Another positive quarter for banks

Commercial banks and savings institutions reported aggregate net income of $56 billion in the first quarter of 2018, up $12.1 billion, or 27.5 percent, from a year ago. The improvement in earnings was attributable to higher net operating revenue and a lower effective tax rate, according to the FDIC.

Financial results for the banking industry’s first quarter are included in the FDIC’s latest Quarterly Banking Profile, released May 22.

Of the 5,606 banks reporting first quarter financial results, more than 70 percent reported year-over-year growth in quarterly earnings. The average return on assets increased to 1.28 percent, up from 1.04 percent in first quarter 2017. Meanwhile, the number of unprofitable banks declined—to 3.9 percent from 4.3 percent a year ago.  

Highlights from the Quarterly Banking Profile include:

  • Community banks (5,168 institutions) reported $6.1 billion in net income, an increase of $913.1 million, or 17.7 percent, from a year earlier.
  • Community bank net operating revenue rose by $1.8 billion, or 8.3 percent, from first quarter 2017, led by higher net interest income,  up $1.6 billion, or 9.7 percent, and noninterest income, up $127.6 million, or 2.9 percent.
  • Loan-loss provisions increased by $154.1 million, or 23.7 percent, while noninterest expenses were $963.9 million (6.9 percent) higher.
  • Net interest income was $131.3 billion in the first quarter, up $10.3 billion, or 8.5 percent from a year earlier. More than four out of five banks reported improved net interest income from a year earlier. The average net interest margin increased to 3.32 percent from 3.19 percent in first quarter 2017.
  • Noninterest income was $67.4 billion in the first quarter, up $4.9 billion, or 7.9 percent, from first quarter 2017. The annual increase was led by higher trading revenue — up $1.1 billion, or 14.9 percent — and other noninterest income, up $2.4 billion, or 8.8 percent.
  • Loan and lease balances increased by $31.3 billion, or 0.3 percent, from fourth quarter 2017. All major loan categories registered growth except for credit card balances, which were down $44.6 billion, or 5.2 percent, a seasonal decline.
  • Commercial and industrial loans grew by $38.6 billion or 1.9 percent; nonfarm nonresidential loans rose by $11.5 billion or 0.8 percent, and residential mortgage loans increased by $8.8 billion, or 0.4 percent.

The number of problem banks declined to 92 from 95 during the quarter, the lowest number of problem banks since the first quarter of 2008. Total assets of problem banks increased from $13.9 billion in the fourth quarter to $56.4 billion.

During the quarter, merger transactions absorbed 65 institutions, three new charters were added, and there were no failures.

Also in the first quarter, the balance of the Deposit Insurance Fund balance rose by $2.3 billion to $95.1 billion, driven by assessment income. The DIF reserve ratio remained unchanged (1.30 percent) from the previous quarter.

“While results this quarter were positive, banks face a challenging operating environment in the latter stage of this economic expansion,” said FDIC Martin Gruenberg in a news release. “An extended period of low interest rates and an increasingly competitive lending environment have led some institutions to reach for yield. This has led to heightened exposure to interest-rate risk, liquidity risk, and credit risk. In addition, with the current expansion in its latter stage, the industry needs to be prepared to manage the inevitable downturn in order to avoid financial system disruption and sustain lending through the economic cycle.”