FDIC Quarterly Banking Profile
COMMUNITY BANK PERFORMANCE
SECOND QUARTER 2019
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.
Community Banks Report 8.1 Percent Increase in Net Income Growth in Net Interest Income and Noninterest Income Increases Net Operating Revenue Loan and Lease Balances Grow 6.3 Percent Net Charge-Off and Noncurrent Rates Both Decline Year Over Year
Community Banks Report 8.1 Percent Increase in Net Income
Community banks reported net income of $6.9 billion in second quarter 2019, an increase of $522.2 million (8.1 percent) from second quarter 2018. Growth in net interest income (up 5.1 percent), noninterest income (up 4.7 percent), and gains on securities sales (up 656.7 percent) drove the annual increase in net income, which was partially offset by an increase in noninterest expense (up 5.6 percent) and a modest increase in provision expense (up 2.3 percent). Community banks reported a pretax return on average assets of 1.48 percent in second quarter 2019, up 7 basis points from a year ago, as the gap between community banks and noncommunity banks narrowed by 12 basis points over the same period. Ninety-six percent of community banks reported a profit during the quarter. At the end of second quarter 2019, there were 4,874 community banks. Fifty-four banks merged, one community bank opened, and one community bank failed during the quarter.
Growth in Net Interest Income and Noninterest Income Increases Net Operating Revenue
Net operating revenue rose to $24 billion at community banks in second quarter 2019, up $1.2 billion from a year ago owing to growth in net interest income (up 5.1 percent) and noninterest income (up 4.7 percent). Higher interest income on non-1-4 family real estate loans (up 13.3 percent), commercial and industrial (C&I) loans (up 17.1 percent), and 1-4 family mortgage loans (up 9 percent) drove the increase in net interest income from a year ago. Noninterest income increased $212.1 million (4.7 percent) from second quarter 2018 to $4.7 billion largely due to higher net gains from loan sales (up $206.9 million, or 25.5 percent). More than half of community banks (56.8 percent) reported an increase in noninterest income from second quarter 2018.
Net Interest Margin Remains Stable
The net interest margin narrowed 1 basis point from a year ago to 3.68 percent, as the increase in average funding costs slightly outpaced the increase in average earning asset yields. Average funding costs for community banks have been lower than funding costs for noncommunity banks for six consecutive quarters, reversing a ten-year trend from first quarter 2008 through first quarter 2018 during which community banks reported a higher cost of funds than noncommunity banks. Community banks funded 89 percent of the increase in earning assets with deposits during the year. Depositors added $82.7 billion (6 percent) to interest-bearing accounts and $14.7 billion (3.9 percent) to noninterest-bearing accounts at community banks from a year ago. Growth in short-term time deposits—time deposits with maturities of three years or less—led the increase in interest-bearing deposit volume.
Noninterest Expense Rises as Payroll Expense and Assets Increase
Noninterest expense increased to $15.3 billion in second quarter 2019, up $817.1 million (5.6 percent) from a year ago. Slightly more than three-quarters (75.7 percent) of community banks reported higher noninterest expense compared with second quarter 2018. Payroll expense increased $526.8 million (6.3 percent) from a year ago, as average assets per employee increased from $5.35 million to $5.56 million.
Loan and Lease Balances Grow 6.3 Percent
Loan and lease balances increased $34.6 billion (2.2 percent) to $1.6 trillion during second quarter 2019, as 73.1 percent of community banks reported higher loan and lease balances compared with the previous quarter. Growth in major loan categories—nonfarm nonresidential loans (30 percent of total loans at community banks), 1–4 family residential real estate loans (25 percent of total loans), C&I loans (14 percent of total loans) and construction and development (C&D) loans (7 percent of total loans)—drove the quarterly and annual increases in loan and lease balances.
Loan and lease balances rose $96.5 billion (6.3 percent) from second quarter 2018, led by growth in nonfarm nonresidential loans (up $32.3 billion, or 7.2 percent), C&I loans (up $17.3 billion, or 8.5 percent), 1–4 family residential real estate loans (up $15.7 billion, or 4.1 percent), and C&D loans (up $9.4 billion, or 9 percent). Community banks continued to grow their small loans to businesses, adding $7.1 billion (2.4 percent) since second quarter 2018. Small loans to businesses held by community banks are 40.9 percent of the industry total.
Asset Quality Metrics Remain Favorable
Noncurrent loan and lease balances declined $146 million (1.2 percent) during second quarter 2019. This decline contributed to an increase in the coverage ratio (loan and lease loss reserves to noncurrent loans) to 150.2 percent from 147.6 percent last quarter. The noncurrent rate for total loans declined 7 basis points to 0.75 percent from a year ago, reflecting a decline in noncurrent rates for major loan categories both quarterly and annually. The C&I noncurrent rate registered the largest decline among major loan categories during the quarter, falling 9 basis points to 0.88 percent.
The noncurrent rate for farm loans, of which community banks hold more than twice the volume held by noncommunity banks, was 1.28 percent in second quarter 2019, an increase of 13 basis points from a year ago but still below the recent high of 1.54 percent in first quarter 2010. The noncurrent rate for farmland loans increased 14 basis points from a year ago to 1.52 percent, and the noncurrent rate for agricultural production loans increased 11 basis points to 0.93 percent.
Net Charge-Off Rate Remains Low
Net charge-offs increased $69 million (19.3 percent) during the quarter and $20.6 million (5.1 percent) compared to second quarter 2018. The net charge-off rate for total loans was relatively flat at 0.11 percent (up 2 basis points quarterly), which is only slightly above the ten-year low of 0.09 percent and 46 basis points below that of noncommunity banks. The net charge-off rate for farm loans increased 4 basis points to 0.10 percent during the quarter. Of the major loan categories, only C&D loans registered a decline in the net charge-off rate during the quarter—down 2 basis points to negative 0.03 percent—as loan loss recoveries exceeded charge offs. The net charge-off rate for C&I loans increased 7 basis points to 0.25 percent during the quarter.
Community Bank Capital Ratios Continue to Expand
Equity capital grew $24.8 billion (10.3 percent) during the year, supporting annual increases in all regulatory capital ratios. The total equity capital ratio increased 52 basis points to 11.68 percent, the leverage capital ratio increased 17 basis points to 11.14 percent year over year, and the total risk based capital ratio increased 8 basis points to 15.80 percent.
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. Second Quarter 2019, FDIC-Insured Community Banks
TABLE V-B. First Half 2019, FDIC-Insured Community Banks
TABLE VI-B. Loan Performance, FDIC-Insured Community Banks