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Net Income Declines 2% To $39.1Bn At FDIC-Insured Institutions in 1Q16

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Net Income Declines 2 Percent to $39.1 Billion At FDIC-Insured Institutions in 1Q16 by FDIC

FDIC-Insured Institutions Performance

  • First-Quarter Net Income of $39.1 Billion Is 2 Percent Lower Than the Year Before
  • Loan-Loss Provisions Are $4.2 Billion Higher
  • Troubled Commercial and Industrial Loan Balances Register a Sharp Increase
  • Loan Growth Rate Continues to Rise
  • Industry Assets Post Largest Quarterly Increase in Eight Years

Higher Expenses for Credit Losses Weigh on First-Quarter Earnings

Higher expenses for loan losses and lower noninterest income from trading and asset servicing contributed to a $765 million (1.9 percent) decline in quarterly earnings for FDIC-insured institutions in first quarter 2016. Most of the year-over-year drop in net income was concentrated among the largest banks. More than half of all banks—61.4 percent—reported higher quarterly earnings compared with first quarter 2015. Only 5 percent of banks reported negative net income in the quarter, down from 5.7 percent the year before. The average return on assets in the first quarter was 0.97 percent, down from 1.02 percent in first quarter 2015.

Net Interest Margins Improve From Year-Ago Levels

Net operating revenue—the sum of net interest income and total noninterest income—totaled $172.9 billion in the quarter, up $4.6 billion (2.7 percent) from the year earlier. Net interest income was $6.7 billion (6.4 percent) higher, while total noninterest income was $2.2 billion (3.4 percent) lower. The improvement in net interest income was attributable to wider net interest margins, as average asset yields increased more rapidly than average funding costs, and to a 3.7 percent increase in average interest-earning assets compared with first quarter 2015. The average net interest margin rose to 3.10 percent, from 3.02 percent the year before, as 57 percent of banks reported year-over-year improvement in their margins. The drop in noninterest income was concentrated among larger banks, and reflected a $1.9 billion (24.9 percent) decline in trading income, as well as a $736 million (46 percent) decline in servicing income.

Aggregate Loan-Loss Provisions Continue to Rise

Banks set aside $12.5 billion in provisions for loan losses in the first quarter, a year-over-year increase of $4.2 billion (49.7 percent). This is the largest quarterly increase since fourth quarter 2012, and marks the seventh consecutive quarter that loan-loss provisions have increased. Slightly more than one-third of all banks—35.6 percent—reported higher quarterly loss provisions than the year before. Most of the increase in loss provisions occurred at larger banks. Quarterly provision expenses at banks with assets greater than $10 billion were $4.1 billion (54.8 percent) higher than in first quarter 2015, while total provisions at banks with less than $10 billion in assets were $140 million (15.8 percent) higher.

Loan Losses Post Second Consecutive Quarterly Increase

Quarterly net charge-offs (NCOs) totaled $10.1 billion, an increase of $1.1 billion (12.3 percent) compared with a year earlier. This is the second consecutive quarter that NCOs have posted a year-over-year increase, following 21 quarters in a row in which NCOs fell. NCOs of commercial and industrial (C&I) loans were $1.1 billion (144.7 percent) higher than in first quarter 2015. Smaller year-over-year NCO increases were reported in credit cards, auto loans, real estate construction and development loans, and agricultural production loans. The average NCO rate in the first quarter was 0.46 percent, compared with 0.43 percent a year earlier. Fewer than half of all banks—41.9 percent—reported year-over-year increases in quarterly NCOs.

Noncurrent C&I Loans Increase by $9.3 Billion

The amount of loan balances that were noncurrent—90 days or more past due or in nonaccrual status—rose by $3.3 billion (2.4 percent) during the first three months of 2016. This is the first quarterly increase in total noncurrent loan balances in 24 quarters, driven by a $9.3 billion (65.1 percent) increase in noncurrent C&I loans. This is the largest quarterly increase in noncurrent C&I loans since first quarter 1987. Most of the increase occurred at larger banks. At institutions with assets greater than $10 billion, noncurrent C&I loans rose by $8.9 billion (82.1 percent). At institutions with less than $10 billion in assets, noncurrent C&I balances increased by $415 million (12 percent). A large part of the weakness in C&I loans is attributable to loans to the energy sector, especially oil and gas producers. Sharply lower energy prices have reduced the ability of many borrowers to service their debts, and a large share of the direct lending exposure of the banking industry to these borrowers is held by larger banks. The average noncurrent loan rate rose from 1.56 percent to 1.58 percent during the quarter. This is still the second-lowest noncurrent rate for the industry since year-end 2007. For C&I loans, the average noncurrent rate rose from 0.78 percent to 1.24 percent. This is the highest noncurrent rate for C&I loans since year-end 2011. Noncurrent rates declined for all other major loan categories in the first quarter.

