2019 FDIC Risk Review

image of Val Stark

About the author
Val Stark

FDIC publishes an annual Risk Review that analyzes risks that may affect FDIC insured institutions focusing on community banks. The credit risk areas explained in the article are agriculture, commercial real estate, energy, and housing, amongst others.

FDIC insured institutions revealed an overall strong financial condition in 2018 with no failures during that year. Net income was a record high for the year totaling $236.7 billion. This number was derived from higher net operating revenue and a lower effective tax rate. Community banks showed steady loan growth, even though slower growth in the overall economy is starting to affect the banking industry. Real estate transactions, as well as agricultural loans, have been affected the most.

Mergers and acquisitions were at a high for the first time since 2015 (230 charters were merged, and seven were acquired by credit unions). Additionally, eight new charters were formed in 2018, which was another peak since 2010.

As previously stated, the main credit risk topics are:

  1. Agriculture – FDIC believes the slowdown in the agricultural sector presents a significant risk to the US economy (low commodity prices and farm income). Farm banks represent one-fourth of banks in the country. While credit quality has shown deterioration, consistent farmland values have prevented major losses.
  2. Commercial Real Estate – the overall CRE market is still considered satisfactory (low vacancy rates, high rents, and property prices). A major concern is the construction of new multi-family and industrial properties. Another matter is the competition between institutions for strong CRE loans.
  3. Energy – 2018 showed significant improvement from the downturn in 2014-2016 setting record high numbers in US oil production. However, banks that were affected by the crisis during those years are susceptible to future downturn.
  4. Housing – The residential mortgage market has slowed down. Even though residential mortgage concentrations declined in the banking industry, they are still elevated in many community banks. Concerns are related to a decline in affordable prices related to the slowdown.

Even though there are several areas of concern in the community bank industry, it appears banks have been diligent in addressing the risks by establishing proper processes and procedures to prevent losses.

Click here to access the complete report.