FDIC Quarterly Banking Profile
COMMUNITY BANK PERFORMANCE
FOURTH QUARTER 2018
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 Climbs $2.7 Billion From a Year Earlier on Lower Income Taxes and Higher Net Interest Income
- Loan and Lease Balances Grow 6.5 Percent Year Over Year
- Net Interest Margin Expands to 3.78 Percent From a Year Earlier
- Asset Quality Improves as Noncurrent and Net Charge-Off Rates Decline
Community Banks Report $6.8 Billion in Net Income During Fourth Quarter
Results from 4,979 FDIC-insured community banks reflected an increase in fourth quarter net income of $2.7 billion (65.1 percent) from a year earlier to $6.8 billion. Lower income tax expense and higher net interest income contributed most to the improvement in earnings. Normalizing net income from fourth quarter 2017 and fourth quarter 2018 using the average tax rate for community banks before the 2017 tax law change, quarterly net income would have been $6.1 billion, 11.2 percent higher than the $5.4 billion reported in fourth quarter 2017.1 Community banks earned a pretax return on assets (ROA) of 1.40 percent, up 10 basis points from the year-ago quarter and 25 basis points below that of noncommunity banks.
Full-Year Net Income Climbs $5.9 Billion
Net income totaled $26.1 billion during 2018, up $5.9 billion (29.4 percent) compared with 2017. Only 3.41 percent of community banks were unprofitable in 2018, the lowest percentage of unprofitable community banks on record. A reduction in income tax expense of $2.9 billion (37.1 percent) contributed most to the improvement in earnings. Normalizing net income from 2017 and 2018 using the average tax rate for community banks before the new tax law, net income would have been $24.1 billion—10.7 percent higher than 2017.2 The annual pretax ROA increased to 1.35 percent, up 7 basis points from a year earlier. An increase in net interest income of $5.8 billion (8.3 percent) offset an increase in noninterest expense of $3 billion (5.3 percent) year over year. An uptick in salary and benefit expenses of $1.9 billion (5.9 percent) drove the increase in noninterest expense. However, the ratio of noninterest expenses to average assets of 2.75 percent is at its lowest level since 1989.
Community Banks Increase Net Operating Revenue by 6.2 Percent
Net operating revenue rose $1.4 billion (6.2 percent) from a year ago primarily because of an increase in net interest income of $1.4 billion (7.7 percent). An increase in other real estate loan income (up $1.3 billion or 14.6 percent) contributed most to the increase in net interest income.3 Noninterest income of $4.7 billion included an increase in other noninterest income of $130.1 million (6.7 percent), which helped offset a 17.4 percent decline in income from loan sales. More than half of community banks (54 percent) reported higher noninterest income compared with fourth quarter 2017. An increase in earning asset yields outpaced an increase in average funding costs, supporting a 12 basis point expansion of the average net interest margin (NIM) to 3.78 percent. This ratio was 34 basis points above that of noncommunity banks.
Noninterest Expense Rises as Salary Expense Meets Increase in Average Assets
Noninterest expense of $15.6 billion was $540.2 million (3.6 percent) higher than the year-ago quarter. In contrast, noncommunity banks achieved a slight reduction in noninterest expense (0.27 percent) during the same period. Payroll expenses of $8.9 billion (up 4.7 percent) rose in tandem with the number of full-time employees (up 0.8 percent) and the increase in quarterly average total assets per employee (up 3.9 percent). More than two-thirds of community banks (67.2 percent) reported higher noninterest expense compared with one year ago.
Loans and Leases Increase 1.5 Percent During Fourth Quarter 2018
Community banks raised loan and lease volume $24.2 billion (up 1.5 percent) during the fourth quarter. Increases in nonfarm nonresidential loans of $8.6 billion (1.8 percent), commercial and industrial (C&I) loans of $6.4 billion (3 percent), 1–4 family residential real estate loans of $4 billion (1 percent), and construction and development (C&D) loans of $2.6 billion (2.3 percent) accounted for almost 90 percent of quarterly loan growth. Unfunded commitments increased $2.8 billion (0.9 percent) during the quarter. Quarterly loan growth lifted the percentage of net loans and leases to total assets to 70.7 percent—the highest ratio on record.
