FDIC Quarterly Banking Profile
ALL INSTITUTIONS PERFORMANCE
SECOND QUARTER 2016
Net Income Rises 1.4 Percent to $43.6 Billion Strong Loan Growth Provides a Lift to Revenues Lower Charges for Litigation, Goodwill Impairment Limit Noninterest Expense Growth Noncurrent C&I Loans Increase Again, Total Noncurrent Balances Fall Loan-Loss Provisions Rise as Industry Builds Reserves
Earnings Improvement Is Broad-Based
Expanding loan portfolios generated higher levels of net interest income, helping lift the total earnings of FDIC-insured commercial banks and savings institutions to $43.6 billion in second quarter 2016. Industry net income was $584 million (1.4 percent) higher than in second quarter 2015. The average return on assets (ROA) was 1.06 percent, down from 1.09 percent the year before, as asset growth outpaced the increase in quarterly net income. More than half of all banks—60.1 percent—reported higher quarterly earnings compared with the year-earlier quarter, while the percentage of banks reporting negative quarterly net income fell to 4.5 percent, from 5.8 percent in second quarter 2015.
Net Interest Income Accounts for Most of the Growth in Revenue
Net operating revenue—the sum of net interest income and total noninterest income—totaled $179.3 billion in the second quarter, an increase of $5.8 billion (3.3 percent) from the year-earlier quarter. Net interest income was up $5.2 billion (4.8 percent), as average interest-bearing assets were 4.4 percent higher than second quarter 2015. The average net interest margin of 3.08 percent was almost unchanged from the 3.07 percent average in second quarter 2015. Noninterest income was $600 million (0.9 percent) higher than the year before. Trading income rose $1.4 billion (24.9 percent), while servicing income fell by $3.4 billion (74.4 percent).
Noninterest Expenses Decline at Many Large Banks
Noninterest expenses totaled $104.8 billion, an increase of only $271 million (0.3 percent) from the year-earlier quarter, as nonrecurring charges at several large banks declined by more than $1.2 billion. In second quarter 2015, three large banks reported itemized litigation expenses totaling $508 million. In the most recent quarter, one bank reported a $473 million release of litigation reserves (a negative litigation expense), so the year-over-year reduction in litigation charges was $981 million. In addition, charges for goodwill impairment were $278 million lower than the year before. The declines in these noninterest expense items almost canceled out a $1.4 billion (2.8 percent) year-over-year increase in salary and employee benefit expenses. Eight of the ten largest banks reported year-over-year declines in their total noninterest expenses, but for the industry as a whole, only 30 percent reported lower noninterest expenses.
Loan-Loss Provisions Rise for the Eighth Consecutive Quarter
Banks set aside $11.8 billion in loan-loss provisions in the second quarter, an increase of $3.6 billion (44.2 percent) compared with second quarter 2015. More than a third of all banks—38.7 percent—reported higher loss provisions than in second quarter 2015. This is the eighth quarter in a row that quarterly loss provisions have posted a year-over-year increase.
Charge-Offs of C&I Loans Post Further Increase
Net loan and lease charge-offs were higher than the year before for the third consecutive quarter. Charge-offs totaled $10.1 billion, a $1.2 billion (13.1 percent) increase over second quarter 2015. Fewer than half of all banks—44.9 percent—reported year-over-year increases in their quarterly net charge-offs. Most of the increase occurred in loans to commercial and industrial (C&I) borrowers. C&I net charge-offs rose to $2.2 billion from $1.1 billion a year earlier, an increase of $1.1 billion (100.3 percent). This is the fifth consecutive quarter that C&I charge-offs have been higher than the year-earlier quarter. Banks reported smaller year-over-year increases in credit cards, auto loans, and agricultural production loans. The average net charge-off rate rose to 0.45 percent, from 0.42 percent in second quarter 2015.
Total Noncurrent Loan Balances Decline, Although Noncurrent C&I Loans Rise
The amount of loans and leases that were noncurrent—90 days or more past due or in nonaccrual status—declined by $4.8 billion (3.4 percent) during the second quarter. Noncurrent C&I loans increased for a sixth consecutive quarter, rising by $2.1 billion (8.9 percent), but all other major loan categories registered quarterly declines in noncurrent balances. The average noncurrent rate declined from 1.58 percent to 1.49 percent during the quarter. This is the lowest noncurrent rate for the industry since year-end 2007.
