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From Banking and Finance Law Daily, February 24, 2016

Banks report increased earnings, Gruenberg still calls for ‘vigilance’

By Lisa M. Goolik, J.D.

Earnings reported by commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation continued to improve in the fourth quarter of 2015, with reported aggregate net income of $40.8 billion—up $4.4 billion from earnings of $36.5 billion a year earlier. Despite the overall positive results, FDIC Chairman Martin J. Gruenberg cautioned banks to “remain vigilant as they manage interest rate risk, credit risk, and evolving market conditions.”

Community banks improve. According to the FDIC’s Quarterly Banking Profile, community bank earnings and revenue also improved in the fourth quarter. The 5,735 self-identified community banks reported $5.1 billion in net income, an increase of 4 percent from the fourth quarter of 2014. In addition, net operating revenue of $22.6 billion at community banks was $1.6 billion (7.4 percent) higher than a year earlier.

Loan growth rates rise. In addition, total loan and lease balances increased more than $197 billion during the fourth quarter. For the 12 months ended December 31, loans and leases increased $530.1 billion—the largest 12-month growth rate since mid-2007 to mid-2008. At community banks, loan balances rose 2.5 percent during the fourth quarter of 2015 and increased 8.6 percent during the past 12 months. The FDIC credited the rising loan growth rates with lifting revenue at most banks, as net interest income rose 3.6 percent—$3.9 billion—from the fourth quarter of 2014.

Loan losses also rise. At the same time, loan losses posted the first year-over-year increase since second quarter of 2010 as net loan and lease charge-offs increased to $10.6 billion in the fourth quarter. The FDIC reported that net charge-offs of loans to commercial and industrial borrowers were $512 million (43.4 percent) higher than a year ago, while charge-offs of credit cards were $292 million (5.6 percent) higher. The average net charge-off rate for the fourth quarter was 0.49 percent, compared to 0.48 percent a year ago.

‘Problem List’ falls below 200 institutions. The number of insured institutions on the FDIC’s “Problem List” declined from 203 to 183 during the quarter, and total assets of problem institutions fell from $51.1 billion to $46.8 billion. In addition, the number of FDIC-insured commercial banks and savings institutions reporting quarterly financial results declined from 6,270 to 6,182 in the fourth quarter. For all of 2015, there were 305 mergers of insured institutions, one new charter was added, and eight banks failed.

Deposit Insurance Fund. The DIF rose $2.5 billion to $72.6 billion, largely driven by $2.2 billion in assessment income. The DIF reserve ratio rose from 1.09 percent to 1.11 percent during the quarter.

Gruenberg calls for “vigilance.” At a press conference releasing the quarterly report, Gruenberg stated that, overall, the banking industry improved in the fourth quarter, but cautioned that “the operating environment for banks remains challenging” due to exceptionally low interest rates and signs of growing interest rate risk and credit risk.

In addition, while Gruenberg stated that the banking industry is better-positioned to withstand less-favorable economic conditions, he noted that interest rate risk, credit risk, and evolving market conditions will continue to be a focus of ongoing supervisory attention.

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