Annual loan and lease growth totaled $98.5 billion (up 6.5 percent) and brought year-end loan and lease volume to $1.6 trillion. Increases in nonfarm nonresidential loans of $34.9 billion (7.8 percent), 1–4 family residential real estate loans of $18.3 billion (4.3 percent), C&I loans of $16.9 billion (8.3 percent), C&D loans of $9.4 billion (9 percent), and multifamily loans of $9.2 billion (8.2 percent) contributed most to annual loan growth. Community banks made commitments to fund an additional $24.6 billion (up 8.6 percent) in loans during 2018. C&I loan commitments increased $9.9 billion (10.7 percent), which exceeded growth in commitments for C&D loans of $7.4 billion (8.7 percent).
Small Loans to Businesses Grow 3.1 Percent Compared With a Year Ago
Community banks extended an additional $9 billion in small loans to businesses during 2018, lifting the total to $299.3 billion—3.1 percent higher than the year earlier. C&I loan growth of 4.5 percent and nonfarm nonresidential loan growth of 2.8 percent contributed most to the growth in small loans to businesses. Community banks hold 42.1 percent of the industry’s small loans to businesses.
Noncurrent Rate Remains Low
The rate of noncurrent loans declined 2 basis points during the quarter and 8 basis points from a year ago to 0.78 percent—the lowest it has been since 2007. The noncurrent rate for all major loan categories except 1–4 family residential loans declined during the quarter. The noncurrent rate for 1–4 family residential loans increased 1 basis point to 1.03 percent. The noncurrent rate for C&D loans (down 9 basis points to 0.59 percent) and for C&I loans (down 8 basis points to 0.91 percent) decreased the most among major loan categories.4 The 1.03 percent noncurrent rate for 1–4 family loans is the highest among major loan categories. The noncurrent rate for multifamily loans, which account for 7.5 percent of total loans, is at its lowest level since fourth quarter 1993. The noncurrent rate for farm loans of 1.11 percent increased 23 basis points since the year-ago quarter, continuing a year-over-year climb that began in fourth quarter 2016.
Net Charge-Off Rate Declines 8 Basis Points From a Year Earlier
The net charge-off rate for total loans declined 8 basis points to 0.14 percent compared with fourth quarter 2017. This rate was 43 basis points below that of noncommunity banks. The net charge-off rate declined for all major loan categories since the year-ago quarter. The net charge-off rate for C&I loans registered the greatest annual improvement (down 29 basis points to 0.36 percent year over year) despite a 9 basis point increase during the fourth quarter. The net charge-off rate for farm loans, which make up 7.9 percent of total loans and leases, increased 2 basis points since the year-ago quarter and 8 basis points during the quarter to 0.15 percent.
Risk-Based Capital Ratios Show Slight Decline
Total equity capital increased $6.7 billion (2.7 percent) during the fourth quarter. The total equity capital ratio increased by 17 basis points to 11.41 percent, while the leverage capital ratio increased 4 basis points to 11.09 percent. The total risk-based capital ratio declined 3 basis points to 15.76 percent, and the tier 1 risk-based capital ratio declined 3 basis points to 14.72 percent.
Total Deposits Increase 1.7 Percent During the Quarter
Total Deposits increased $30.2 billion to $1.9 trillion during the fourth quarter. This growth included an increase in domestic interest-bearing deposits of $26.1 billion (1.8 percent) and an increase in domestic noninterest-bearing deposits of $4 billion (1 percent).
One New Bank Opened in Fourth Quarter 2018
The number of FDIC-insured community banks declined by 65 to 4,979 during the quarter, including 64 mergers and consolidations. Five community banks voluntarily liquidated and four became noncommunity banks. Five noncommunity banks transitioned to community banks. One new community bank charter was opened during the quarter. No community banks failed.
Chart 2. Net Interest Margin
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 2018, FDIC-Insured Community Banks
TABLE V-B. Full Year 2018, FDIC-Insured Community Banks
TABLE VI-B. Loan Performance, FDIC-Insured Community Banks
1 This estimate of quarterly net income adjusts fourth quarters 2017 and 2018 by applying the average quarterly tax rate at community banks between fourth quarter 2011 and third quarter 2017 to income before taxes and discontinued operations.