STT State Street Corporation

By Donna Borak 

WASHINGTON -- The federal fund that protects consumers' U.S. bank deposits reached its highest level since the financial crisis, surpassing a key threshold that means relief for many smaller lenders that pay into it.

On Tuesday, the Federal Deposit Insurance Corp. said its deposit-insurance fund stood at $77.9 billion at the end of the second quarter and its insurance fund reserve ratio surpassed a critical threshold of 1.15% of the institutions' estimated insured deposits.

The growth of the fund, which is made up of premiums collected from banks, means that the 93% of institutions that have less than $10 billion in assets will pay less into the fund starting in the current quarter than they did before. All banks were required to pay a premium until the deposit fund surpassed the 1.15% threshold mandated under the 2010 Dodd-Frank financial overhaul law. Under the law, once the threshold is surpassed, smaller banks get to pay less.

Additionally, the number of financial institutions on the FDIC's "problem list" shrank to 147, the lowest in more than seven years. Two banks failed during the second quarter.

Tuesday's figures contrast with the fund's $20.9 billion deficit at the end of 2009, as a flood of bank failures squeezed agency resources. At the time, the depletion of the agency's fund stoked fears the FDIC might need to tap its credit line with the Treasury Department.

"This marks a significant milestone for the fund, which fell into negative territory following the financial crisis," said FDIC Chairman Martin Gruenberg.

The Dodd-Frank law requires the fund to reach a minimum ratio of 1.35% by the end of the third quarter of 2020. It mandates that banks with $10 billion or more in total assets bear the cost of increasing the reserve ratio from 1.15% to 1.35%. The reserve ratio was 1.17% on June 30, the FDIC said.

Earlier this year, the FDIC approved a rule imposing a surcharge on large banks. Those banks will have to begin paying quarterly surcharges, in addition to lower regular risk assessments, starting in the third quarter.

The agency projects the reserve ratio will reach 1.35% in 2018, at which point the FDIC will stop collecting surcharges on large banks.

The disclosure came on the same day that the FDIC released its report card for the nation's commercial banks and savings institutions, which reported a 1.4% year-over-year rise in net income in the second quarter.

"The second quarter was a solid one for banks as lending rose sharply to meet increased demand," said James Chessen, chief economist for the American Bankers Association, a trade group representing the country's banks. "With interest rates still far below normal, loan demand was strong practically across the board. While loan growth was a key earnings driver, noninterest income also played an important role, boosted by a strong increase in trading revenue."

Gains in noninterest income were driven by a 25% rise in trading income from the year-ago period to $1.4 billion, offsetting a 74%, or $3.4 billion, decline in servicing income in the most recent quarter.

Net income at the 6,058 banks insured by the FDIC rose $584 million to $43.6 billion in the second quarter from $43 billion a year earlier, according to the agency.

"Income and revenue both increased from a year ago, loan growth remained strong, the number of unprofitable banks was at an 18-year low, and there were fewer banks on the problem list," Mr. Gruenberg said, noting that community banks' revenue, income and lending continues to improve.

The rise in net income was in part because of a $5.2 billion increase in net interest income and a $981 million decline in expenses for litigation put aside at a few large banks, including J.P. Morgan Chase & Co., Citigroup Inc. and State Street Corp. Banks also increased their loan-loss provisions by 44% from a year earlier to $3.6 billion, driven in part by rising levels of troubled loans to commercial and industrial borrowers in the energy sector.

In the second quarter, the number of loan payments by commercial and industrial borrowers that were past due rose 8.9% to $2.1 billion, as low energy prices continued to challenge oil and gas producers. Mr. Gruenberg reiterated that the full impact of low energy prices remains to be seen on the banking industry.

"Banks are still operating in a challenging environment," he said. "Net interest margins and return on assets remained low by historical standards, noncurrent commercial and industrial loans increased, and loan charge-offs rose for a third consecutive quarter."

Community banks, which account for 5,602 of the insured institutions, fared better than the industry overall, reporting a 9% rise in earnings in the second quarter to $5.5 billion. Net operating income in the quarter rose 7.1% to $22.8 billion from the second quarter of 2015. Those banks have continued to hold larger shares of longer-term assets on their balance sheets compared with the rest of the industry, according to the agency. Doing so helps them sustain their net interest margins in the low-interest-rate environment.

Write to Donna Borak at donna.borak@wsj.com

(END) Dow Jones Newswires

August 30, 2016 19:27 ET (23:27 GMT)

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