Industry's 3Q strong despite ‘nonrecurring events’ at 3 banks: FDIC

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WASHINGTON — The U.S. banking industry's profit took a slight hit in the third quarter because of “nonrecurring events” at three large banks, yet net interest income rose and most banks were profitable, the Federal Deposit Insurance Corp. said Tuesday.

Net income in the third quarter of 2019 was $57.4 billion, down 7.3% from a year earlier and 8.3% from the previous quarter. It was the first quarterly decline in net income since late 2018.

The results appeared to be skewed by one-time costs related to noninterest expenses and realized securities losses for just a handful of big institutions: Bank of America, Wells Fargo and MUFG Union Bank. But overall, the FDIC's Quarterly Banking Profile said the industry remains healthy.

“Despite nonrecurring events at three large institutions that impacted overall net income, the banking industry reported positive results this quarter,” said FDIC Chairman Jelena McWilliams.

The earnings picture was brighter for community banks; their earnings increased 7.2% from a year earlier to $6.9 billion.

For the industry, net interest income rose 1.2% in the third quarter to $1.7 billion, while 62% of banks reported an increase in income from a year earlier. That is down from 75% of banks in the second quarter of 2019. Banks' deposit business also remains strong; deposit balances increased 1.7%.

The industry's profit decline corresponds with large expenses at Wells, BofA and MUFG Union Bank, which they reported in third-quarter earnings.

Wells Fargo’s profit was down by $1.4 billion, which is nearly equal to a rise in noninterest expense due to higher legal costs. The bank’s third-quarter filing referred to “a $1.6 billion discrete litigation accrual for previously disclosed retail sales practices matters, partially offset by lower remediation expense.”

Meanwhile, BofA reported litigation expenses from legacy mortgage issues as well as a $2 billion pretax impairment from the termination of a joint venture with First Data. And MUFG Union Bank reported a $1.6 billion goodwill impairment charge.

The FDIC’s list of “problem banks” remains low, dropping in number from 56 to 55, yet the assets of banks on the list rose from $48.5 billion to $48.8 billion. And the agency’s Deposit Insurance Fund also posted modest gains, rising by $1.5 billion to $108.9 billion. The ratio of FDIC reserves to insured deposits rose one basis point to 1.41%.

But some problem spots remain for the industry. Net charge-offs increased by 17.2% from a year earlier, with banks reporting $13.1 billion in uncollectable loans. The dollar increase of $1.9 billion in charge-offs was the largest since 2010. Yet the average charge-off rate, up six basis basis points from a year earlier, remained low at 0.51%.

The increase in overall charge-offs was driven mostly by those for commercial and industrial loans, which rose by $1 billion or 78.7% from a year earlier.

The number of FDIC-insured banks slipped to 5,256 from 5,303 in the third quarter, the lowest since the first quarter of 2007. While four new banks were added to the system, 46 were absorbed by mergers. No banks failed in the third quarter of 2019.

Equity levels were flat compared with the second quarter. Capital increased by about 0.2%, or $3.5 billion.

Alan Kline contributed reporting to this article.

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Earnings Non-interest income Net interest margin Jelena McWilliams FDIC Bank of America Wells Fargo