| Banking industry profits rose in the third quarter and community banks enjoyed a particularly profitable period, even as regulators cautioned bankers about credit risk and reaching for yield in a persistently low interest rate environment.
Net income across all FDIC-insured banks totaled $45.6 billion in the period ended Sept. 30, representing an increase of $5.2 billion, or 13 percent, from the year-ago period, according to the FDIC’s latest quarterly banking profile. Community banks reported net income totaling $5.6 billion, up nearly $600 million or 12 percent from the same quarter in 2015.
The FDIC said the increase in earnings was mainly attributable to a $10 billion, or 9.2 percent, increase in net interest income and a $1.2 billion, or 1.9 percent, rise in noninterest income. One-time accounting and expense items at three institutions had an impact on the growth in income. Banks increased their loan-loss provisions by $2.9 billion, or 34 percent, from a year earlier.
Total loans and leases increased $590.8 billion, or 6.8 percent, over the 12 month period ended Sept. 30. Residential mortgages increased $28.6 billion, or 2.2 percent, during the quarter, while real estate loans secured by nonfarm nonresidential real estate properties rose $22.4 billion, or 1.5 percent, and credit card balances increased $15.7 billion, or 2.1 percent.
Banks charged off $10.1 billion during the third quarter, an increase of $1.5 billion, or 16.9 percent, from last year. This is the fourth consecutive quarter that net charge-offs have risen year-over-year. Charge-offs of loans to C&I borrowers increased $946 million, or 82.7 percent, from the year-ago period. Credit card charge-offs increased $658 million, or 13.4 percent.
The average net charge-off rate in the third quarter was 0.44 percent, up from 0.40 percent a year earlier. Noncurrent loans and leases – which the FDIC defines as those that are at least 90 days past due or in nonaccrual status – fell $2.5 billion, or 1.8 percent, during the third quarter.
In prepared remarks, FDIC Chairman Martin J. Gruenberg said the “challenging environment has led some institutions to reach for yield through higher-risk assets and extended asset maturities. Banks must manage their interest-rate risk, liquidity risk and credit risk prudently to ensure that growth is on a long-run, sustainable path. These challenges continue to be a focus of our supervisory attention.”
The number of banks on the FDIC’s “problem list” fell from 147 to 132 during the third quarter, representing the smallest number of problem banks in more than seven years and a significant decline from the peak of 888 in the first quarter of 2011.
Total industry capital increased to $1.89 trillion, representing a 0.9 percent increase over last year. The American Bankers Association’s Chief Economist James Chessen praised that figure as a “bulwark against any economic downturns that could arise.”
He also said, “Our expectation is that the Fed will raise rates in December as the economy continues to firm. Banks have been prepared for a rise in rates for some time and are managing that risk. The Fed has made it clear that any increase in the Federal Funds Rate will be gradual, ensuring that borrowing costs will remain low for the foreseeable future.”
