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Opening Statement
Don Powell
Federal Deposit Insurance Corporation
At a Press Conference
Preliminary Bank Earnings for 2001
Washington, D.C.
February 28, 2002
Today we are announcing preliminary earnings for commercial banks for the fourth
quarter of 2001 and for the entire year. The good news is that commercial banks had
record fourth-quarter earnings of $19 billion and record annual earnings of $74.6 billion that is $3.5 billion more than the previous record of $71.1 billion set in 1999. Nearly half
of all banks reported higher earnings last year than in 2000, which is quite an
accomplishment, considering the broader economy.
Sharply lower funding costs helped the industry deliver its record performance. Net
interest margins shot up at larger banks, those banks with assets of more than $1
billion, and the net interest margin at smaller institutions improved as well.
All that is good news, but the news is not all good.
If you look at industry earnings more closely, you'll see that the record for 2001 was
made possible only by $4.5 billion in gains on sales of securities, and in fact, net
operating income - which excludes these gains and other nonrecurring items - was 1.2
percent lower in 2001 than in the year 2000, about $830 million lower. Without these
gains, fourth quarter earnings last year would have been about equal to the fourth
quarter earnings in 1999, when such gains played almost no role. In other words,
earnings from core banking operations have dipped.
As we discussed yesterday in our publication FYI, asset quality continues to deteriorate,
and today I want to stress that concerns about those problems continue to grow.
The provision for loan losses in 2001 increased more than at any time in the past 12
years, growing from $30 billion in 2000 to $43 billion. Net charge-offs for the year
reached an all-time high of $36.5 billion.
Net charge-offs in the fourth quarter increased 44.3 percent from a year ago. At $12.7
billion, they were the highest quarterly total ever reported by the industry, and chargeoffs of commercial and industrial loans accounted for almost half of that record.
Commercial and industrial loan charges-offs totaled $6 billion - up dramatically from the
third quarter. Even with this dramatic increase in charge-offs, noncurrent C&I loans

continued to rise as well, and together, they came to almost $30 billion in the fourth
quarter. That compares to the low of $7.4 billion recorded in the first quarter of 1997.
Most of the problems in C&I lending remain centered in larger banks. Over the past two
years, larger banks have experienced a faster decline in asset quality than smaller
banks have, and in the fourth quarter, troubled C&I loans at larger banks rocketed from
2.60 percent to 3.18 percent. The deterioration at smaller banks has been more recent
and more gradual.
Banks are recognizing asset quality problems, as the figures for loan losses show. And
for the first time in eight quarters, loss reserves are keeping pace with their noncurrent
But problems are still growing, and if you were to look at the industry figures as if they
were the returns from one bank, you could conclude that asset quality may be even
more of a problem in the near future.
I want to make one more point. There was a significant increase in the number of banks
on our problem list in the fourth quarter and in their total assets. The 21 banks going on
the list was the largest quarterly increase in problem banks since the third quarter of
1991, and the $22 billion increase in problem bank assets was the largest increase
since the fourth quarter of that same year.
The last time we had $36 billion in problem bank assets was in 1994.
To sum up: The banking industry in 2001 again enjoyed record earnings. Capital levels
remain high and the industry continues strong, but there are concerns - the integrity of
the earnings, the decline of asset quality, the increase in troubled institutions - and
these concerns continue to grow.
Last Updated 02/28/2002