics Service
prices high and prices for inputs (such as seed fertilizer and fuel) stay within a reasonable range then the current values for farmland can be supported12
However if farm incomes return to historical levels either through declining demand or because of higher farm operating costs then farmland values may be pres-sured downward to reflect lower capitalized returns to the land Concerns about a global recession could cause US farm exports which are currently 70 percent above the most recent ten-year average to return to more normal levels13 As mentioned earlier falling export demand was a contributing factor in both of the US farmland busts of the past century
Threats to the fragile corn ethanol industry also may derail the optimistic price future for corn and ultimately affect land values In the near term high oil price vola-tility and declining ethanol prices resulting from rapid escalation in ethanol production have squeezed industry profit margins14 As a result a number of corn ethanol plants have closed while plans for construction and expansion projects have been abandoned or delayed15
In the long term political and technological risks could also negatively affect the corn ethanol industry Already there is growing opposition to US government support of a 45-cent-per-gallon subsidy for blending corn etha-nol into gasoline and a 54-cent-per-gallon tariff against cheaper Brazilian sugar-based ethanol16 Moreover the
12 Jason Henderson ldquoWill Farmland Values Keep Boomingrdquo Federal Reserve Bank of Kansas City Economic Review second quarter (2008) pp 88 and 92 13 Value of US Agricultural Trade by Fiscal Year httpwwwersusda govDataFATUSDATAXMS1935fyxls 14 Jacqui Fatka ldquoBiofuel Capacity Outpaces Demandrdquo Feedstuffs 80 no 45 (2008) p 3 15 Chris Blank ldquoBiofuels Plants Hit Economic Road Blockrdquo Associated Press State and Local Wire October 9 2008 16 ldquoUS Congress Extends Ethanol Subsidy and Tariffrdquo Chemical News amp Intelligence May 15 2008 ldquoA Renewed Push for Ethanol Without the Cornrdquo New York Times April 17 2007
development of advanced biofuels such as cellulosic ethanol could displace much of the corn ethanol indus-try though it is uncertain when this technology will be commercially viable However a growing number of experimental production plants have begun operation or are under construction
The recent retreat in the residential real estate market coupled with tighter credit conditions may also weigh on farmland values The dramatic slowdown in residen-tial construction has caused demand for raw develop-ment land to evaporate putting downward pressure on farmland values in areas that had rapid housing price growth For example as shown in Table 1 the real annual farmland price growth rate in California Florida and Georgia ranged from -37 percent to 43 percent in 2008 well below the 2004 to 2007 growth rates Further liquidity and credit quality problems in the financial sector have caused tightening of lending standards overall and therefore the extent to which credit availability was driving farmland prices higher likely has stalled or reversed
Farm Banks Have Declined in Number and Market Share but Have Higher Risk Profiles Than Before the Early 1980s Agricultural Crisis Given the similarities between the recent escalation in farmland prices and the land price booms of the 20th century it is worthwhile to examine the current condi-tion of farm banks Specifically how are these banks positioned at this point in the agricultural cycle compared with the late 1970s
A significant difference is that today there are fewer farm banks nationally than there were in the 1970s In addition todayrsquos farm banks hold a much smaller share of agricultural loans as agricultural lending has become more diffused throughout the banking system during
FDIC QUARTERLY 26 2008 VOLUME 2 NO 4
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Record Farmland Prices
Chart 3 Chart 4
0
10
20
30
40
50
60
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
100 Largest Banks by Asset Size
Farm Banks
Other Institutions
Source FDIC commercial banks Note Rabobank National Association a large farm bank is included in both the farm bank and 100 largest banks data series
Proportion of Agricultural Loans Held (Percent)
Farm Banks Hold a Shrinking Share of the Bank Industryrsquos Agricultural Loans
0
10
20
30
40
50
60
70
80
Q273 Q278 Q283 Q288 Q293 Q298 Q203 Q208
Source FDIC commercial banks
Median Loans-to-Assets Ratio (Percent)
Farm Banks
Nonfarm Banks
Banks Have Invested Greater Shares of Assets in Loans over Time
