6 takeaways as FDIC reports another record earnings quarter

Banks earned a record $60.2 billion in the second quarter, thanks to lower taxes resulting from last year’s legislative overhaul and growth in interest-related revenue, the Federal Deposit Insurance Corp. said in the Quarterly Banking Profile.

While a little more than half of the industry’s dollar-amount increase in net income was due to a lower corporate tax rate, rising net interest margins and higher loan balances are a sign that institutions continue to derive revenue from their loan book. The $10.7 billion increase in net interest income from the second quarter of 2017 was the highest year-over-year jump ever.

“It is worth noting that the current economic expansion is the second-longest on record, and the nation’s banks are stronger as a result,” FDIC Chairman Jelena McWilliams said in her first QBP presentation since joining the agency in June. “The competition to attract loan customers will be intense, and it will remain important for banks to maintain their underwriting discipline and credit standards.”

Here are six takeaways from the report:

Income grew on a lower tax rate and strong revenue

The FDIC attributed the 25% growth in net earnings, from a year earlier, to the lower effective tax rate resulting from last year's legislative overhaul of the tax code and higher net operating revenue. Without lower taxes, the agency estimated, earnings growth would only have been 11.7%. "A little more than half of the dollar increase in net income was attributable to tax reform," McWilliams said.

Net interest income was the rising tide that lifted (nearly) all boats

Over 80% of all banks reported higher revenue from a year earlier. Revenue was driven by strong net interest income, which rose by $10.7 billion, the largest year-over-year increase ever reported. The higher net interest income was due to both higher loan balances and improvement in net interest margins.

Margins rose overall, but community banks are losing their edge over bigger rivals

The industry's average quarterly net interest margin rose 16 basis points from a year earlier to 3.38%. More than two out of three banks reported better margins. Community banks' margins were even stronger, totaling an average of 3.69%, but McWilliams noted that that "gap has been narrowing" as bigger banks benefit more from rising interest rates.

C&I loan growth has decelerated

Total loans grew by just over 1% from the first quarter, totaling $9.8 trillion, with quarterly increases in all major categories. Loans grew year over year by 4.2%, which was slightly off the 4.9% growth rate in the previous quarter. Commercial and industrial loans grew 1.2% over the quarter and 4.8% from a year earlier, totaling $2.08 trillion. But the industry's dollar-amount growth in C&I loans has slowed compared to past quarters.

The industry's 'coverage ratio' is on an upswing

Loan-loss provisions declined 2.4% from a year earlier to $11.7 billion, which was 5.8% of net operating revenue, the lowest percentage since the third quarter of 2015. Overall, loan-loss reserves declined 0.3% from the previous quarter to $123.4 billion. But as noncurrent loans fell at a faster rate, the coverage ratio was 117.7%, up from 110% in the first quarter.

FDIC's Deposit Insurance Fund is almost where it needs to be

The Deposit Insurance Fund's ratio of reserves to insured deposits totaled 1.33%, an increase of 3 basis points from the first quarter. The reserve ratio in the second quarter was the highest it has been since March 2004. Following the financial crisis, the FDIC was required by law to get the ratio up to 1.35%, which the agency expects to reach this year.