Banks set another record — and FDIC hits a milestone

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WASHINGTON — The banking industry notched another record earnings performance in the third quarter while the Federal Deposit Insurance Corp.’s finances also crossed a milestone, the agency said Tuesday.

The FDIC’s quarterly report on the industry’s health said institutions earned a total profit of $62 billion last quarter, a 3% increase from the second quarter and a 29% increase from a year earlier. Banks once again benefited from last year’s major tax reform overhaul, which resulted in lower corporate rates, but industry earnings were also buoyed by historic asset yields.

The quarter also marked a significant achievement for the agency’s Deposit Insurance Fund. After the fund took a beating during the crisis, lawmakers attempted to strengthen it in the 2010 Dodd-Frank Act. For the first time since that law’s passage, the fund exceeded the statutory minimum of 1.35% of insured deposits. (As of Sept. 30, the reserve ratio was 1.36%.)

But the agency cautioned that the industry must be on alert for risks on the horizon, particularly any headwinds from interest-rate volatility and competition for loans.

“While the performance results were strong, the extended period of low interest rates and the competition to attract loan customers have led to heightened exposure to interest-rate risk, and credit risk,” FDIC Chairman Jelena McWilliams said in a press release accompanying the Quarterly Banking Profile. “Banks must maintain prudent management of these risks in order to sustain lending through the economic cycle.”

The FDIC estimated that, with the tax rate preceding the legislative overhaul, net income would have totaled $54.6 billion, an increase of just 13.9% from a year earlier.

But the earnings benefit from return on assets was also notable. The average ROA rose 29 basis points from a year earlier to 1.41%, which was the highest quarterly return since the establishment of the QBP in 1986.

The average net interest margin rose 15 basis points from a year earlier to 3.45%. A 44-basis-point increase in average asset yields exceeded the 29-basis- point increase in funding costs. Nearly 70% of banks had a higher net margin than a year earlier.

“Community banks continue to report a higher average net interest margin than the overall industry. However, the gap has been narrowing,” said Diane Ellis, director of the FDIC’s insurance and research division, in a prepared statement. “Large institutions have benefited more than community banks from rising short-term interest rates, as large institutions have a greater share of assets that reprice quickly.”

Nearly 72% of all banks reported a higher loan balance than the previous quarter, with total balances rising 0.8% to $9.9 trillion — a 4% increase from a year earlier. All major loan categories registered a quarterly increase. Consumer loans (including credit cards) led the way at $32.4 billion over the previous quarter.

With the higher loan growth, banks are setting aside loss provisions as they continue to enjoy improving loan quality. The industry’s loan-loss provisions totaled $11.9 billion, surpassing the $11.2 billion in net charge-offs. Overall, loss reserves rose by 0.2% during the quarter to $123.7 billion. With a 3.6% drop in noncurrent loans, the “coverage ratio” — measuring reserves against bad credits — rose to 122.2%, the highest level since the first quarter of 2007. It was the sixth straight quarter that the ratio was above 100%.

With the FDIC’s insurance fund crossing the 1.35% threshold, the report noted that a temporary premium surcharge for large banks will end Oct. 1. Dodd-Frank had required the FDIC at a certain point to place a bigger burden on large banks than small banks to raise the fund level to the required minimum.

“Small banks will receive credits to offset the portion of their assessments that helped to raise the reserve ratio from 1.15% to 1.35%,” the report said.

The FDIC estimated the total amount of small-bank credits to be $750 million. The agency noted that when the reserve ratio hits 1.38%, the FDIC will apply a small bank’s credit to reduce its regular premium up to the entire amount.

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