Bank net income falls 70% in second quarter, FDIC report shows

Commercial banks and savings institutions reported Tuesday (Aug. 25) net income decreased 70% in the second quarter while liquidity and capital levels remained strong to meet loan demand and to absorb any losses, according to the Federal Deposit Insurance Corp. (FDIC)

The 5,066 commercial banks and savings institutions insured by the FDIC reported aggregate net income fell to $18.8 billion in the second quarter, from $43.7 billion in the same period in 2019. The net income decline can be attributed to continued economic uncertainty, leading to a rise in provision expenses. Second-quarter financial results were included in the FDIC’s Quarterly Banking Profile released Tuesday.

“Lower levels of business activity and consumer spending – combined with uncertainty about the path of the economy and the low interest-rate environment – contributed to higher provisions for loan and lease losses, as well as a decrease in net interest margins,” FDIC Chairman Jelena McWilliams said. “Notwithstanding these disruptions, however, the banking industry maintained strong capital and liquidity levels at the end of the second quarter, which will protect against potential losses in the future.

“Although economic stress related to the COVID-19 pandemic continued to affect bank earnings, the industry had remained a source of strength for the economy,” McWilliams added. “Banks of all sizes supported their customers and communities, including by originating more than $480 billion in Paycheck Protection Program (PPP) loans in the second quarter.”

The second-quarter decline in net income can be attributed to a rise in provision expenses of $49.1 billion to $61.9 billion. Less than half, or 47.5%, of all institutions reported annual declines in net income. The share of unprofitable institutions rose to 5.4% from a year ago. The average return on assets ratio declined to 0.36% in the second quarter, from 1.38% in the same period in 2019.

The average net interest margin fell from 3.39% to 2.81%, the lowest level reported in the Quarterly Banking Profile. Net interest income fell 5.4%, or by $7.6 billion, in the second quarter, marking the third consecutive quarterly decline. The 1.19-percentage point decline in yields on earnings assets contributed to the decrease in net interest income. Less than half, or 42.2%, of all banks reported annual declines in net interest income.

Community banks posted a 3.2% increase in net income in the second quarter. Reports from 4,624 FDIC-insured community banks showed an annual net income growth of $202.5 million. More than half of all community banks reported higher net income as provision expenses rose 273% to $2.4 billion and net interest margin continued to compress. The rise could be attributed to higher revenue from gains on the sale of loans that were up 142.2%, or $1.4 billion, and gains on the sale of securities that were up 130.7%, or $299.8 million.

Community banks noted loan growth of 13.5% as a result of PPP lending activity. The net interest margin for community banks fell to 3.51% in the second quarter, from 3.68% in the same period in 2019, as the decline in average earning asset yields exceeded the decrease in funding costs.

Total loan and lease balances increased 0.3%, or by $33.9 billion, from the previous quarter. Quarterly results were mixed among the major loan categories. The commercial and industrial loan portfolio reported the largest quarterly dollar increase, up 5.8% or by $146.5 billion. Most of the growth can be attributed to the PPP as $482.2 billion in credit was extended by the banking industry to businesses. Consumer loans fell $67.1 billion because of reductions in credit card balances. Over the past 12 months, total loan and lease balances rose by 6.7%, down from the annual growth rate of 8% in the previous quarter.

The total noncurrent loan rate, or those that are 90 days or more past due or in nonaccrual status, increased to 1.08%, from 0.93% in the previous quarter. Total noncurrent loans rose 15.5%, or by $15.9 billion, from the previous quarter. The total net charge-off rate increased to 0.57%, from 0.64% in the same period last year, while net charge-offs increased by 22.2%, or by $2.8 billion, over the same period.

The Deposit Insurance Fund balance rose by $1.4 billion to a record $114.7 billion in the second quarter, from the previous period. Assessment income had the largest impact on the quarterly increase. Because of an influx of more than $1 trillion in new deposits, the reserve ratio fell to 1.3% in the second quarter, from 1.39% in the previous quarter.

In the second quarter, one new bank opened and one bank failed, while 47 institutions were absorbed through mergers.

ARKANSAS NUMBERS
Arkansas’ 86 FDIC-insured banks and financial institutions together posted net income of $517 million for the six-month period ended June 30, down 36% from $807 million in the first six months of 2019. Altogether, those Arkansas banks and saving institutions have total assets of $130.2 billion through June this year, a 16.8% gain from $111.4 billion in the year-ago period.