U.S. banks’ earnings jumped 7.3 percent in the April-June period from a year earlier, as revenues increased and the volume of soured loans banks had to write off fell to the lowest level since before the financial crisis.
The data issued Wednesday by the Federal Deposit Insurance Corp. showed continued improvement for the banking industry seven years after the crisis struck. The number of “problem” banks continued to fall and some big banks had reduced expenses for legal settlements following large amounts paid out previously to resolve crisis-related cases.
The FDIC reported that U.S. banks earned $43 billion in the second quarter, up from $40.1 billion a year earlier.
Nearly 60 percent of banks reported an increase in profit from a year earlier. Only 5.6 percent of banks were unprofitable.
“The banking industry had another positive quarter as recent trends have continued,” FDIC Chairman Martin Gruenberg said at a news conference. Still, he noted, low interest rates continued to crimp banks’ profit margins on loans during the April-June period.
Higher interest rates could be on the horizon if the Federal Reserve raises a key rate later this month. An increase by the Fed has been widely anticipated, but it has been thrown in doubt in recent weeks by global turmoil in stock markets fueled by economic disruption in China.
Banks are getting ready for higher interest rates, said James Chessen, chief economist at the American Bankers Association. Higher rates could increase the cost for banks to borrow to fund the loans they make. At the same time, bank customers seek long-term loans at low rates, Chessen noted in a statement.
Gruenberg said regulators are working on alerting banks to the potential financial risks of higher interest rates and how they need to address them.
The volume of loans that were written off in the second quarter fell $1.1 billion, or 11.2 percent, from the same period last year. The rate of those loans declined from 0.5 percent to 0.42 percent, the lowest level since the third quarter of 2006. Charged-off loans were down for all major categories except commercial and industrial loans, and auto loans, the FDIC reported.
Also, the amount of noncurrent loans, those 90 days or more past due, continued to improve. Lending overall grew by $437.8 billion, or 5.4 percent from last year’s second quarter – the largest percentage gain since mid-2008 and a sign of a healthy banking industry.
The number of banks on the FDIC’s confidential “problem list” fell to 228 from 253 in the first quarter. The number of banks requiring special monitoring by the agency’s examiners is down 75 percent from the peak of 888 registered in the first quarter of 2011.
Community banks scored strong earnings growth in the second quarter, surging 12 percent from the same period last year to $5.3 billion. They continued to show stronger growth in lending than the rest of the industry, the FDIC said.
The number of bank failures continues to slow, marking 18 last year. That is still more than normal. In a strong economy, an average of four or five banks close annually. But failures declined from 24 in 2013 and were down sharply from 157 in 2010 – the most in one year since the height of the savings-and-loan crisis in 1992.
So far this year, six banks have failed. Fourteen had been shuttered by this time last year.
The decline in bank failures has allowed the deposit-insurance fund to strengthen. The fund, which turned from deficit to positive in the second quarter of 2011, had a $67.6 billion balance at the end of June, according to the FDIC. That was up from $65.3 billion at the end of the first quarter.
The FDIC was created during the Great Depression to insure bank deposits. It monitors and examines the financial condition of U.S. banks. The agency guarantees bank deposits up to $250,000 per account.