The third quarter was another positive period for the national and state banking industry, according to a recent report from the Federal Deposit Insurance Corp. Revenue and net income were higher, loan balances increased, net interest margins improved, and the number of unprofitable banks and “problem banks” continued to fall.
Community banks also reported another solid quarter of revenue, net income, and loan growth, according to the U.S. report.
“While overall performance improved, the interest-rate environment and competitive lending conditions continue to pose challenges,” noted FDIC Chairman Martin Gruenberg.
Among the 5,737 banking and savings institutions insured by the FDIC, net income totaled $47.9 billion for the third quarter ending Sept. 30. It was a gain of $2.4 billion or 5.2% from the year-ago period. The report said the biggest contributor to the higher profits was increased net interest income which grew 7.4% from a year ago.
Gruenberg said 67.3% of the national banks reported higher third-quarter earnings than a year ago. The proportion of unprofitable banks fell to 3.9% in the quarter. He said the competitive lending climate is causing some banks to “reach for yield” through investing in higher-risk and longer-term assets. He warned that the industry must manage interest-rate risk, liquidity risk and credit risk to continue to grow on a sustainable path.
He said the community bank sector continues to report higher net interest margins than the overall industry. The community bank’s third-quarter earnings rose 9.4% from the same period in 2016.
The 5,294 U.S community banks reported $6 billion in net income in the third quarter, up $513 million from the prior year. Net operating revenue was $1.5 billion or 6.7% higher, as net interest income was up $1.7 billion or 9.7%. Noninterest income declined $174.2 million, or 3.4%. Loan-loss provisions increased $39.8 million, or 5.5%, while noninterest expenses were $631.7 million, or 4.3% higher. The net interest margin widened to 3.65% in the third quarter.
The U.S. community bank sector reported a combined return on assets of 1.42%, up slightly from a year ago. Charge-offs among this group fell 34% in the third quarter as defaults improved in all of the major loan categories.
The 98 banks in Arkansas reported total net profits of $298 million in the third quarter compared to growth of $300 million in the year-ago period. For the first nine months of this year total net income reported by Arkansas banks is $908 million, up 13.9% from the same period in 2016.
There are five fewer banks this year as consolidation continues. There are 22 banks with assets less than $100 million, down from 24 banks a year ago. This small banking group reported a combined $12 million in net income through three quarters of this year, up 2%. Deposits rose slightly to $1.283 billion while loans grew to $888 million, up 1.95% from a year ago.
Overall financial health for the smaller of the Arkansas banks also improved with a combined return on assets of 1.21%, up from 0.94%. The targeted benchmark for ROA is 1%.
There were 78 banks in Arkansas with assets greater than $100 million and this cohort earned a combined $896 million through three quarters of this year, up compared to $787 million reported a year ago. Two years ago net income reported by this group was $645 million.
Deposits grew to $76.768 billion, up 10.7% from a year ago. Loans rose to $65.872 billion through the third quarter representing year-over-year growth of 14.14%. Loan performance was on par with a year ago with charge-offs representing just 0.18% of total loans on the books.
The net interest margin fell slightly to 3.98% through the third quarter, while this cohort’s yield on earning assets rose to 4.44% from 4.35% a year ago. Other real estate holding sitting on bank books totaled $203 million, down from $243 million last year and $300 million in 2015.
With banks earning quarterly profits and fewer loans defaulting this cohort has been able to beef up equity capital holdings to $13.098 billion as of Sept. 30, up from $11.258 billion last year and $8.869 billion just two years ago.
Stronger equity capital is a good for banks and also required now from Dodd-Frank regulations passed in recent years. Return on assets for this cohort stood at 1.31% as of Sept. 30, down slightly from 1.33% a year ago.
Home BancShares of Conway, parent of Centennial Bank, said the third quarter was noisy but still profitable as it sought to complete another merger and assess the fallout from Hurricane Irma which hit Florida where the bank operates.
“A significant portion of Home BancShares’ South Florida market area and customer base have been adversely impacted by Hurricane Irma,” said Tracy French, Centennial Bank president and CEO.
As of Sept. 30, the bank estimated potential credit impact and damage at $33.4 million. The bank set aside $32.9 million to establish a storm-related provision for loan losses and a $556,000 charge related to direct expenses incurred through Sept. 30.