Banking and Finance Law Daily FDIC releases Quarterly Banking Profile
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Wednesday, August 26, 2020

FDIC releases Quarterly Banking Profile

By Colleen M. Svelnis, J.D.

The second quarter banking profile shows a decrease in net income, which the agency attributes to the economic uncertainty surrounding the COVID-19 pandemic.

The Federal Deposit Insurance Corporation announced the release of its Quarterly Banking Profile for the second quarter of 2020, reporting that banks reported a decrease in net income of $43.7, down 70 percent from a year ago, while liquidity and capital levels remained strong to meet loan demand and absorb any losses in the future. The profile covers the 5,066 commercial banks and savings institutions insured by the FDIC, for which aggregate net income totaled $18.8 billion in second quarter 2020. The decline in net income is a continuation of uncertain economic conditions, which drove an increase in provision expenses. The average net interest margin fell by 58 basis points from a year ago to 2.81 percent, the lowest level ever reported in the Quarterly Banking Profile. Net interest income fell by $7.6 billion from second quarter 2019, marking a third consecutive quarterly decline.

Community Banks registered a 3.2 percent increase in net income from the previous year. Despite a 273 percent increase in provision expenses to $2.4 billion and continued net interest margin compression, more than half of all community banks reported higher net income.

According to remarks by FDIC Chairman Jelena McWilliams, "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." She noted, however, that the industry remains "a source of strength for the economy" even though economic stress related to the COVID-19 pandemic continues to affect bank earnings. McWilliams pointed out that banks originated more than $480 billion in Small Business Administration-guaranteed Paycheck Protection Program loans in the second quarter.

McWilliams discussed the effect of the rapid growth of deposits on the reserve ratio. Banks experienced their second consecutive quarter of over $1 trillion in new deposits, far exceeding deposit growth the FDIC has seen in the past. McWilliams stated that this demonstrates public confidence in the banking system. However, she noted, the rapid growth has been so substantial that, despite a $1.4 billion increase in the Deposit Insurance Fund (DIF)–resulting in a record balance of $114.7 billion–the DIF reserve ratio fell from 1.39 percent in first quarter to 1.30 percent, which is below the required minimum level of 1.35 percent.

McWilliams emphasized that the DIF has more money than at any time in the FDIC’s history, and stated that the reduction in the reserve ratio "was solely a result of the unprecedented increase in bank deposits." According to McWilliams, the deposit growth "is likely to normalize in the upcoming quarters and for the reserve ratio to rise above 1.35 percent without any need to modify assessment rates in the near-term."

Robert Strand, American Bankers Association Senior Economist, also issued a statement noting that "While lending in the second quarter of 2020 was up due to strong bank participation in the SBA's Paycheck Protection Program in support of small businesses, net interest income fell. As expected, loan quality in the quarter deteriorated due to the economic downtown. Banks continue to shore up provisions to prepare for tougher times ahead in anticipation of additional losses stemming from the pandemic. The record surge in deposits in the first half of the year reflects the continued trust consumers and businesses have in their banks during these uncertain times."

Consumer Bankers Association President and CEO Richard Hunt commented on the results, calling it "another sign of the banking industry’s strength throughout the COVID-19 pandemic. Banks of all sizes have joined together to support struggling communities, small businesses and customers during their time of need."

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