A Rising Economy Raises all Banks

Posted on September 19, 2018 Published by

Most of us have heard the adage that a rising tide raises all boats. Apparently, good news in the overall economy (low unemployment, strong GDP growth, lower taxes, wage growth, strong consumer and business confidence) also means good things for financial institutions. The second quarter FDIC report reads like a real feel good story.

The over 5,500 banks that reported for the second quarter saw net income rise to $60.2B, an increase of $12.1B (25.1%) for the period ending June 30, 2018 compared to same period a year ago. Return on assets came in at 1.37% compared to 1.13% a year ago. Return on equity showed similar improvements increasing to 11.8% vs 9.7% a year ago. Net interest margin had a nice increase to 3.38%, up 16bps from a year earlier. This improvement was broadly felt as over 70% of reporting institutions indicated improved margins.

These numbers are particularly good news as the fed funds rate has increased from 0.75% coming into 2017 to the current level of 2.0% as of June 13, 2018. While this increase in the fed funds rate has the affect of increasing revenues from prime-based floating rate loans, it also has the potential of increasing the bank’s interest cost. All in, 85% of banks reported year-over-year increases in net interest income.

The increase in business economic activity and improved consumer confidence has led to increases in banks’ loan portfolios. Loan and lease balances are up 4.2% over levels from a year ago, and up 1.1% from 1Q 2018. The increases have been distributed over commercial and industrial, consumer (including credit card balances), nonfarm non-residential loans, and consumer mortgages. Quality has remained good as well. One-third of banks reported a reduction in loan loss provision from the previous year. Overall provision declined to 5.8% of net operating revenue, the lowest level since 2015. While total dollar amount of charge-offs was up, which was lead by credit card balances (with an increase of 12.8%), the overall charge-off rate remained stable at 0.48%.

While it does appear that all boats (banks) are floating a little higher this year, some boats (banks) seem to have the wind at their back. From the 2Q FDIC report, it appears that the performance boats (banks) are the community banks. Given that this is the segment of the industry where Enlighten Financial focuses its attention, this is of interest and importance.

The FDIC uses five criteria when determining if a bank is considered a “community bank.” While some of the criteria can get a bit complex, in general community banks would exclude specialty banks (such as credit card banks), have a relatively limited service geography, and total assets less than $1B. Of the roughly 5,500 banks included in the 2Q report, 5,100 are considered in the data for community banks.

Looking at the data for this segment, there’s also quite a bit of good news.

  • 73% of community banks reported higher net income in 2Q 2018 compared to one year ago with an increase of 21%.
  • Return on assets increased from 1.33% to 1.41% compared to 1.37% for all banks.
  • Net interest margin rose to 3.69% running 35bps higher than non-community banks.
  • 85% of community banks reported increases in net interest income compared to one year ago.
  • Loan and lease balances were up 7% in the last 12 months exceeding non-community banks by more that 3%.
  • 80% of the banks reported increases in their overall portfolios and 60% reported increases in small loans to businesses and represented 42% of the industry total.
  • Loan quality is strong with charge-offs at 0.15% compared to 0.54% for non-community banks.

With all this good news, what could go wrong? Well, the tide cycles two times per day and economics, while not cycling nearly as quickly, does experience ebbs and flows. I would certainly recommend readers look back to Kevin’s blog in July on “Where are the Losses?” While we don’t know exactly where they are now, we do know that they exist. The danger is to be lulled into complacency because of portfolio and income growth, which can lead to relaxed underwriting standards (higher loan to values, lower debt service coverage requirements, etc.) and less rigorous portfolio monitoring. In the meantime, enjoy the pleasant cruise.


Richard Rudolph is Senior Consultant at Enlighten Financial, a specialized consulting firm that focuses on loan review and risk management services to community banks and credit unions. Enlighten Financial has made it our business to shed light on the complex financial landscape, and lead clients in the right direction. We work with financial institutions and other providers to mitigate risk. To talk to Rick directly, please call: 920.264.9150.

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