FDIC: Community banks outperform industry in third quarter
To provide a report card on industry status and performance, the FDIC publishes a Quarterly Banking Profile. Results from the third quarter were just released, and while overall results were positive, community banks in particular excelled. They performed better than a year ago and also outperformed the industry as a whole. In short, they had stronger loan growth and higher net interest margins compared to the entire industry. Here are five highlights from the report:
Loan Growth Still Increasing
Compared to the second quarter of 2014 and the third quarter of 2013, loan growth continues to increase. Loan balances grew almost two percent over the second quarter of 2014, and almost five percent year-over-year. Growth was even stronger at community banks, where over 70 percent reported increased loan growth from the previous quarter. Year-over-year growth at community banks was eight percent, compared to the five percent for the industry mentioned previously.
Loan-Loss Provisions Increase
For the first time in five years, total loan-loss provisions increased to $7.2 billion. This total represents an increase of almost 24% over the third quarter of 2013.
Charge-Off Rate Down 21 Percent
In the third quarter, institutions charged off $9.2 billion in uncollectible loan balances. The 21 percent decrease from a year ago marks the 17th consecutive quarterly decrease over the previous year.
Earnings Improve Year-Over-Year
Community banks’ net income grew almost 11 percent to $4.9 billion from the third quarter of 2013. This was largely a result of higher net interest income, increased noninterest income and lower provision expenses. Another bright spot: less than seven percent of community banks were unprofitable – the lowest since the second quarter of 2006.
Problem Bank List Continues to Decrease
The FDIC maintains a problem bank list, defined as “institutions with financial, operational or managerial weaknesses that threaten their continued financial viability.” The latest list is down to 329, a decrease from 354 in the second quarter of 2014. With only two community banks failing during the quarter, this is largely a result of improved performance according to FDIC Chairman Martin J. Gruenberg.
Gruenberg summarized the positives from the third quarter: “Net income was up, revenue growth was relatively strong and broad-based, asset quality improved and loan balances grew.” He also highlighted that income growth was a result of revenue growth rather than lower loan-loss provisions.
But the good news isn’t without some challenges. There is still a low interest rate environment which puts pressure on margins, and higher-risk loans are increasing among banks. In addition, the pending FASB CECL model is expected to be released in the first half of 2015. With it comes a one-time capital adjustment, which is expected to be between 10 and 50 percent according to industry experts.
Bankers interested in learning more about the CECL model and associated impacts can access the complimentary whitepaper: FASB’s CECL Model: How to Prepare Now.
