Banking industry profits rose to $38.7 billion during the third quarter, up by $2.6 billion or 7.3 percent from $36.1 billion in the comparable prior year quarter. Operating revenues, which consist of net interest income and total noninterest income, rose by an impressive 4.8 percent or $7.8 billion, the biggest increase since the dark days of 2009’s fourth quarter.
Profit growth was widespread with almost 63 percent of all banks reporting yearly growth in quarterly earnings. There are still some problem banks that are losing money but during the quarter only 6.4 percent of banks reported losses compared to 8.7 percent a year earlier.
Profit growth for the quarter was also impressive considering the source of income growth. According to FDIC Chairman Martin Gruenberg, “Most importantly, third quarter income growth was based on revenue growth instead of lower loan-loss provisions. This can be a sustainable foundation for continued earnings growth going forward.” Also noteworthy is the fact that banks actually increased provisions for loan losses by $7.2 billion, up almost 24 percent from $5.8 billion last year, the first time in five years that banks have increased loan-loss provisions. While higher loan-loss provisions can result from a gloomy assessment of future economic trends or the result of poor lending decisions, in this case the increased provisions appear to be normal increases associated with higher lending volume.
Lending activity showed gains in loan and lease balances, commercial and industrial loans, and auto loans. The one area in which lending showed a slight decline, possibly as a result of higher mortgage rates, was mortgage lending for one to four family homes. Mortgage loans dropped by $6.7 billion or 0.4 percent during the quarter.
Contributing to revenue gains was a rise of $5.4 billion in noninterest income, a rise of 9.2 percent, the first increase in the last five quarters. Net interest income rose by $2.4 billion or 2.3 percent, despite a continued decline in net interest margins (the difference between a bank’s average yield on loans and the cost of funding). Due to the financial repression policies of the Federal Reserve, interest rates have been driven to near zero levels never seen in the past. While the net interest margin has dropped to the lowest level since 1989, forecast interest rate increases by the Federal Reserve could quickly reverse this situation and lead to further profit gains by the banking industry.
Asset quality improved for banks as loans 90 days or more past due declined by 5.3 percent while the percentage of noncurrent loans and leases dropped to 2.1 percent, the lowest level since the second quarter of 2008.
The number of banks classified as “problem banks” by the FDIC declined for the 14th consecutive quarter to 329 from 354 in the prior quarter. The number of problem banks has declined by 63 percent since reaching a post crisis high of 888 during the first quarter of 2011.
The FDIC Deposit Insurance Fund (DIF) showed strong improvement during the quarter, increasing to a record $54.3 billion. The fund increased due to bank assessments, litigation settlements, and asset recoveries from failed banks that exceeded initial estimates. The DIF reserve ratio or the fund balance divided by total insured deposits, rose to 0.89 percent at September 30, 2014. By law, the FDIC is required to increase the DIF reserve ratio to 1.35 percent by 2020.