the past three decades At the outset of the 1980s agricultural crisis 4515 banks nearly one-third of all US commercial banks specialized in agricultural lend-ing17 These banks represented more than half of the industryrsquos farm operating and real estate loans (see Chart 3) Farm banks now represent only 22 percent of all commercial banks in the United States and account for just 38 percent of all agricultural loans Also large banks have an increased share of the nationrsquos agricul-tural loans and traditional farm banks have expanded into nonagricultural loans While 99 of the 100 largest commercial banks are not farm banks they hold 26 percent of the banking industryrsquos agricultural loans These institutions have diversified loan portfolios and agricultural loans represent a relatively small proportion of their capital Because of their diversified holdings large banks are not as vulnerable to agricultural downturns
Despite the diffusion of agricultural risk across banks of various types and sizes 1579 farm banks were operating nationally as of June 30 2008 These banks were primarily headquartered in the wheat- corn- and soybean-growing areas in the middle of the country Overall these banks are relatively healthy thanks to strong farm incomes during the past several years Indeed as of mid-year 2008 farm banks reported histor-ically low farm loan delinquencies nearly nonexistent farm loan net charge-offs and high levels of capital and reserves However the one negative aspect of farm bank performance is earnings particularly net interest margin (NIM) performance In 2007 the median annual NIM
17 For purposes of this article a farm bank is a commercial bank with a volume of farm loans including loans secured by farmland exceed-ing 25 percent of its total loan portfolio
for farm banks fell below 4 percent for the first time since 1977
Despite their relatively healthy condition farm banks have increased their risk profile considerably since the 1980s Among the reasons for the increased risk are elevated loans-to-assets (LTA) ratios increased expo-sure to several types of nonagricultural loans and lower balance sheet liquidity
The most striking structural change in farm bank lend-ing in the past 20 years is in the ratio of loans to assets LTA ratios among farm banks are much higher today than they were in 1980 (see Chart 4) Farm banks now hold a median 64 percent of total assets in loans up from 55 percent in 1980 This trend is not unique to farm banks but instead reflects a similar trend in the broader banking industry as banks have countered declining NIMs by increasing the concentration of loans on their balance sheets18
What makes this trend worrisome is that according to research in the FDIC study History of the Eightiesmdash Lessons for the Future LTA ratios were much more highly correlated with bank failures than equity levels growth rates or earnings performance19 Even though
18 Richard D Cofer Jr and John Anderlik ldquoDeclining Net Interest Margins and Rising Loan-to-Asset RatiosmdashA Disturbing Paradoxrdquo FDIC Regional Outlook fourth quarter (2000) 19 FDIC History of the EightiesmdashLessons for the Future (Washington 1997) p 281 Researchers examined eight bank performance vari-ables including loan volume asset and loan growth and various earnings measures and found that a bankrsquos loans-to-assets ratio was the best predictor of failure When ranked according to their loans-to-assets ratio the top one-fifth of farm banks was five times more likely to fail than other farm banks
FDIC QUARTERLY 27 2008 VOLUME 2 NO 4
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
their capital levels are considerably higher many farm banks now have more loans in relation to capital than they did in 1980 In addition because overall farm loan portfolios have grown little in relation to asset levels higher LTA levels indicate growth in nonagricultural loan portfolios In fact farm banks have greatly increased holdings of construction and development (CampD) loans and residential real estate loans since 1980 The downturn in the housing market and the weakening economy have caused deterioration in these credit portfolios Since June 2006 just as the housing market downturn began in earnest farm loan portfolio delinquencies have declined while the median delin-quency ratio for nonfarm loans has increased to 27 percent from 22 percent Nearly 25 percent of farm banks reported nonagricultural loan delinquencies of 5 percent or more as of June 30 2008
Finally farm banks today exhibit lower balance sheet liquidity than they did in 1980 The median farm bank holds liquid assets of 33 percent of total assets down from 42 percent in 1980 As a result of lower asset-based liquidity sources bankers are relying increasingly on other funding sources including Federal Home Loan Bank advances correspondent borrowing lines and brokered and wholesale deposits
