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Report on the Condition of the U.S. Banking Industry: Fourth Quarter, 2005

Total assets of reporting bank holding companies increased slightly (0.7 percent, or $77.8 billion) over the fourth quarter of 2005, to $11.3 trillion, as robust growth in loans--particularly real estate loans--was nearly offset by a scaling back of money market assets and investment securities portfolios. Non-interest income fell somewhat after a particularly strong third quarter, contributing to a modest decline in earnings. However, profitability ratios remained high and the nonperforming assets ratio held steady at a low level.

Loans continued to grow briskly, increasing 2.5 percent, or $135 billion, over the quarter. Real estate loans accounted for almost two-thirds of that expansion. Single-family mortgage loans increased $50 billion, or 3.4 percent (compared with 4.7 percent in the preceding quarter), with most of the growth reported to have been in fixed-rate products. Home equity lines of credit (most of which take the form of variable-rate loans) fell for the first time since early 1999 as short-term rates escalated. Commercial real estate lending increased $41 billion, spurred by a sharp rise in construction and land development loans up (7.7 percent, or $27 billion). Commercial and industrial (C&I) loans advanced (up 3.4 percent, or $33 billion), while unused commitments to lend grew 3.6 percent ($191 billion), to $5.4 trillion.

Reporting bank holding companies reduced their holdings of securities and money market assets $89 billion over the quarter. The declines in money market assets (down $70 billion) and money market liabilities (down $61 billion) were due mostly to changes at one of the four large bank holding companies at which banking operations account for a small proportion of the consolidated entity.¹ Downsized investment securities portfolios reflected the adverse effect of interest rate hikes on the market value of available-for-sale securities and efforts by bank holding companies to restructure their interest rate risk positions.

Banking organizations funded asset growth with deposits (mainly time deposits), which increased 2.5 percent ($138.5 billion). They reduced borrowings $80 billion over the same period, to $3.6 trillion. Tier 1 and total risk-based capital ratios remained largely unchanged at 9.14 percent and 11.86 percent respectively. The leverage ratio was also stable at 6.50 percent.

Net income for the fourth quarter was $33 billion, 5 percent less than for the third quarter, as trading revenues at large bank holding companies dropped modestly after a strong third quarter. Net interest income edged up somewhat despite a 2 basis point drop in the net interest margin--a decline attributable to further flattening in the term structure, increased reliance on higher cost deposits, and competitive loan pricing. Reflecting overall strong asset quality, loan-loss provisions declined moderately despite the effects of a spike in personal bankruptcy filings in October related to changes in the bankruptcy code. For 2005 as a whole, net income grew 16.8 percent, to a record $133.5 billion.

The nonperforming assets ratio improved for the sixth consecutive quarter, falling 1 basis point, to 0.69 percent, in the fourth quarter of 2005 despite a modest increase in nonaccrual loans. The rise of nonaccrual loans largely reflected a midyear clarification of regulatory reporting instructions such that bank holding companies were required to recognize on their balance sheets certain delinquent and nonaccruing residential mortgage loans that had been previously securitized and sold in connection with the issuance of Government National Mortgage Association (GNMA) mortgage-backed securities. Excluding the effect of the rebooked GNMA loans, nonaccrual loans would have fallen.

1. Financial information for four large bank holding companies (BHCs) at which banking operations represent only a small component of the consolidated entity is included in the data for all reporting bank holding companies shown in table 1 but not in the data for the fifty large bank holding companies (table 2) or for all other reporting bank holding companies (table 3). For background information on the institutions included in each table, see Board of Governors of the Federal Reserve System (2004), "Report on the Condition of the Banking Industry: Third Quarter, 2003," Federal Reserve Bulletin, vol. 90 (Winter), pp. 47-51.  Return to text

Table 1: Financial characteristics of all reporting bank holding companies in the United States

Table 2: Financial characteristics of fifty large bank holding companies in the United States

Table 3: Financial characteristics of all other reporting bank holding companies in the United States

Table 4: Nonfinancial characteristics of all reporting bank holding companies in the United States