Commercial banks and savings institutions insured by the FDIC reported aggregate net income of $40.4 billion in the third quarter of 2015, up $1.9 billion (5.1%) from a year earlier. The increase in earnings was mainly attributable to a $3.2 billion decline in noninterest expenses, as itemized litigation expenses at large banks were $2.7 billion lower than a year ago.

Of the 6,270 insured institutions reporting third quarter financial results, more than half (58.9%) reported year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable during the third quarter fell to 5%, down from 6.6% a year earlier and the lowest since the first quarter of 2005.

FDIC chairman Martin J. Gruenberg said, “Most performance indicators continued to show improvement. Earnings were up from a year ago, loan portfolios grew, asset quality improved, the number of problem banks declined, and only one insured institution failed.”

“While the banking industry had another positive quarter, there are signs of growing interest-rate risk and credit risk that warrant attention,” he continued. “History tells us that it is during this phase of the credit cycle when lending decisions are made that could lead to future losses. Timely attention by banks to address these growing risks will benefit banks and contribute to the sustainability of the current economic expansion.”

The following highlights were excerpted from the news release:

• The FDIC said the average net interest margin (the difference between the average yield on banks’ interest-earning investments and the average interest expense of funding those investments) rose slightly to 3.08% in the third quarter from 3.07% in the second quarter, but remained below the 3.15% average reported in the third quarter of 2014.
• To mitigate the impact of low rates on net interest margins, the FDIC noted that banks continue to lengthen asset maturities, contributing to a growing mismatch between longer maturity assets and shorter maturity sources of funding. This growing mismatch is important because when interest rates rise, the cost of funding liabilities tends to re-price more rapidly than the yield on assets, causing further compression to the net interest margin. The percentage of loans and securities with maturities of three or more years rose from 34.2% to 34.6% during the third quarter. This is the highest percentage in the 18 years for which these data have been available.
• Total loan and lease balances increased $95.3 billion (1.1%) during the third quarter. For the 12 months ended September 30, loans and leases increased $482.2 billion (5.9%). This is the largest 12-month growth rate since mid-2007 to mid-2008. At community banks, loan balances rose 1.9% during the third quarter of 2015 and increased 8.5% during the past 12 months.