How Susceptible Are Farm Banks to a Downturn in Farmland Prices There is little consensus among agricultural economists as to the sustainability of high farm incomes and farm-land prices However it is safe to predict that any signif-icant overall decline in farmland values is likely to be preceded by a decline in net farm income This combi-nation would cause farmers to have less income with which to pay their loans and lower collateral values securing these loans This would be true in any environ-ment but would likely be magnified given the current boom in net farm income and farmland prices
However there is one dramatic difference in farm loan underwriting compared with the late 1970s It does not appear that collateral-based lendingmdashrelying on farm-land values rather than farm cash flow to determine loan repayment abilitymdashis nearly as widespread as it was leading up to the last agricultural crisis Many banks that failed during the 1980s relied too heavily on collat-eral-based lending which put farm loans at risk when land prices declined Subsequently both bankers and regulators have recognized the prudence of cash-flow-based lending In outreach meetings with the FDIC and other federal regulators farm bankers have consistently
Chart 5
-20 -15 -10 -5 0 5
10 15 20 25 30 35
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Farmland Loansmdashfarm banks in continuous operation YE 1972 through YE 2007
Farmland Loan Growth Remains Well below 1970s Levels
Farmland Loansmdash commercial banks
Sources FDIC commercial banks USDA
Farmland Pricesmdash 2007 dollars
Year-over-Year Growth Rate (Percent)
said that they have held the line on lending on farmland and required solid cash flow numbers Thus according to these lenders many of the highest-priced farmland sales have been cash sales or have otherwise not involved bank financing A look at recent farmland loan growth suggests that farm bankers have been careful to avoid overlending for farm real estate although farm-land values have been escalating rapidly since 2003 farmland loan growth at farm banks actually declined during that time (see Chart 5)
Still farm banks have increased their risk profiles primarily by increasing nonagricultural loan portfolios This has left them more susceptible to nonagricultural risks such as the macroeconomic weaknesses that have affected residential CampD and consumer loan portfolios
Moreover some farm banks have significantly higher risk profiles As of June 30 2008 190 farm banks (about 12 percent of the total) held loan portfolios in excess of 80 percent of their assets compared with just 14 farm banks in June 1980 Not only do these banks exhibit higher credit risk tolerance but they also have other high-risk characteristics As Table 2 shows these banks hold less capital and smaller loan loss reserves to balance greater risk taking Indeed these banks hold one dollar of capital for every eight dollars of loans while the typical farm bank holds one dollar of capital for every five dollars of loans In addition high-LTA farm banks operate with far less balance sheet liquidity than the typical farm bank Farm banks with high LTA ratios also have a greater share of loans concentrated in CampD lending than the typical farm bank and have nearly three times as much capital exposure Agricultural loan delinquencies at these banks remain very low in line
FDIC QUARTERLY 28 2008 VOLUME 2 NO 4
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Record Farmland Prices
Table 2
Farm Banks with High Loans-to-Assets Ratios Exhibit Other Higher-Risk Profiles as Well Farm Banks with High LTA Ratiosa All Farm Banks
As percentage of total assets Capital and loan loss reserves
Median Values (Percent)b
102 112 Total loans 842 635
All agricultural loans 344 254 Farmland-secured loans 154 113 Construction amp development (CampD) loans 22 09 Commercial business loans 120 81
Liquid assets 116 326 As percentage of total capital and reserves Total loans 8317 5623
All agricultural loans 3363 2277 CampD loans 204 78
Loan delinquency ratios Agricultural loans 05 03 All other loans 28 27
CampD loans 56 25 Commercial business loans 18 15
Annualized growth rates 2004 to 2008 Total assets 75 44 All agricultural loans 101 56 Farmland-secured loans 105 61 Source FDIC all farm banks a Farm banks with loans-to-assets (LTA) ratios exceeding 80 percent b Reported CampD loan delinquency ratios are 75th percentile values not medians Both groups report median values of 00 percent
with the industry however their CampD loan delinquen-cies are more than double the industry average
