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Higher Provision Expenses Take Toll on Q2 U.S. Bank Earnings, FDIC Says

August 26, 2020, 09:05 AM
Filed Under: Banking News
Related: FDIC

The banking industry reported quarterly net income of $18.8 billion during the second quarter, a 70 percent decline from one year ago, according to data released by The Federal Deposit Insurance Corp.  Slightly less than one-half of all banks reported annual declines in net income, and 5.4 percent of institutions were unprofitable. The industry’s return-on-assets ratio was 0.36 percent in the second quarter, down from 1.38 percent a year ago.

The decline in earnings was primarily the result of higher provision expenses. As a result of the continued economic uncertainty, provision expenses totaled $62 billion during the second quarter, an increase of 382 percent from one year ago. This high level of provisions is a continuation of first quarter trends when provisions totaled $53 billion.

Community banks reported quarterly net income of $6.6 billion in the second quarter, an increase of 3.2 percent from a year ago. While an increase in provision expense limited their profitability, gains on loan sales boosted overall community bank net income.

The average net interest margin for the industry declined 58 basis points to 2.81 percent in the second quarter, the lowest level ever reported in the Quarterly Banking Profile (QBP). The narrowing of the average net interest margin was broad-based, as it fell for banks of all size groups featured in the QBP. The decline was attributable to asset yields declining more rapidly than funding costs, as well as an increase in the volume of lower-yielding assets, such as balances due from depository institutions.

The quarterly results were mixed among the major loan categories. The commercial and industrial (C&I) loan portfolio reported the largest quarterly dollar increase of $146.5 billion. The implementation of the PPP in the second quarter drove this growth, with $482 billion in PPP loans on banks’ balance sheets at the end of the quarter. Consumer loans, on the other hand, declined by $67.1 billion during the quarter, driven by lower consumer spending and a decline in credit card loan balances.

Loan growth at community banks was stronger than the overall industry, with total loan volume rising by 13.5 percent from a year ago. The annual increase was led by growth in the C&I loan portfolio and community banks’ participation in the PPP. Community banks hold 31 percent of PPP loans, which significantly exceeds their 12 percent share of industry assets. Community bank C&I loans increased $143.1 billion, or 69.6 percent, in the second quarter, from one year earlier.

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