US Community Bank Profits Rise as Overall Bank Earnings Fall 7.3 Percent

Two women walk past a video $100 bill during a tour of the "Money in Motion" exhibit at the Philadelphia Federal Reserve Bank in Philadelphia, Penn., on July 2, 2003. (William Thomas Cain/Getty Images)

Earnings at U.S. banks fell by 7.3 percent in the third quarter due to “nonrecurring events at three large institutions,” which offset overall strong loan growth and a low number of problem banks, according to the Federal Deposit Insurance Corp.’s (FDIC) quarterly banking sector report.

Banks and savings institutions whose depositors are insured up to the coverage limit by the FDIC generated net income of $57.4 billion in the period, which represents a drop of $4.5 billion from a year ago, the report notes (pdf). The average return on assets fell to 1.25 percent from 1.41 percent year-over-year.

However, 62 percent of the 5,256 FDIC-insured institutions reported earnings growth over the past year.

“In line with recent years, more than 60 percent of all banks reported year-over-year increases in net income, and only 4.1 percent of institutions were unprofitable,” said Diane Ellis, director of the FDIC’s Division of Insurance and Research.

Community banks, notably, saw a year-over-year rise in net income to $6.9 billion, an increase of $466 million. That’s a 7.2 percent increase from the same period last year. The quarterly pretax return on assets (ROA) ratio rose to 1.51 percent, the highest quarterly number reported by community banks since the third quarter of 2006.

The FDIC said the decline in overall net income was caused by higher noninterest expense and loan-loss provisions and realized securities losses.

Jelena McWilliams, head of the FDIC, described the hits to profitability as one-offs.

“Overall, the banking industry reported positive results, despite nonrecurring events at three large institutions,” McWilliams said. “While these events resulted in a modest decline in aggregate quarterly net income, the industry reported loan growth, and the number of problem banks remained low.”

Federal Deposit Insurance Corp. Chairman Jelena McWilliams hosts a conference on financial technology at the FDIC in Arlington, Va., on April 24, 2019. (Chip Somodevilla/Getty Images)

Net operating revenue in the banking sector totaled $208.2 billion in the third quarter, up 2.2 percent from a year ago.

“The growth in revenue was due to higher noninterest income, which grew by 4.3 percent,” Ellis said.

Strong Community Bank Figures

Loan portfolio growth was an important factor driving community banks’ solid performance, McWilliams said.

“Net income rose at community banks primarily because of higher net operating revenue,” McWilliams said. “Additionally, the annual rate of loan growth at community banks outpaced the overall industry.”

Problem Banks

The number of banks on the FDIC’s “Problem Bank List” ticked down to 55 from 56 during the quarter, the report notes. That’s the lowest figure since 2007.

Four new banks opened in the period, for a total of 10 new banks in 2019.

“No banks failed in the third quarter,” Ellis said.

The FDIC said that the assets of problem banks “rose modestly from $48.5 billion in the second quarter to $48.8 billion.”

‘Prudent Risk Management’

The FDIC head urged banks not to take on excessive risk in the booming economy.

“Despite nonrecurring events at three large institutions that impacted overall net income, the banking industry reported positive results this quarter. With the sustained economic expansion, the FDIC urges banks to uphold careful underwriting standards and prudent risk management,” McWilliams said.

Meanwhile, ABA Chief Economist James Chessen told ABA Banking Journal that 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.”

Chessen said 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.”

Ellis said that all major loan categories reported increases.

“During the past 12 months, loan balances rose by 4.6 percent, slightly above the 4.5 percent annual growth rate reported last quarter,” she said. “The biggest contributors to loan growth were commercial and industrial loans, consumer loans, and residential mortgages.”

“The competition to attract and maintain loan customers and depositors remains strong; consequently, banks need to maintain rigorous underwriting standards and prudent risk management,” McWilliams said.

“In summary, the banking industry reported overall positive results, despite nonrecurring events at three large institutions,” Ellis said. “Loan balances expanded, and the number of ‘problem banks’ remained low.”