Conclusion While it is not clear whether todayrsquos high farmland values represent the first act of a boom-bust cycle or a new era in farming bankers must continually assess risk in relation to economic events History has shown that rapid spikes in farm income and farmland values are followed by significant declines Recent economic evidence may portend a retreat from record farm incomes and farmland values The national housing downturn already has led to a decline in real farmland prices in coastal states and increasing risks in the corn ethanol industry could deflate farmland prices in the nationrsquos crop-producing states
Although the number of farm banks has declined along with their share of the agricultural lending market these lenders still account for one-fifth of the nationrsquos commercial banks and hold sizeable agricultural
loan portfolios These institutions are susceptible not only to swings in farm incomes and farmland values but increasingly to nonagricultural factors as well The not-so-distant experience of the early 1980s agricultural crisis stands as a reminder of the need for vigilance especially during times of agricultural prosperity
Authors Richard D Cofer Jr Regional Manager Division of Insurance and Research rcoferfdicgov
Jeffrey W Walser Regional Economist Division of Insurance and Research jwalserfdicgov
Troy D Osborne Senior Financial Analyst Division of Insurance and Research tosbornefdicgov
The authors would like to thank John M Anderlik Assis-tant Director Regional Operations Division of Insurance and Research for his contributions to this article
FDIC QUARTERLY 29 2008 VOLUME 2 NO 4
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Feature Article
Highlights from the 2008 Summary of Deposits Data
Each year as of June 30 the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervi-sion (OTS) survey all FDIC-insured institutions to collect information on bank and thrift deposits and operating branches and offices The resulting Summary of Deposits (SOD) is a valuable resource for analyzing deposit market trends and measuring concentrations nationally and at the local level This article highlights some preliminary conclusions from the 2008 SOD data1
Deposit Growth Remains Strong While Office Growth Slows Slightly Commercial banks and thrifts continue to expand their branching networks and deposits The number of FDIC-insured institution offices increased 20 percent during the year ending June 30 2008 slightly below the year-ago rate of 27 percent Similar to prior periods deposit growth exceeded growth in the number of offices The volume of deposits increased by 48 percent compared to a 39 percent increase a year ago (see Chart 1)2
Deposit and Office Growth Continue to Outpace US Population Growth To better understand the industryrsquos level of expansion it is useful to look at various measures of deposit and
1 This analysis reflects updates in the Summary of Deposits data as of November 21 2008 All FDIC-insured institutions that operate branch offices beyond their home office must submit responses to SOD surveys to the FDIC or the OTS ATMs are not considered offices for the purposes of the survey Call Report information on unit banks (banks with a single headquarters office) have been combined with branch office data to form the SOD database which can be accessed at wwwfdicgov For office information related to savings institutions regulated by the OTS the SOD can be used for current and historical branch data The SOD is the sole source of OTS branch information derived from the annually collected OTS Branch Office Survey Subsequent to June 30 2008 significant business combinations among some of the nationrsquos largest banking organizations were announced These institutions are Bank of America Countrywide Financial Corporation and Merrill Lynch and Company JPMorgan Chase and Company and Washington Mutual Corporation PNC Finan-cial Services Group and National City Corporation and Wells Fargo amp Company and Wachovia Corporation 2 Offices included are those in the 50 states and the District of Colum-bia but not those in US territories The SOD data include domestic deposits only which are referred to in this report as deposits
Chart 1
60
65
70
75
80
85
90
95
100
105
110
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 0
1
2
3
4
5
6
7
Number of Offices
Domestic Deposits
Number of Offices (Thousands) Domestic Deposits (Trillions of Dollars)
Source FDIC Summary of Deposits and OTS Branch Office Survey
Offices and Deposits of FDIC-Insured Institutions Continue to Grow
Chart 2
Banks and Thrifts Are Using Expanding Branch Networks to Boost Deposit Growth
Domestic Deposits per Office Offices per Million People (Millions of Dollars) 330
320
310
300
290
280
270
260
250
Offices per Million People Domestic Deposits per Office
