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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
THIRD 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 Increases for Most Community Banks
Reports from 5,0441 insured community banks reflected net income of $6.8 billion—up $1.2 billion (21.6 percent) from third quarter 2017.2 Net income benefited from an increase in net operating revenue and a reduction in income tax expenses; both combined to offset growth in noninterest expense. The pretax return on assets ratio rose from 1.42 percent to 1.48 percent during the year. This ratio was 34 basis points below that of noncommunity banks.

Provisions for loan and lease losses totaled $627 million, a decline of $112.1 million (15.2 percent) from third quarter 2017. However, total reserves increased by $458 million (up 2.6 percent) to $18.3 billion as nearly two-thirds (63.3 percent) of community banks reported higher reserves compared with the same period the year before.

More than seven out of ten community banks (72 percent) reported higher net income from a year earlier, and only 3.7 percent of community banks reported a net loss this quarter. Income tax expense declined by $395 million (23 percent) from third quarter 2017, as community banks continued to benefit from a lower effective tax rate. Absent the benefits of a lower corporate tax rate, estimated quarterly net income would have been $6.4 billion,13.3 percent higher than the $5.6 billion reported in third quarter 2017.3

Higher Net Interest Income Drives Increase in Net Operating Revenue
Net interest income totaled $19.3 billion, up $1.6 billion (8.9 percent) from third quarter 2017. This growth contributed most to the increase in annual net operating revenue, which totaled $23.9 billion (up 7.6 percent).

Non 1–4 family real estate loan income (up $1.3 billion or 15.6 percent) contributed to most of the growth in interest income.4 The net interest margin (NIM) expanded 8 basis points from the level reported in third quarter 2017 to 3.74 percent. Although this ratio was 33 basis points higher than that of noncommunity banks, the NIM for noncommunity banks grew more (17 basis points) during the same period.

More Than Half of Community Banks Report Higher Noninterest Income
Community banks reported noninterest income of $4.7 billion, up $110 million (2.4 percent) from third quarter 2017 despite a decline in net gains on loan sales of $136 million (13.8 percent). More than half of community banks (53.3 percent) reported higher noninterest income compared with third quarter 2017.

Noninterest Expense and Assets Per Employee Continue Upward Trend
Salary and employee benefits increased by $566.1 million (7 percent), lifting noninterest expense by $855.1 million (6 percent) from third quarter 2017. During the same period, the number of full-time equivalent employees increased by 11,177 (2.8 percent) and average assets per employee rose to $5.4 million (up 3.6 percent). Nearly three out of four (74.2 percent) community banks reported higher noninterest expenses compared with third quarter 2017.

Loan and Lease Balances Grow 6.6 Percent From a Year Earlier
Loan and lease balances rose $98.9 billion (6.6 percent) during the past 12 months. More than seven out of ten community banks (78.4 percent) reported annual growth in loan and lease balances. The following categories led this growth: nonfarm nonresidential loans, up $36.1 billion or 8.2 percent; 1–4 family residential loans, up $17.2 billion or 4.5 percent; commercial and industrial (C&I) loans, up $15.7 billion or 8.1 percent; construction and development (C&D) loans, up $10.3 billion or 10.3 percent; and multifamily residential loans, up $9 billion or 8.3 percent.

Loan and lease balances increased by $22.8 billion (1.5 percent) to $1.6 trillion during third quarter 2018. Among the categories that led quarterly loan growth were nonfarm nonresidential loans, up $8.8 billion or 1.9 percent; 1-4 family residential real estate loans, up $3.3 billion or 0.8 percent; C&D loans, up $2.6 billion or 2.4 percent; and C&I loans, up $1.8 billion or 0.9 percent.

Unused loan commitments of $306.3 billion were up $6.1 billion (2 percent) during third quarter 2018. Undrawn commitments on C&I loans increased $5 billion (5.3 percent) and commitments to lend against commercial real estate properties, including C&D properties, increased by $3.2 billion (3.5 percent) during the same period.

Noncurrent Loans Decline During the Quarter
Community banks reported a decline of $90 million (0.7 percent) in noncurrent loans and leases and a 2 basis point decline in the noncurrent rate to 0.80 percent, 26 basis points below that of noncommunity banks and the lowest noncurrent rate since first quarter 2007. The coverage ratio (noncurrent loans to allowance for loan and lease losses) increased from 141.2 percent to 143.3 percent during the third quarter.

The noncurrent rate declined for all major loan categories except C&I, which increased by 4 basis points to 1 percent during third quarter 2018. The noncurrent rate for farm loans increased by 1 basis point during the quarter to 1.16 percent because of a slight increase in the noncurrent rate for farmland loans (up 3 basis points to 1.41 percent), which outpaced a decline in the noncurrent rate for agricultural production loans (down 2 basis points to 0.80 percent).

Net Charge-Off Rates for Major Loan Categories Decline or Remain Flat
The net charge-off rate declined by 3 basis points to 0.10 percent from third quarter 2017, the lowest net charge-off rate since first quarter 2016 and 42 basis points below that of noncommunity banks. The net charge-off rate for C&D loans of 0.03 percent and the net charge-off rate for nonfarm nonresidential loans of 0.04 percent have remained flat since third quarter 2017. The net charge-off rate for 1-4 family loans declined by 1 basis point to 0.04 percent and the net charge-off rate for C&I loans declined by 6 basis points to 0.27 percent compared with a year earlier.

Community Banks Report Uptick in Regulatory Capital Ratios
Equity capital totaled $249.8 billion, up $3.7 billion (1.5 percent) from the previous quarter. The leverage capital ratio increased by 8 basis points to 11.05 percent. The tier 1 risk-based capital ratio increased by 8 basis points to 14.75 percent as the growth rate for risk-based capital outpaced that of risk-weighted assets. The total risk-based capital ratio increased by 7 basis points to 15.79 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

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

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

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

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


Footnotes:

1 The number of insured community banks reflects no community bank failures during this quarter.

2 Data for third quarter 2018 do not include two insured institutions, which had not reported at the time data were compiled.

3 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.

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

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