U.S. banking earnings rose 1.4% in the second quarter from a year earlier to $43.6 billion driven largely by interest-related income while the Deposit Insurance Fund hit a key trigger that will affect industry premiums.

The Federal Deposit Insurance Corp.'s Quarterly Banking Profile reported that the industry's net interest income rose 4.8% year over year, to $113.5 billion. Loan balances grew by $181.9 billion, or 2%, from the first quarter, with total assets growing by $240.6 billion, or 1.5%. However, the average net interest margin stayed nearly stagnant, growing by just one basis point from a year earlier to 3.08%.

But another noteworthy detail in the report was news that the DIF — the agency's ratio of reserves to insured deposits — exceeded the all-important 1.15%, reaching 1.17%. The ratio was the highest in eight years. Going past the 1.15% benchmark — the statutory minimum before the crisis — will trigger several modifications in banks' assessment rates starting in the third quarter as the fund builds up to a new statutory minimum of 1.35%.

The industry overall will see its regular assessment rates cut, and banks with less than $10 billion in assets will pay on average about one-third less, according to FDIC estimates. Additionally, these small banks will begin to collect credits for future assessments as large banks will be responsible for bearing the costs of pushing the ratio higher, a key requirement of the Dodd-Frank Act. There will also be a modification in how the FDIC calculates the risk-based assessments of small banks.

Meanwhile, the industry's positive report card was also driven in part by a $981 million year-over-year decline in expenses for litigation reserves at a few large banks. This helped mitigate the total increase in noninterest expense, which grew 0.3% year over year, to $104.8 billion.

"Results for the banking industry were largely positive in the second quarter," FDIC Chairman Martin Gruenberg said in a prepared statement announcing the results. "However, banks are still operating in a challenging environment."

There were signs of continuing recovery for banks, as the percentage of unprofitable institutions fell to 4.5%, from 5.8% at the same period last year, which was the lowest percentage of unprofitable banks seen since 1998. Also, the amount of noncurrent loan balances fell by $4.8 billion, or 3.4%, during the second quarter.

Community banks performed particularly well, posting $5.5 billion in earnings in the second quarter, up 9% from the same period last year. Total loans and leases grew $41.2 billion for community banks from the first quarter. Net operating revenue grew 7.1% to $22.8 billion compared with the year-earlier quarter.

However, there were also indications of fragility as banks' noncurrent commercial and industrial loans rose for a sixth consecutive quarter, by $2.1 billion, or 8.9%. Meanwhile, the average return on assets fell to 1.06%, from 1.09% a year earlier.

Banks' loan-loss provisions increased 44.2% to $11.8 billion from a year earlier — marking the eighth consecutive quarter of growth for provisions.

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