In the latest earnings report on the nation’s 5,177 institutions insured by the Federal Deposit Insurance Corp. (FDIC), a challenging interest rate environment in the fourth quarter slowed the pace of profit growth, but still led to the second-highest annual profits in banking history.
The banking industry reported profits of $233.1 billion in 2019, down 1.5 percent from the record level of $236.7 billion recorded in 2018. Fourth-quarter profits fell 6.9 percent to $55.2 billion as lower net interest income and higher expenses cut into profits, which had been on pace to top 2018 levels.
“The banking industry remains strong, despite declines in full-year and quarterly net income,” FDIC Chairman Jelena McWilliams said in a release accompanying the report. “Loan balances continue to rise, asset quality indicators are stable, and the number of ‘problem banks’ remains low.”
The decline in the fourth quarter was broad-based, the FDIC reported, with nearly half of all institutions reporting year-over-year declines in profits. The fourth quarter of 2018, at the time, was the third most profitable quarter in banking history; it since was surpassed by both the first and second quarters of 2019.
“The record-long economic expansion continued in the fourth quarter. However, with three reductions in short-term rates during the second half of 2019, challenges in lending and funding persisted,” McWilliams said. “The environment to attract and expand loan customers and depositors remains competitive and challenging. Consequently, banks need to maintain rigorous underwriting standards and prudent risk management.”
By contrast to the overall quarterly results, the 4,750 institutions classified as community banks collectively saw profits of $6.4 billion, up 4.4 percent from $6.13 billion in 2018. More than half of all community banks (53.9 percent) reported profit growth in the quarter.
For the full year, community banks showed profits rising 7.7 percent to $26.7 billion.
“Community banks reported another positive quarter,” McWilliams said. “Net income at community banks improved because of higher net operating revenue, and the annual loan growth rate at community banks exceeded the overall industry.”
Loan balances in the industry rose by $117.9 billion in the quarter. Loan balances rose 3.6 percent overall in 2019 from a year earlier. The FDIC said almost all of the major loan categories reported quarterly increases, except for the commercial and industrial loan portfolio, which reported the first quarterly decline since fourth quarter 2016. On an annual basis, the commercial and industrial loan portfolio grew at its lowest rate since 2010.
Loan growth at community banks was strong, with total loans rising by 5.5 percent from a year ago. The commercial real estate loan portfolio drove growth among community banks, with increases in loans for both existing properties and for construction and development.
The number of problem banks fell by four in the quarter to 51, the lowest level since the fourth quarter of 2006. Three banks failed in the quarter, offset by three new bank openings, for a total of 19 new banks in the year.
The Deposit Insurance Fund gained $1.4 billion from the previous quarter and the reserve ratio remained at 1.41 percent.