FDIC Quarterly Banking Profile
COMMUNITY BANK PERFORMANCE
FOURTH QUARTER 2017
Community banks are identified based on criteria defined in the FDIC’s Community Banking Study. When comparing community bank performance across quarters, prior-quarter dollar amounts are based on community banks designated in the current quarter, adjusted for mergers. In contrast, prior-quarter performance ratios are based on community banks designated during the previous quarter.
Net Income Falls 14.2 Percent From a Year Ago Largely Due to One-Time Changes From New Tax Law Excluding Changes From the New Tax Law, Estimated Quarterly Net Income Would Have Been $5.6 Billion, Up 17 Percent From a Year Ago Net Interest Margin Widens Year-Over-Year to 3.66 Percent Loan and Lease Balances Rise 7.7 Percent Annually Noncurrent Loans Decline, While Net Charge-Offs Remain Flat Year-Over-Year
Community Banks Report Fourth Quarter Net Income of $4.1 Billion
Net income of $4.1 billion for 5,227 FDIC-insured community banks was down $681 million (14.2 percent) compared with fourth quarter 2016, following a significant rise in income tax expenses. A reduction in corporate tax rates under the new tax law prompted significant one-time write-downs on deferred tax assets, which contributed to a $1.8 billion increase in income tax expense compared with the same period last year. Excluding one-time income tax effects, estimated quarterly net income would have been $5.6 billion at community banks, up 17 percent from fourth quarter 2016.1 Higher net interest income lifted the pretax return on assets (ROA) 13 basis points to 1.31 percent, compared with the same quarter last year. This improvement narrowed the gap between community and noncommunity bank pretax ROAs from 33 basis points at fourth quarter 2016 to 9 basis points at fourth quarter 2017. One de novo opened and two community banks failed during the quarter.
Annual Net Income of $20.6 Billion Is 4 Percent Higher Than 2016
Annual net income of $20.6 billion was up $757 million (4 percent) from a year earlier, as the majority of community banks (56 percent) reported higher net income. Changes from the new tax law contributed to a $2.3 billion (39 percent) increase in income tax expenses in 2017. Excluding these tax effects, estimated annual net income would have been $22.3 billion, up from $19.8 billion in 2016.2 A $5.8 billion increase in net interest income during the year offset higher noninterest expense (up $2.4 billion, or 4 percent) and boosted the pretax ROA by 5 basis points to 1.35 percent. Higher payroll expenses (up $1.7 billion, or 5 percent) led the annual increase in noninterest expenses.
Net Operating Revenue Rises More Than 7 Percent From the Previous Year
Higher net interest income (up $1.6 billion, or 9.4 percent) lifted net operating revenue 7.2 percent year-over-year to $23.4 billion. Growth in other real estate loan income (up $1 billion, or 13.3 percent) drove most of the increase in net interest income.3 The average net interest margin (NIM) at community banks widened 8 basis points year-over-year to 3.66 percent, but increased less than 1 basis point during the quarter. Higher earning asset yields, which increased at a faster rate than average funding costs, drove this improvement. NIM for community banks was 40 basis points wider than that of noncommunity banks. Noninterest income fell by $31.1 million (0.6 percent) from fourth quarter 2016 largely due to a $261 million decline in net gains on loan sales.
Noninterest Expense Rises 3 Percent Year-Over-Year
Higher payroll expenses drove most of the $502.8 million (3.4 percent) year-over-year increase in noninterest expenses. Payroll expenses were up $393.1 million (4.7 percent) as community banks added 7,547 full-time employees in 2017, a 1.8 percent increase. Average total assets per employee increased 4.8 percent to $5.2 million during the same period. More than two out of three (68.5 percent) community banks reported higher noninterest expense, while noninterest expense as a percentage of average assets declined by 7 basis points to 2.83 percent from the year ago quarter.
Loan and Lease Balances Increase 1.8 Percent During the Quarter
Loan and lease balances totaled $1.6 trillion at year-end 2017, up 1.8 percent in the fourth quarter. Increases in nonfarm nonresidential loans of $9.7 billion (2.2 percent), construction and development (C&D) loans of $4.2 billion (4.1 percent), commercial and industrial (C&I) loans of $5.2 billion (2.6 percent), and multifamily loans of $2.4 billion (2.1 percent) contributed most to the quarterly growth. Unfunded commitments increased by $4 billion (1.4 percent) during the quarter. Over the past 12 months, loan and lease balances increased by $111 billion (7.7 percent), led by increases in nonfarm nonresidential loans (up 9.7 percent), 1-to-4 family residential loans (up 4.9 percent), C&I loans (up 7.4 percent), C&D loans (up 12.2 percent), and multifamily loans (up 11.8 percent). Community banks made commitments to fund an additional $22.3 billion (8.3 percent) in loans compared to a year ago. Annual growth in unfunded commitments was led by C&D loans (up $10.2 billion or 13.3 percent) and C&I loans (up $5.9 billion or 6.9 percent).
Community Banks Add More Small Loans to Businesses
Community banks funded an additional $9.2 billion in small loans to businesses compared with fourth quarter 2016, increasing the total to $294.8 billion (up 3.2 percent). Most of the growth in this category was in nonfarm nonresidential loans (up $4.3 billion or 3.1 percent) and C&I loans (up $3.6 billion or 4.1 percent). The annual rate of increase in small loans to businesses of 3.2 percent was more than twice that of noncommunity banks.
Noncurrent Loan Rate Declines
The noncurrent loan rate declined 6 basis points during the fourth quarter to 0.85 percent, following a quarterly 4.4 percent decline in noncurrent loan balances to $13.3 billion. The noncurrent rate for C&I loans improved most among major loan categories during the fourth quarter, declining by 13 basis points. Despite the improvement, C&I loans had the highest noncurrent rate among major loan categories (1.13 percent) followed by 1-to-4 family residential loans (1.12 percent). Additionally, nearly two out of three community banks (63.5 percent) reported lower or unchanged noncurrent rates from a year ago. Since fourth quarter 2016, the noncurrent rate declined 16 basis points (7.1 percent).
Net Charge-Off Rate Holds Steady From a Year Ago
The net charge-off rate of 0.21 percent at year-end 2017 was down 1 basis point from fourth quarter 2016. The net charge-off rate at community banks was 40 basis points below that of noncommunity banks (0.61 percent). Net charge-off rates increased from a year ago in two major loan categories: C&I loans (up 7 basis points) and C&D loans (up 3 basis points), while it declined by 3 basis points for nonfarm nonresidential loans.
TABLE I-B. Selected Indicators, FDIC-Insured Community Banks
TABLE II-B. Aggregate Condition and Income Data, FDIC-Insured Community Banks
TABLE III-B. Aggregate Condition and Income Data by Geographic Region, FDIC-Insured Community Banks
TABLE IV-B. Fourth Quarter 2017, FDIC-Insured Community Banks
TABLE V-B. Full Year 2017, FDIC-Insured Community Banks
TABLE VI-B. Loan Performance, FDIC-Insured Community Banks
Footnotes:2 This estimate of net income applies the average annual tax rate at community banks between 2011 and 2016 to income before taxes and discontinued operations.