FDIC: Bank Earnings Decline But Fundamentals Remain Strong

FDIC-insured banks and savings institutions earned $57.4 billion in the third quarter, a 7.3% decrease from the industry’s earnings a year before, the FDIC said in its Quarterly Banking Profile released today. Despite the decline, “the FDIC’s report shows that our nation’s banks remain key drivers of the U.S. economy with nearly $100 billion in new loans generated in the third quarter,” said ABA Chief Economist James Chessen.

Community banks earned $6.9 billion during the third quarter, up 7.2% from the same period last year. Growth in net interest income, noninterest income, and gains on securities sales were responsible for the annual increase in profitability. Community banks’ increase in net interest income exceeded the overall industry pace at 4%, as did their loan growth rate. Community banks’ loan and lease balance rose by 6% year-over-year, compared to 4.6% for all banks.

‌The agency attributed the overall decline in net income in the third quarter to nonrecurring events at three large institutions, which resulted in higher noninterest expense and loan-loss provisions and realized securities losses. Meanwhile, noninterest income increased by 4.3% from the previous year. Community bank noninterest income rose 16.4%. Chessen commented that the Federal Reserve’s recent interest rate cuts “have helped sustain the pace of commercial real estate and multi-family lending, and have stimulated an increase in mortgage refinances, which boosted noninterest income.”

The increase in noninterest expense—up 5.7% over the previous year—was driven by higher salaries and benefits, goodwill impairment charges and other noninterest expense. Average return on assets fell by 16 basis points to 1.25%, and average net interest margin fell by 10 basis points to 3.35%. Deposit balances rose by 1.7% from the previous quarter.

‌Net charge-offs rose 17.2% from a year ago, the largest dollar increase since the first quarter of 2010, while the rate of loans that were 90 or more days past due remained stable at 0.92%. Meanwhile, the number of institutions on the problem bank list fell to 55. Four de novo banks were added in the third quarter.