100 90 80 70 60 50 40 30 20 10 0
2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06 2Q08 Sources FDIC Summary of Deposits and OTS Branch Office Survey Population estimates from Moodys Economycom
office growth in relation to demographic trends For example trends in deposit growth and population can be compared to the number of bank offices As shown in Chart 2 banks continue to expand their retail pres-ence at a faster pace than population growth at the national level Both the number of offices per million people and the volume of deposits per office continue to increase However the pace of this growth is slowing Indeed the annual growth in both domestic deposits per office and offices per million people were below their respective five-year averages
FDIC QUARTERLY 30 2008 VOLUME 2 NO 4
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Summary of Deposits
Metropolitan Areas Have Attracted Greater Deposit and Office Growth Than Less Populated Areas During the Past Five Years Metropolitan areas hold the largest share of bank offices and bank deposits3 About 77 percent of offices holding 89 percent of domestic deposits were located in metropol-itan areas during the year ending June 30 (see Table 1)
The rate of deposit growth was highest in metropolitan areas during the year The one-year growth rate in deposits among offices in metropolitan areas was 51 percent more than double the growth rate of deposits in micropolitan areas4 This pattern of deposit growth is in line with the long-term trend The five-year compound growth rate of domestic deposits in offices located in metropolitan areas was slightly more than twice that of micropolitan areas and almost twice the rate of growth in other areas5
Table 1
Similar trends are also found in the rate of increase in the number of bank offices The five-year compound growth rate in the number of offices in metropolitan areas was almost twice that of micropolitan areas and more than ten times that of other areas This trend continued during the past year
Office Growth Is Related to State Demographic Trends States with the most rapid office growth during the past five years are not necessarily the ones where deposit growth is also robust Generally the pace of office growth is strongest in the southeastern and southwest-ern regions of the country and along the West Coast whereas deposit growth varies more widely (see Map 1 and Map 2) Other studies have shown that demo-graphic factors such as population employment and per capita income growth are associated with the growth in deposits and number of offices6 However state law and specific local market conditions also drive these changes
Office Growth Has Been Faster in the Nationrsquos Largest Cities Other Areas Micropolitan Areas Metropolitan Areas
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
9729 9812 9840
03
02
254 295 307
39
39
11559 12104 12269
13
12
410 467 476
21
30
65252 73803 75418
22
21
4424 5874 6173
51
69 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Metropolitan statistical areas have urban clusters of greater than 50000 inhabitants Each micropolitan statistical area has an urban cluster of between 10000 and 50000 inhabitants Other areas have less than 10000 inhabitants See US Census Bureau definitions for greater detail
3 Metropolitan statistical areas are characterized by urban clusters of greater than 50000 inhabitants 6 See Ron Spieker ldquoBank Branch Growth Has Been Steadymdash 4 Each micropolitan statistical area has an urban cluster of between Will It Continuerdquo (Future of Banking Study Federal Deposit 10000 and 50000 inhabitants Insurance Corporation August 2004) 5 Other areas have populations of 10000 or fewer inhabitants wwwfdicgovbankanalyticalfuturefob_08pdf
FDIC QUARTERLY 31 2008 VOLUME 2 NO 4
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Map 1
The Strongest Office Growth Occurred in the Southeast and Southwest
5-year Compound Growth Change in Number of Offices
-061ndash119 120ndash159 160ndash205 206ndash294
Source FDIC 295ndash679
The Largest Banks and Thrifts Reported Higher Deposit and Office Growth Than Smaller Banking Organizations Large bank and thrift organizations (those with $10 billion or more in total assets as of June 30 2008) hold a substantial share of domestic deposits (67 percent) and offices (48 percent) This category of banks also reported higher compound growth rates in domestic deposits over the past five years although the pace of deposit growth eased in the 2008 period
Table 2
Map 2
Weak Deposit Growth Was Concentratedin the Midwest
5-year Compound Growth Change in Deposits
-496ndash352 353ndash441 442ndash657 658ndash820
Source FDIC 821ndash4432
