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Federal Deposit
Insurance Corporation

Each depositor insured to at least $250,000 per insured bank

FDIC Quarterly Banking Profile

COMMUNITY BANK PERFORMANCE
SECOND QUARTER 2018

Notes to Users

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 Growth Reaches 21.1 Percent Annually on Higher Net Operating Revenue and Lower Effective Tax Rate
  • Loan and Lease Growth Remains Strong at 7 Percent Year-Over-Year
  • Net Interest Margin Expands 8 Basis Points to 3.69 Percent
  • Noncurrent and Net Charge-Off Rates Remain Low
  • Most Community Banks Report Increased Net Income Year-Over-Year
    More than seven out of ten community banks (73 percent) reported higher net income compared with a year earlier. Reports from 5,111 insured community banks reflected net income of $6.5 billion—up $1.1 billion (21.1 percent) from second quarter 2017—as higher net operating revenue and lower income tax expenses offset an increase in noninterest expense.1 Absent the benefits of a lower corporate tax rate, estimated quarterly net income would have been $6.1 billion—up 15.4 percent from the $5.3 billion reported in second quarter 2017.2

    The pretax return on assets rose from 1.33 percent to 1.41 percent between first and second quarter 2018 and was up 5 basis points since second quarter 2017. Loan-loss provisions declined by $193.5 million (22.5 percent), while noninterest expenses were $934.2 million (6.6 percent) higher.

    Higher Net Interest Income Lifts Net Operating Revenue
    Net operating revenue rose by $1.8 billion (8 percent) from second quarter 2017, led by increases in net interest income and noninterest income. More than four out of five community banks (84.9 percent) reported higher net interest income, which totaled $19 billion and increased by $1.6 billion (9 percent) from the year before. Growth in non 1–4 family real estate loan income (up $1.2 billion or 14.7 percent) contributed most to this increase.3 Increases in earning asset yields exceeded increases in funding costs, compared with the same period last year, causing an 8 basis point expansion in the average net interest margin (NIM) at community banks to 3.69 percent. This ratio was 35 basis points higher than that of noncommunity banks, although the distance between the two ratios continued to contract.

    More Than Half of Community Banks Report Higher Noninterest Income
    Noninterest income rose $201.9 million (4.5 percent) to $4.7 billion since second quarter 2017, despite a $28 million (5.61 percent) decline in net gains on loan sales and sales of other assets. Community banks continue to report a much lower ratio of noninterest income as a percentage of average assets (0.86 percent) compared with that of noncommunity banks (1.65 percent). More than half of community banks (55.3 percent) reported higher noninterest income compared with second quarter 2017.

    Noninterest Expense Up on Higher Payroll Expense as Assets Per Employee Rises
    Higher salary and employee benefits of $589.1 million (up 7.3 percent) pushed noninterest expense up $934.2 million (6.6 percent) since second quarter 2017. Salary and employee benefit growth accompanied an increase in the number of full-time equivalent employees, which increased by 10,923 (2.7 percent) during the year ending second quarter 2018, while average assets per employee rose by 3.9 percent to $5.3 million.

    Community Bank Loan and Lease Growth Rate Outpaces That of the Industry
    Loan and lease balances increased by $35.8 billion (2.3 percent) during the quarter to $1.6 trillion. Among the categories that led quarterly loan growth were nonfarm nonresidential loans, up $8.9 billion or 2 percent; 1-4 family residential real estate loans, up $7.9 billion or 2 percent; commercial and industrial (C&I) loans, up $6.8 billion or 3.4 percent; and construction and development (C&D) loans, up $2.6 billion or 2.4 percent.

    Loan and lease balances rose by $103.2 billion (7 percent) in the past 12 months, exceeding the growth rate for noncommunity banks by more than 3 percentage points. Nearly eight out of ten community banks (79 percent) reported higher loan balances compared with second quarter 2017, and more than six out of ten community banks (60.5 percent) increased small loans to businesses. Community banks added $9 billion (3.1 percent) in small loans to businesses since second quarter 2017 to a collective total of $297 billion. This figure represents 42 percent of the industry total.

    More than seven out of ten community banks (78.5 percent) reported annual loan and lease growth. The following categories led annual loan growth: nonfarm nonresidential loans, up $36.2 billion or 8.4 percent; 1–4 family residential loans, up $18.8 billion or 4.9 percent; C&I loans, up $15.4 billion or 7.9 percent; C&D loans, up $11.3 billion or 11.6 percent; and multifamily residential loans, up $10.1 billion or 9.4 percent. Unused loan commitments of $303.3 billion were up $25.2 billion (9.1 percent) during the year ending second quarter 2018. Commitments to lend against commercial real estate properties—including C&D properties—increased by $9.4 billion (11.4 percent) from a year earlier.

    Noncurrent Loan Balances Shrink Despite Slight Increase in Noncurrent Farm Loans
    Total noncurrent loan and lease balances declined by $229.7 million (1.7 percent) quarterly, supporting a 3 basis point decline in the noncurrent rate to 0.82 percent—29 basis points below that of noncommunity banks. As a result, six out of ten community banks (63.2 percent) reported a lower or unchanged noncurrent loan rate compared with the previous quarter. The noncurrent rate for all major loan categories declined compared with first quarter 2018; C&I loans showed the most improvement—as the noncurrent rate for this category decreased by 10 basis points during the quarter. The noncurrent rate for farm loans increased 6 basis points during the quarter to 1.15 percent because of increases in the noncurrent rates for farmland loans (up 10 basis points to 1.38 percent) and agricultural production loans (up 3 basis points to 0.82 percent).

    Net Charge-Off Rates Remain Relatively Low
    Community banks reported a 3 basis point decline in the net charge-off rate to 0.15 percent during the year ending second quarter 2018—a rate that remained well below that of noncommunity banks (0.54 percent). Despite an overall decline, the net charge-off rates for 1–4 family loans (up 6 basis points) and C&D loans (up 3 basis points) increased year-over-year.

    Community Bank Equity Capital Up Since First Quarter
    Equity capital totaled $248 billion, up $4.1 billion (1.7 percent) during the quarter. An increase in risk-weighted assets slightly outpaced the rate of capital formation during the quarter, causing a small decline in the tier 1 risk-based capital ratio (down 3 basis points to 14.67 percent) and the total risk-based capital ratio (down 4 basis points to 15.72 percent). However, the leverage capital ratio increased 7 basis points to 10.97 percent.

    Chart 1. Contributors to the Year-Over-Year Change in Income

    Chart 2. Net Interest Margin

    Chart 3. Change in Loan Balances and Unused Commitments

    Chart 4. Noncurrent Loan Rates for FDIC-Insured Community Banks

     

    TABLE I-B. Selected Indicators, FDIC-Insured Community Banks

    TABLE II-B. Aggregate Condition and Income Data, FDIC-Insured Community Banks

  • Nominal
  • Merger-Adjusted
  • TABLE III-B. Aggregate Condition and Income Data by Geographic Region, FDIC-Insured Community Banks

    TABLE IV-B. Second Quarter 2018, FDIC-Insured Community Banks

    TABLE V-B. First Half 2018, FDIC-Insured Community Banks

    TABLE VI-B. Loan Performance, FDIC-Insured Community Banks


    Footnotes:

    1 The number of insured community banks reflects one new community bank charter and no community bank failures during the second quarter.

    2 This estimate of net income applies the average quarterly tax rate at community banks between fourth quarter 2011 and third quarter 2017 to income before taxes and discontinued operations.

    3 Non 1–4 family real estate loans include construction and development, farmland, multifamily, and nonfarm nonresidential loans.

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