What’s Next?

Posted on October 9, 2019 Published by

Anticipation. Like the popular Carly Simon song or Heinz 57 ketchup. Or like the Second Quarter FDIC Quarterly Banking Profile, which was a bit late in arriving. But was worth the wait. In this month’s blog we will review Q2 and year-to-date performance for 2019. While we will include an overview of performance for all FDIC Insured institutions, since it is unlikely that Jamie Dimon will be reading this, our focus will be on Community Bank performance.

Before diving into the strong historical performance for the past quarter, it is important that we not overly focus on the past. As we cautioned in the February 2019 blog, there is a danger to Driving While Looking in the Rearview Mirror. Just recently, the Saudi oil fields were attacked cutting Saudi Arabia’s oil production by 50%.

Since that time there has been significant market uncertainty regarding what might happen next. The potential ripple effect, both in severity and longevity, could have a significant impact on business activity and banking performance for the third quarter and beyond. Further, Fed fiscal policy domestically, foreign economic and fiscal policy, and ongoing trade negotiations will each play a role in future performance.


For the three months ending June 30, 2019, net income for the 5,303 banks and savings institutions that are covered in the profile increased by $2.5 billion (4.1%) to $62.6 billion. The improvement in quarterly net income was attributable to higher net interest income and realized gains on securities with net interest margin remaining stable. Nearly 60% of banks reported increases in net income from the same quarter a year ago.

Total loan and lease balances rose by $152.3 billion (1.5%) from the first quarter of 2019. Almost three-quarters of institutions reported quarter-over-quarter increases led by consumer loans. Over the past year, loan and lease balances rose $443 billion (4.5%) with commercial and industrial loans having the largest dollar increase from a year ago, increasing by $142.8 billion (6.9%). With the improved income results, banks set aside $12.8 billion in loan-loss provision, an increase of $1.1 billion (9.3%) from a year earlier with loan-loss provisions as a percentage of net operating revenue increasing from 5.8% in Q2 2018 to 6.25%.

Total deposit balances increased by $114 billion from the previous quarter with $37.2 billion coming in the form of non-interest-bearing accounts. Some of the less favorable results were a decline in noninterest income and increase in noninterest expenses.


Historically, a community bank was defined based upon asset size, where $1 billion was the threshold. More recently, the FDIC has developed a more complex matrix to determine which banks qualify as community banks.

This change was driven, at least in part, as it was easier to define the characteristics of a community bank and how it conducts business than to simply agree on asset size. There was general agreement that community banks focused on providing traditional banking services in the communities they serve. They would gather deposits locally and many of their loans would be to local businesses.

The lenders tended to view themselves as “relationship” bankers and not “transactional” bankers. Accordingly, they may tend to rely more heavily on specific knowledge of the local community and base credit decisions on non-standard data obtained through long-term relationships. Also, community banks tend to be privately held and locally controlled.

Currently, the FDIC community bank matrix would exclude institutions with significant foreign deposits, specialty banks (credit card, trust companies, banker’s banks, etc.). What does all this mean? After the slicing and dicing what do we get? Of the 6,524 banking institutions designated as community banks, 6,194 had total assets of less than $1 billion but accounted for $1.3 trillion in total assets. The remaining 330 banks with assets in excess of $1 billion had $623 billion in assets.

For second quarter 2019, 4,874 community banks reported for the quarterly banking profile. Community banks reported net income of $6.9 billion, which is an increase of $522.2 million (8.1%) over year-ago levels. Ninety-six percent of community banks reported a profit for the quarter. Net operating revenue rose to $24 billion in second quarter 2019 – up $1.2 billion from a year ago – which was driven by growth in both net interest income (up 5.1%) and noninterest income (up 4.7%). Higher interest income was achieved in non-1-4 family real estate loans, commercial and industrial loans and 1-4 family residential loans with commercial and industrial leading the pack (up 17.1%). Net interest margin remained stable from year ago levels.

Interestingly, funding costs for community banks have been lower than funding costs for their non-community competitors for the last six consecutive quarters, reversing a 10-year trend from the first quarter of 2008 to first quarter 2018. The improvement is due in part to the fact that community banks funded 89% of the increase in earning assets with deposits during the year.

While noninterest income increased compared to a year ago, noninterest expense increased as well. Net interest income increases were driven by loan and lease balance increases of $34.6 billion in the second quarter over first quarter 2019. Asset quality metrics remain favorable with noncurrent loans and leases declining $146 million (1.2%) during the second quarter, which contributed to an increase in the coverage ratio to 150.2%. Net charge-off rate for loans was relatively flat at 0.11% which is only slightly above the 10-year low of 0.09% and 46 bps below that of noncommunity banks.

It is apparent that banks are experiencing some very favorable performance numbers as result of strong economic activity. While it is certainly a good time to enjoy the success, it is also a perfect time to position your portfolios to prepare for the inevitable slow down, whenever that will happen. Not unlike a garden, it is an excellent time to do some “weeding” of low performing credits and less desirable industries and those most susceptible to an economic slowdown. Until the slow down comes, Cheers!



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: 920.445.8133

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