The pace of office expansion among large institutions has slowed during the past year (see Table 2) In contrast with the five-year trend the rate of office growth for banks characterized as small and mid-sized matched or exceeded the growth rate for large institu-tions The stronger long-term growth rates for offices and deposits among institutions in the largest size category are likely related to ongoing industry consoli-dation However growth occurs not only from expan-sion of existing branch networks and collection of additional deposits through those networks but also from mergers and from the migration of institutions
Institutions Categorized as ldquoLargerdquo Reported Higher Deposit Growth Small Organizations Mid-size Organizations Large Organizations
Number of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) Number
of Offices
Domestic Deposits (Billions
of Dollars) June 2003
June 2007
June 2008
1-Year Growth Rate
5-Year Compound Growth Rate
32050 31593 32039
14
00
1075 1165 1188
20
26
17405 18773 19590
44
24
895 1033 1074
39
37
37679 46247 46888
14
45
3112 4432 4688
58
85 Source FDIC Summary of Deposits and OTS Branch Office Survey Excludes institutions in US territories
Note Small = organizations with consolidated deposits less than $1 billion Mid-size = organizations with consolidated deposits of $1 billion to $10 billion Large = organizations with consoli-dated deposits greater than $10 billion
FDIC QUARTERLY 32 2008 VOLUME 2 NO 4
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Summary of Deposits
between categories It is difficult to disaggregate the independent contributions of each of these factors
Retail Offices Continue to Grow More Rapidly Than Other Office Types Brick-and-mortar offices continue to make up the over-whelming majority (90 percent) of banking offices However retail offices such as those found in super-markets represent the fastest-growing office type The once-popular drive-through facilities continued to decline in number during the year in line with the long-term trend (see Table 3)
Table 3
Table 4
The Number of Banking Organizations with Operations in Multiple States Remains Relatively Stable The number of FDIC-insured commercial banks and savings institutions declined from 8614 to 8451 during the year Merger and acquisition activity is affected by general economic conditions trends in equity markets and national and state laws such as the nationwide concentration limits mandated by the Riegle-Neal Act (see Table 4) Although no banking organization even the largest or most geographically diverse operates in all 50 states and the District of Columbia institutions continue to expand their operations across the country7
As of June 30 2007 the banking organization with the
The Number of Retail Banking Offices Has Risen Sharply during the Past Five Years
Brick-and-Mortar Offices Retail Offices
Drive-Through Facilities Other Office Types Total
June 2003 June 2007 June 2008 1-Year Growth Rate 5-Year Compound-
Growth Rate
65264 73973 75718
24
30
3944 4742 4991 53
48
2933 2511 2366
-58
-42
532 612 608
-07
27
72673 81838 83683
22
29 Source FDIC Summary of Deposits and OTS Branch Office Survey
Note Commercial banks only Retail banking offices are full-service offices located in a retail facility such as a supermarket or department store
Banks Are Inching Closer to a 50-State Franchise
Company Number of States with
Deposit Offices Reported Number of
Deposit Offices Domestic Deposits (Billions of Dollars)
Wells Fargo amp Company 40 6669 7167 Bank Of America Corporation 35 6179 7878 JPMorgan Chase amp Co 24 5276 6855 US Bancorp 24 2592 1278 BNP Paribas 20 723 433 First Citizens Bancshares Inc 17 393 131 Dickinson Financial Corporation 17 212 45 Northern Trust Corporation 17 94 191 Capitol Bancorp Ltd 17 73 42 Regions Financial Corporation 16 1923 862 Citigroup Inc 15 1050 2658 Keycorp 15 991 610 Pro forma reflecting mergers andor acquisitions announced subsequent to June 30 2008
Source FDIC Summary of Deposits and OTS Branch Office Survey for the 50 states and the District of Columbia
Note See SOD instructions for definition of deposit offices
7 Based on pro forma results of mergers and acquisitions between large geographically diversified banking organizations announced subsequent to June 30 2008
FDIC QUARTERLY 33 2008 VOLUME 2 NO 4
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Table 5
Two of the Largest Metro Areas Are Characterized as ldquoHighly Concentratedrdquo Markets (Top 25 metropolitan areas by population as of June 30 2008)
Metropolitan Area
Herfindahl-Hirschman
Index
Population Estimate (Millions)
5-Year Compound
Growth Rate in Offices (Percent)
5-Year Compound
Growth Rate in Deposits (Percent)
