FDIC Quarterly Banking Profile – Fourth Quarter 2018
"Good afternoon, and welcome to our release of fourth-quarter and full-year 2018 performance results for
"Once again, the banking industry reported a strong quarter. Net income improved on higher net operating revenue and a lower effective tax rate. Loan balances continued to increase, net interest margins improved, and the number of "problem banks" remains low.
"Community banks also reported another positive quarter. Net income at community banks also benefitted from higher revenue and a lower effective tax rate, as well as loan growth that was stronger than the overall industry during the year.
"The current economic expansion is the second-longest on record, and the nation's banks are stronger as a result.
"While results this quarter were positive, the extended period of low interest rates and an increasingly competitive lending environment continue to lead some institutions to "reach for yield." With the recent flattening of the yield curve, new challenges for institutions in lending and funding may emerge. Furthermore, the competition to attract loan customers remains strong, and therefore, banks need to maintain their underwriting discipline and credit standards.
"These factors have led to heightened exposure to interest-rate, liquidity, and credit risk. Banks must prudently manage these risks in order to sustain lending through the downside of this economic cycle when it occurs.
"I am joined here today by
"Diane, I will turn this over to you. Thank you.
Remarks of
Click here to view the charts: (https://www.fdic.gov/news/news/speeches/spfeb2119.html)
"Thank you, Chairman McWilliams.
"Our first chart shows that net income for the industry was
"Community banks reported net income of
"Chart 2 shows that full-year 2018 net income increased to
"Adjusted for tax-reform effects, we estimate that full-year 2018 net income would have been
"Community banks reported annual net income of
"The next chart shows that net operating revenue totaled
"Net interest income grew by 8.1 percent from a year ago because of loan growth and improved net interest margins. Noninterest income rose by 2.6 percent from a year ago because of net gains on sales of other assets and other noninterest income.
"Chart 4 shows that the average net interest margin for the industry was 3.48 percent in the fourth quarter, up from 3.31 percent a year earlier. The average funding cost increased by 37 basis points from fourth quarter 2017, while the average asset yield rose by 54 basis points.
"Community banks continue to report a higher average net interest margin than the overall industry. However, the gap has been narrowing. Large institutions have benefitted more than community banks from rising short-term interest rates, as large institutions have a greater share of assets that reprice quickly.
"Chart 5 shows that the shares of longer-term assets relative to total industry assets remain elevated, with more than a third of industry assets maturing or repricing in three or more years.
"Some banks have responded to the extended period of low interest rates by "reaching for yield" through investments in longer-term assets, while other banks have reduced their on-balance sheet liquidity - cash, federal funds - to increase overall yields on earning assets and maintain net interest margins.
"Further flattening of the yield curve in conjunction with banks' increased proportion of long-term assets could be a headwind against future earnings.
"So far, increases in interest rates have been largely beneficial to most banks as assets have repriced at a faster rate and in a greater amount than liabilities.
"However, repricing of deposits in response to growing depositor demand for increased rates could result in earnings pressure for banks, particularly those that have a significant amount of long-term assets or those that rely on rate-sensitive deposits.
"Community banks are particularly vulnerable to interest-rate risk, as nearly half of their assets mature or reprice in three or more years.
"Chart 6 shows that loan balances increased by
"Over the past year, loan balances rose by 4.4 percent. This is a slight increase from the 4 percent annual growth rate reported in the third quarter.
"Loan growth at community banks was also strong, measuring 6.5 percent for the past 12 months, led by growth in commercial real estate loans, residential mortgages, and commercial and industrial loans.
"The next chart shows that overall asset quality indicators remain strong. The noncurrent rate declined from the previous quarter, and the net charge-off rate was lower than a year ago. Among the major loan categories, credit card balances registered the largest dollar increase in net charge-offs this quarter. However, growth in credit card volume outpaced growth in charge-offs, causing the net charge-off rate for credit cards to decline 6 basis points to 3.71 percent in the fourth quarter. This remains well below the recent high of 13.21 percent reported in first quarter 2010.
"We continue to monitor trends in the agricultural sector. Commodity prices remain low, and net farm income has declined by roughly 50 percent since reaching its peak in 2013. Farmland loan delinquencies have ticked up, but remain relatively low.
"Chart 8 shows that the industry's reserve coverage ratio, which measures loan-loss reserves relative to total noncurrent loan balances, increased to 124.4 percent at the end of the fourth quarter. This is the highest reserve coverage ratio since first quarter 2007. The primary driver for the improvement in the reserve coverage ratio is a
"Chart 9 shows that the number of banks on the
"
"Chart 10 shows that the reserve ratio--the amount in the
"Small banks will receive credits for the portion of their assessments that contributed to growth in the reserve ratio from 1.15 percent to 1.35 percent. These credits amount to
"In summary, the banking industry reported positive results for the quarter. Higher net operating revenue and a lower effective tax rate increased net income. Loan balances grew, net interest margins improved, and the number of "problem banks" continued to decline.
"We will now answer any questions you have regarding fourth-quarter performance of the banking industry.
"Thank you.
"And with that, we will take questions."
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