Banks Continue to Build Their Reserves
Insured institutions increased their reserves for loan losses by $1 billion (0.8 percent) during the quarter, as the $11.8 billion in loss provisions added to reserves exceeded the $10.1 billion in net charge-offs subtracted from reserves. Banks with assets greater than $1 billion, which also report their reserves for specific loan categories, increased their total reserves by $987 million (0.9 percent). The largest increase was in reserves for credit card losses, which increased by $1.3 billion (4.7 percent). They also increased their reserves for commercial loan losses by $787 million (2.2 percent), while reducing their reserves for residential real estate losses by $1.1 billion (5.1 percent). The increase in total reserves, combined with the reduction in total noncurrent loan balances, lifted the average coverage ratio of reserves to noncurrent loans from 85.5 percent to 89.2 percent during the quarter. The increase in reserves did not keep pace with the growth in total loan balances, however, as the average reserve ratio of reserves to total loans and leases fell from 1.35 percent to 1.33 percent. This is the 23rd time in the last 24 quarters that the industry’s reserve ratio has declined, and it is now at its lowest level since year-end 2007.
Internal Capital Generation Grows
Equity capital increased by $30.4 billion (1.7 percent) in the quarter, as retained earnings contributed $20.4 billion to capital growth and an increase in the market values of securities portfolios added to total equity. Retained earnings were $6.7 billion (49.2 percent) higher than the year before, as banks reduced their quarterly dividends by $6.1 billion (20.9 percent), compared with second quarter 2015 levels. Accumulated other comprehensive income, which includes changes in the values of banks’ available-for-sale securities, increased by $9.7 billion during the quarter. At the end of the second quarter, more than 99 percent of all banks, representing 99.9 percent of total industry assets, met or exceeded the requirements for well-capitalized banks as defined for Prompt Corrective Action purposes.
Loan Growth Remains Strong
Total assets increased by $240.6 billion (1.5 percent) during the quarter. Total loan and lease balances rose by $181.9 billion (2 percent). The largest increases occurred in residential mortgages (up $42.4 billion, 2.2 percent), real estate loans secured by nonfarm nonresidential properties (up $26.9 billion, 2.1 percent), credit card balances (up $22.3 billion, 3.1 percent), and loans to nondepository financial institutions (up $19.8 billion, 6.9 percent). All major loan categories saw increases in balances outstanding during the second quarter. For the 12 months ended June 30, total loans and leases increased 6.7 percent, down slightly from 6.9 percent for the 12 months ended March 31. In addition to the growth in loan balances, banks increased their unfunded loan commitments by $36.4 billion (0.5 percent). This is the smallest quarterly increase in unfunded commitments since fourth quarter 2013. For a second consecutive quarter, unfunded commitments to make C&I loans declined, falling by $24.1 billion (1.3 percent). Banks’ investments in securities rose by $36.1 billion (1.1 percent), with $28.7 billion of the growth coming from increased holdings of mortgage-backed securities. Balances with Federal Reserve banks declined by $90.6 billion (7.2 percent).
Banks Increase Borrowings From Federal Home Loan Banks
Nondeposit liabilities funded a larger share of asset growth than deposits in the second quarter. These borrowings rose by $111.7 billion (5.5 percent), as advances from Federal Home Loan Banks increased by $64.4 billion (13.4 percent). Total deposits increased by $98.6 billion (0.8 percent). Deposits in domestic offices rose by $94.8 billion (0.9 percent), while foreign office deposits increased $3.8 billion (0.3 percent). Interest-bearing domestic office deposits were up $52.2 billion (0.6 percent), while balances in noninterest-bearing accounts rose by $42.5 billion (1.4 percent). At banks that offer consumer deposit accounts (checking or savings accounts intended primarily for individuals for personal, household, or family use), balances in these accounts declined by $13 billion (0.3 percent) during the quarter. At banks with assets greater than $1 billion that offer consumer accounts, quarterly service charge income on these accounts increased by $35 million (0.8 percent) from the year before.
‘Problem List’ Shrinks to 147 Institutions
The number of FDIC-insured commercial banks and savings institutions reporting quarterly financial results declined to 6,058 from 6,122 in the second quarter. During the quarter, mergers absorbed 57 insured institutions, two banks failed, and no new charters were added. The number of banks on the FDIC’s “Problem List” declined from 165 to 147, and total assets of problem banks fell from $30.9 billion to $29 billion. This is the smallest number of problem banks in eight years. Banks reported 2,045,221 full-time equivalent employees in the quarter, an increase of 5,302 compared with the first quarter, and 2,816 more than in second quarter 2015.
Chart 1. Quarterly Net Income
Chart 2. Quarterly Net Operating Revenue
Chart 3. Quarterly Net Interest Margin
Chart 6. Quarterly Change in Loan Balances
Chart 7. Quarterly Change in Asset Funding
TABLE I-A. Selected Indicators, All FDIC-Insured Institutions
TABLE II-A. Aggregate Condition and Income Data, All FDIC-Insured Institutions
TABLE III-A. Second Quarter 2016, All FDIC-Insured Institutions
TABLE IV-A. First Half 2016, All FDIC-Insured Institutions
TABLE V-A. Loan Performance, All FDIC-Insured Institutions
TABLE VI-A. Derivatives, All FDIC-Insured Call Report Filers
TABLE VII-A. Servicing, Securitization, and Asset Sales Activities