Loss Reserves Increase for the First Time in Six Years

As a result of the increase in noncurrent loans, the industry’s coverage ratio of loan-loss reserves to noncurrent loans posted its first quarterly decline in 14 quarters, falling from 86 percent at the end of 2015 to 85.5 percent at the end of March. Banks increased their loan-loss reserves by $2.1 billion (1.8 percent), as they added more in loan-loss provisions ($12.5 billion) than they took out in net charge-offs ($10.1 billion). This is the first time in six years that the industry’s aggregate loan-loss reserves have increased. Banks with assets greater than $1 billion, which itemize their reserves for major loan categories, reported a $3.3 billion (10.4 percent) increase in their reserves for estimated losses on non-real-estate commercial loans in the first quarter.

Equity Capital Increases by $39.3 Billion

An increase in retained earnings and higher market values in securities portfolios helped lift the equity capital of FDIC-insured institutions by $39.3 billion (2.2 percent) during the first quarter. This is the largest quarterly increase in equity since third quarter 2009. While net income was lower than the year before, banks reduced their cash dividends by $1.6 billion (7.1 percent) compared with first quarter 2015. As a result, retained earnings totaled $18.3 billion, a year-over-year increase of $815 million (4.7 percent). In addition, accumulated other comprehensive income increased by $17.3 Institutionsbillion during first quarter 2016, buoyed by higher unrealized gains on available-for-sale securities. The industry’s ratio of equity capital to total assets increased from 11.24 percent to 11.26 percent during the quarter. At the end of the first quarter, 99 percent of all FDIC-insured institutions, holding 99.9 percent of total industry assets, met or exceeded the requirements for the highest regulatory capital category as defined for Prompt Corrective Action purposes.

Loan Growth Remains Strong

Total assets increased by $325.6 billion (2 percent) during the quarter, the largest quarterly increase in industry assets since first quarter 2008. Balances with Federal Reserve banks increased by $79.7 billion (6.7 percent), primarily at large banks. Investment securities portfolios grew by $31.1 billion (0.9 percent), primarily as a result of a $23.4 billion increase in unrealized gains on available-for-sale securities. Total loans and leases increased by $99.7 billion (1.1 percent) during the first three months of 2016. C&I loans increased by $71.2 billion (3.9 percent), with the acquisition of a commercial finance business from outside the industry contributing to the strong growth in reported C&I loan balances. Real estate loans secured by nonfarm nonresidential real estate properties increased by $20.3 billion (1.6 percent), and 1-to-4 family residential mortgage loans rose by $14.3 billion (0.7 percent). Credit card balances posted a seasonal decline of $32.8 billion (4.3 percent), as borrowers paid down balances incurred during the holiday season. Over the 12 months ended March 31, total loan and lease balances increased by 6.9 percent. This is the highest 12-month growth rate for loan portfolios since midyear 2007–midyear 2008. Unused credit lines increased by $121.6 billion (1.8 percent) during the quarter, and are up by $451.1 billion (6.9 percent) over the previous 12 months.

Deposits Fund Most of the Industry’s Asset Growth

Total deposits increased by $239.5 billion (2 percent) during the quarter. Deposits in domestic offices rose by $201.3 billion (1.8 percent), while deposits in foreign offices increased by $38.2 billion (3 percent). Domestic deposits in interest-bearing accounts grew by $218.4 billion (2.8 percent), while balances in noninterest-bearing domestic accounts fell by $17.1 billion (0.6 percent). Banks increased their nondeposit liabilities by $47 billion (2.4 percent), as liabilities in trading accounts rose by $38 billion (15.4 percent).

One Insured Bank Failed in the First Quarter

The number of insured commercial banks and savings institutions filing quarterly financial reports declined from 6,182 to 6,122 in the first quarter. During the quarter, mergers absorbed 58 FDIC-insured institutions, while one insured bank failed. No new charters were added in the first quarter. The number of full-time equivalent employees totaled 2,039,887 in the quarter, a net increase of 6,163 (0.3 percent) from the fourth quarter of 2015, but 2,799 (0.1 percent) fewer than the year before.

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