Tax Reform, Strong Economy Drive Q3 Bank Profits Higher

FDIC-insured banks and savings institutions earned $62 billion in the third quarter, an increase of 29.3 percent from the industry’s earnings a year before, the FDIC said today. The agency attributed the growth to higher net operating revenue and a lower effective tax rate. American Bankers Association Chief Economist James Chessen noted that loan growth was strong during the third quarter, and that a strong economy overall contributed to bank performance.

“Lending rose in almost every category, helping to spur strong economic growth throughout the country,” Chessen said. “Asset quality was the strongest it’s been in more than a decade while capital levels hit record highs. We’re also seeing competition for deposits heating up as banks look to further expand the lending that drives our economy forward.”

Net interest income increased 7.5 percent year-on-year, totaling $137.1 billion. The average net interest margin increased 15 basis points year-over-year, as average asset yields outpaced average funding costs.  Noninterest income grew 3.8 percent, driven by servicing and investment banking fees.  Average return on assets rose 29 basis points to 1.41 percent, the highest quarterly level since the FDIC began reporting QBP data in 1986. Community banks earned $6.8 billion during the third quarter, up 21.6 percent from the same period last year. They also reported an 8.9 percent increase in net interest income and a 2.4 percent increase in noninterest income.

Net charge-offs rose 1.6 percent from a year ago, while the number of loans that were 90 or more days past due fell 3.4 percent from the previous quarter. Meanwhile, the number of institutions on the problem bank list fell to 71, the lowest number since 2007, and one de novo bank was added.

The deposit insurance fund rose by $2.6 billion in the third quarter to total $100.2 billion, the FDIC reported. The DIF reserve ratio rose to 1.36 percent, passing the statutory requirement of 1.35 percent of insured deposits. Chessen noted that the recapitalization of the fund was completed two years earlier than expected.

For banks above $10 billion, this marks and end of “surcharge assessments.” (Based on an FDIC rule to implement a section 334 of the Dodd-Frank Act, banks of this size were required to pay a quarterly 1.125 basis point “surcharge assessment” beginning in the third quarter 2016 until the fund reached 1.35 percent.) In December, these banks will pay one final surcharge for the third quarter. After that, these banks will no longer be obliged to pay a surcharge, even if the fund dips below 1.35 percent.

For banks below $10 billion in assets, the successful recapitalization of the DIF will lower future assessments payable. The FDIC will allocate assessment credits to these banks for the $750 million they contributed to raise the fund from 1.15 percent to 1.35 percent. Once the fund grows to 1.38 percent, the banks will use their credits to partially offset assessments.

Topping 1.35 percent has no effect on the assessment schedule for risk-based assessments for banks of any size. The current schedules, set by FDIC in 2011, are in effect as long as the fund is over 1.15 percent.