Banks Make $40.4 Billion in Third-Quarter Profits

FDIC-insured banks and savings institutions earned $40.4 billion in the third quarter, 5.1 percent higher than the industry’s earnings a year ago, the FDIC said today. The increase in earnings was principally driven by reductions in noninterest expenses — specifically, a $2.7 billion drop in litigation expenses at large banks — the agency said. Community banks collectively earned $5.2 billion in the third quarter, up 7.5 percent from the year before.

“Robust loan growth was the driving factor behind another strong quarter for America’s banking industry,” said ABA Chief Economist James Chessen. “Lending served as the primary driver of the growth in bank assets as the bread and butter of banking moves to center stage.” Total loan and lease balances rose 5.9 percent year-on-year, the fastest annual pace of growth since 2008.

The average return on assets remained little changed, edging up to 1.02 percent from 1.01 percent last year. Net operating revenue edged up by only 0.3 percent year-over-year, with 1.7 percent growth in net interest income offsetting a 2 percent decline in noninterest income. While noninterest expenses declined overall by 2.9 percent, the dip was driven mostly by savings at a few large banks; fewer than one in three banks saw expenses decline.

Net interest margins remained near record lows at 3.08 percent, pushing banks to reach further for yield — the percentage of assets with maturities beyond three years rose to 34.6 percent in the third quarter, a record high. But “banks are well prepared to manage what is expected to be a slow and gradual increase in interest rates by the Fed,” Chessen added. “This gives institutions ample time to adjust while low interest rates will continue to attract business borrowers.”

Asset quality continued to improve as troubled loans and leases fell, however. Charge-offs were $8.7 billion in the third quarter, down 6.2 percent from a year earlier. The number of institutions on the problem bank list dropped from 228 to 203, and the Deposit Insurance Fund balance rose from $51.1 billion to $67.6 billion during the quarter.