Cincinnati-Middletown OH-KY-IN 2179 21 21 27 Pittsburgh PA 1872 24 02 47 Minneapolis-St Paul-Bloomington MN-WI 1742 32 32 44 Dallas-Fort Worth-Arlington TX 1698 63 76 189 San Francisco-Oakland-Fremont CA 1546 42 16 37 Detroit-Warren-Livonia MI 1508 45 22 29 Phoenix-Mesa-Scottsdale AZ 1458 43 83 73 Seattle-Tacoma-Bellevue WA 1367 34 14 66 Atlanta-Sandy Springs-Marietta GA 1306 54 39 91 Portland-Vancouver-Beaverton OR-WA 1227 22 25 62 Houston-Sugar Land-Baytown TX 1182 58 75 48 New York-Northern New Jersey-Long Island NY-NJ-PA 1177 189 32 49 Tampa-St Petersburg-Clearwater FL 1168 27 39 84 SacramentondashArden-ArcadendashRoseville CA 1049 21 59 63 Baltimore-Towson MD 1046 27 15 48 Philadelphia-Camden-Wilmington PA-NJ-DE-MD 1032 58 18 108 Boston-Cambridge-Quincy MA-NH 1021 45 12 14 San Diego-Carlsbad-San Marcos CA 1010 30 37 47 Washington-Arlington-Alexandria DC-VA-MD-WV 961 54 33 84 Riverside-San Bernardino-Ontario CA 927 42 55 65 Miami-Fort Lauderdale-Pompano Beach FL 809 54 30 56 Denver-Aurora CO 778 25 42 60 Los Angeles-Long Beach-Santa Ana CA 752 129 30 51 St Louis MO-IL Metropolitan Statistical Area 692 28 33 28 Chicago-Naperville-Joliet IL-IN-WI 595 96 56 42 Source FDIC Summary of Deposits OTS Branch Office Survey and Moodyrsquos Economycom
Note The Herfindahl-Hirschman Index (HHI) a commonly accepted measure of market concentration is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers Markets in which the HHI is between 1000 and 1800 points are considered to be ldquomoderately concentratedrdquo and those in which the HHI is greater than 1800 points are considered to be ldquohighly concentratedrdquo For more information please refer to the joint US Department of Justice and Federal Trade Commission Web site at httpwwwusdojgovatrpublictestimonyhhihtm Population estimates for 2008 are from Moodyrsquos Economycom
widest geographic footprint reported deposit offices in 31 states If Wells Fargo amp Company consummates mergers and acquisitions announced subsequent to June 30 2008 it could have deposit offices in as many as 40 states
Two of the Nationrsquos 25 Largest Metropolitan Areas Are Now ldquoHighly Concentratedrdquo Consolidation and growth of branch networks have led to increased market concentration in many metro-politan areas Market concentration is an important competitive factor considered by bank regulatory agencies and the Department of Justice in the analysis of proposed mergers and acquisitions The Herfindahl-Hirschman Index (HHI) is a commonly used measure of
market concentration8 As of June 30 2008 16 of the 25 largest metropolitan areas had an HHI in the ldquomoderately concentratedrdquo range with a score between 1000 and 1800 two metropolitan areas scored in the ldquohighly concentratedrdquo range with a score of more than 1800 (see Table 5) Only 14 metropolitan areas reported an HHI in excess of 1000 as of June 30 2007 with no markets in the ldquohighly concentrated rangerdquo Nineteen of the 25 largest metropolitan areas saw an
8 Under the Department of Justice (DOJ) guidelines markets with an HHI of less than 1000 are considered ldquounconcentratedrdquo those with an HHI between 1000 and 1800 are considered ldquomoderately concen-tratedrdquo and those with an HHI greater than 1800 are considered ldquohighly concentratedrdquo For more details see the joint Federal Trade Commission (FTC) and DOJ Web site on ldquoHorizontal Merger Guidelinesrdquo at wwwusdojgovatrpublicguidelineshoriz_bookhmg1html
FDIC QUARTERLY 34 2008 VOLUME 2 NO 4
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Summary of Deposits
increase in their HHI during the past year with an aver-age increase of 98 points
Summary of Deposits Data Were Publicly Released on October 8 2008 The 2008 SOD data are available to the public through the FDICrsquos Web site at www2fdicgovsodindexasp Available SOD data include information on the deposits and branching activities of individual FDIC-insured institutions market share information and various summary charts and tables
Author Robert E Basinger Senior Financial Analyst Division of Insurance and Research robbasingerfdicgov
The author would like to thank Jeffrey Ayres Senior Finan-cial Analyst Division of Insurance and Research FDIC for his contributions to this article
FDIC QUARTERLY 35 2008 VOLUME 2 NO 4
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
-
Federal Deposit Insurance Corporation Washington DC 20429-9990 OFFICIAL BUSINESS PENALTY FOR PRIVATE USE $300
PRESORTED STANDARD
MAIL Postage amp Fees Paid
FDIC Permit No G-36
- Structure Bookmarks
-
- Quarterly Banking Profile Third Quarter 2008
- Do Record Farmland Prices Portend Another Steep Downturn for Agriculture and Farm Banks
- Highlights from the 2008 Summary of Deposits Data
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