The Federal Deposit Insurance Corporation released its Quarterly Banking Profile for fourth-quarter 2016, so let's look at both quarterly and full-year data. I believe this quarterly report represents the balance sheet for the U.S. economy.

Conventional wisdom is that higher interest rates are positive for bank stocks as net income margins widen. I have been opining that this is not always the case, particularly when banks have not been careful with investment portfolios. The FDIC indicates that the banking system continues to face challenges: "Margin pressures have led some institutions to 'reach for yield' through higher-risk assets and extended asset maturities. Banks must manage their interest-rate risk, liquidity risk and credit risk carefully for industry growth to remain on a long-run, sustainable path. These challenges will continue to be a focus of supervisory attention."

The rise in longer-term interest rates resulted in a decline in market values of portfolio holdings. At the end of the third quarter, the market value of investment securities exceeded their book value by almost $60 billion. At the end of the fourth quarter, these gains evaporated to an unrealized loss of $20 billion.

Here's a portion of the FDIC Quarterly Banking Profile for the fourth quarter.

 

While the number of problem banks continued to decline, the number of FDIC-insured financial institutions fell to 5,913 down from 8,533 at the end of 2007. The number of problem banks fell to 123 vs. 76 at the end of 2007. The number of employees increased to 2.05 million but down 7.3% from 2.21 million at the end of 2007.

Total Assets rose to $16.78 trillion in the fourth quarter, up 28.7% since the end of end of 2007. The four "too big to fail" money center banks, JP Morgan (JPM) , Wells Fargo (WFC) , Bank of America (BAC) and Citigroup (C) still hold 41.9% of all assets, which remains a regulatory headache.

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Residential Mortgages (1 to 4 family structures) represent the mortgage loans on the books of our nation's banks. Production rose to $1.995 trillion in the fourth quarter, still 11.1% below the pace at the end of 2007.

Nonfarm / Nonresidential Real Estate Loans represent lending to construction companies to build office buildings, strip malls, apartment buildings and condos, a major focus for community banks. This category of real estate lending expanded to a record $1.324 trillion, up 36.7% from the end of 2007. This is a potential problem as on-line shopping reduces traffic at America's malls. There are 1,526 community and regional banks overexposed to CRE lending, including 517 that are publicly traded.

Construction & Development represent loans to community developers and homebuilders to finance planned communities. This was the Achilles Heel for community banks and the reason why more than 500 banks were seized by the FDIC bank failure process since the end of 2007.

The recovery in this real estate loan category remains solid. C&D loans were up 3.3% in the fourth quarter to $313 billion, up 13.7% in 2016. This is still 50.2% below the level at end of 2007. There are 362 community overexposed to C&D lending, including 79 that are publicly-traded.

Home Equity Loans represents second lien loans to homeowners who borrow against the equity of their homes. Regional banks typically offer HELOCs but these loans continue to decline quarter over quarter, despite the dramatic rise in home prices. HELOC lending declined 2.3% fourth quarter to $434 billion and down 28.5% since the end of 2007.

Total Real Estate Loans -- Growth in total real estate loans slowed to 0.7% in the fourth quarter vs. 1.3% in the third quarter and from 1.9% in the second quarter. Real estate lending is down 8.6% since the end of 2007.

Other Real Estate Owned declined a solid 6.9% in the fourth quarter as formerly foreclosed properties return to the market. This asset category peaked at $53.2 billion in the third quarter of 2010.

Notional Amount of Derivatives are a financial stress among the seven largest banks. This exposure plunged by 7.3% in the fourth quarter to $166.7 trillion, approaching the year-end 2007 level.

Deposit Insurance Fund represents the dollars available to protect insured deposits. These monies are funded by all FDIC-insured institutions via annual assessments, with the largest banks paying the largest amounts. The fourth-quarter sequential gain was 3.1%, to $83.2 billion, as the FDIC is well on its way to satisfy the regulatory guidelines. By the end of September 2020, this fund is mandated to have the fund at 1.35% of insured deposits. The current level is 1.20%.

Insured Deposits grew by 1.7% in the fourth quarter, to $6.917 trillion, up 61.2% since the end of 2007. This growth can be attributed to the rise in deposit insurance guarantees to $250,000 from $100,000.

Reserves for Losses declined 0.5% in the fourth quarter, to $121.4 billion, but still 19.4% from the end of 2007, which is a sign of residual stress in the banking system.

Noncurrent Loans declined by 1.8% in the fourth quarter to $131.6 billion, but still 19.7% above the level at the end of 2007. Much of this is legacy loans still in the banking system.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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