PROVIDENCE – Reports from 4,539 commercial banks and savings institutions insured by the Federal Deposit Insurance Corp. show that those banks had a combined $71.5 billion in net income in the second quarter, an increase of $7.3 billion – or 11.4% – over the previous quarter.
A decline in noninterest expense – down $3.6 billion, or 2.4% – along with higher noninterest income – up $1.2 billion, or 1.5% – and higher gains on the sale of securities – up $937 million – were the primary factors driving the increase in net income, according to the FDIC’s Quarterly Banking Profile released on Sept. 5.
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More specifically, the quarterly increase in net income was largely driven by nonrecurring items, including an estimated $4 billion reduction in reported expense related to an FDIC special assessment, approximately $10 billion in gains on equity security transactions by large banks, and the sale of an institution’s insurance division that resulted in an after-tax $4.9 billion gain.
These increases were partially offset by several large banks selling bond portfolios at a loss and a $2.7 billion increase in provision expense, the FDIC said.
The banking industry reported an aggregate return-on-assets ratio of 1.20% in the second quarter, up 12 basis points from the first quarter but down one basis point from the second quarter of 2023, the agency said.
Community banks also reported an increase in net income quarter over quarter.
Net income for the 4,104 community banks insured by the FDIC was $6.4 billion in the second quarter, an increase of $72.6 million (1.1%) from the first quarter. Higher net interest income – up $546.4 million, or 2.7% – and higher noninterest income – up $253.9 million, or 5% – more than offset higher noninterest expense – up $365.7 million, or 2.1% – and higher provision expenses – up $140.5 million, or 18.2%. The community bank pretax return-on-assets ratio increased one basis point from last quarter to 1.14%.
The American Bankers Association touted the data as a signal that U.S. banks are weathering some economic headwinds.
“The latest FDIC Quarterly Banking Profile indicates that the banking industry remains resilient as it continues to support growth while navigating economic uncertainty,” said Sayee Srinivasan, ABA chief economist.
The industry’s net interest margin – a key metric that indicates the difference between the interest income generated and the amount paid out – declined slightly for the quarter, down one basis point to 3.16% in the second quarter.
The FDIC said the margin increased quarter over quarter for all size groups except for the largest banks – those with assets over $250 billion – who in aggregate reported a four-basis-point decline.
The community bank net interest margin of 3.30% increased seven basis points quarter over quarter, reversing a five-quarter declining trend but was still 33 basis points lower than the pre-COVID-19 pandemic average.
The FDIC said asset quality metrics remained generally favorable, although charge-offs increased.
Noncurrent loans, or loans that are 90 days or more past due or in nonaccrual status, remained unchanged from the prior quarter at 0.91% of total loans and well below the pre-pandemic average of 1.28%. However, the noncurrent rate for non-owner occupied commercial real estate loans of 1.77% was at its highest level since the third quarter of 2013, driven by office portfolios at the largest banks, the FDIC said.
The industry’s net charge-off rate increased three basis points to 0.68% from the prior quarter and was 20 basis points higher than the year-ago quarter. This ratio was also 20 basis points above the pre-pandemic average and remained the highest quarterly rate reported by the industry since the second quarter of 2013. The credit card net charge-off rate was 4.82% in the second quarter, up 13 basis points quarter over quarter and the highest rate reported since the third quarter of 2011.
Loan balances increased from the prior quarter and a year ago.
Total loan and lease balances increased $125.8 billion – 1% – from the previous quarter.
The increase was driven by higher loans to non-depository financial institutions – up $76 billion, or 9.6% – and consumer loans – up $25.8 billion, or 1.2%. Much of the growth in lending appeared to be due to reclassification from other existing loan categories, the FDIC said. The majority of banks – 75.1% – reported quarterly loan growth, and all major loan categories except construction and development loans showed quarter-over-quarter growth.
Community banks reported a 1.7% increase in loan and lease balances from the previous quarter and a 6.3% increase from the prior year, the FDIC said. Growth in nonfarm, nonresidential commercial real estate loans and one- to four-unit residential mortgage loans drove both the quarterly and annual increases in loan and lease balances. Loan growth was broad-based across community banks with over three quarters of such banks reporting higher loan balances from the prior quarter.
The FDIC said domestic deposits decreased $197.7 billion – 1.1% – from the first quarter, well below the pre-pandemic average second-quarter growth of 0.2%. Both savings and transaction deposits declined from the prior quarter, with growth in small-time deposits partially offsetting the declines. Brokered deposits decreased for the second straight quarter, down $10.1 billion – 0.8% – from the prior quarter. Banks with over $250 billion in assets drove the quarterly decline in deposits.
