WASHINGTON — The banking industry earned $34.5 billion in the second quarter as continued declines in loan loss expenses outpaced a reduction in net interest margins, the Federal Deposit Insurance Corp. said Tuesday.
The FDIC's Quarterly Banking Profile also provided encouraging news about loan growth, as total loan balances increased by 1.4% during the quarter to $7.5 trillion. It was the fourth time in the last five quarters that loans grew.
Net operating revenue was $1.3 billion higher than it was a year earlier, an increase of 0.8%. Nearly two out of every three institutions had higher earnings than a year earlier.
But the report indicated that, as has been in the case for several quarters in the row, improvements in asset quality were the primary driver of earnings. (In the second quarter, institutions posted their 12th straight year-over-increase in quarterly net income.)
"The industry continues to recover at a gradual, but steady, pace," Acting FDIC Chairman Martin Gruenberg said in remarks prepared for Tuesday's release of the QBP. "This recovery features rising profitability attributable primarily to improving asset quality."
The $14.2 billion set aside in loan loss provisions was 26% lower than in the second quarter of 2011, and was the lowest amount of quarterly provisions in five years. Meanwhile, noncurrent loans fell for the ninth straight quarter, dropping 4.2% during the quarter to $292 billion.
The improved asset quality helped overcome a drain on the industry's net interest income, which fell by 0.3%, or $287 million, compared to a year earlier to $105.6 billion. The average net interest margin of 3.46% was a three-year low, and was 15 basis points lower than a year earlier, as "average asset yields declined faster than average funding costs," the agency said.
"In the current environment of extremely low interest rates, older, higher-yielding assets are maturing, and are being replaced by lower-yielding investments," Gruenberg said.
Meanwhile, banks' total equity increased by 1.3% during the quarter, driven by an infusion of $14.9 billion in retained earnings. The FDIC said it was the second-highest total for retained earnings since the third quarter of 2006.
The industry finished its fourth consecutive quarter without adding a new charter. Institutions on the "Problem" list fell by 40 to 732, and assets for those on the list declined by 3% to $282 billion. The Deposit Insurance Fund's ratio of reserves to insured deposits increased 10 basis points to 0.32%.
