WASHINGTON— The nation’s 4,645 federally insured commercial banks and savings institutions reported aggregate net income of $70.8 billion in second quarter 2023, a decrease of $9.0 billion (11.3%) from Q1 2023.
However, the FDIC noted that after excluding the effects on acquirers’ incomes of their acquisition of three failed banks in 2023, quarter-over-quarter net income would have been roughly flat for the second consecutive quarter.
Declines in noninterest income, reflecting the accounting treatment of the acquisition of three failed institutions, lower net interest income, and higher provision expenses were the drivers of the decline in net income, the FDIC explained.
The new data and other financial results for second quarter 2023 were included in the FDIC’s latest Quarterly Banking Profile.
Highlights from the report include:
Quarterly Net Income Declined Quarter Over Quarter but Increased Year Over Year
Net income for the 4,645 FDIC-insured commercial banks and savings institutions declined $9.0 billion (11.3%) from one quarter ago to $70.8 billion in second quarter 2023, the regulators/insurer said.
“Declines in noninterest income, reflecting the accounting treatment of the acquisition of three failed institutions, lower net interest income, and higher provision expense drove the decrease,” according to the FDIC. “Without the three failed-bank acquisitions in the past two quarters, net income would have been roughly flat from the prior quarter. With these adjustments, second quarter 2023 net income was 5.7% higher than the year-ago quarter as growth in net interest income exceeded growth in provision expense and noninterest expense.”
The report shows the banking industry reported an average return on assets (ROA) of 1.21% in the second quarter, down from 1.36% in first quarter 2023, but up from 1.08% in second quarter 2022.
The Net Interest Margin Declined for the Second Straight Quarter
Following a decline of seven basis points in the first quarter, the net interest margin (NIM) declined three basis points to 3.28% in the second quarter, the report states.
“The NIM remains 48 basis points higher than the year-ago quarter and above the pre-pandemic average of 3.25%,” the FDIC said. “The decline in the NIM reflects the cost of funds (i.e., the interest banks pay on deposits and other borrowings) rising at a faster rate than the yield on earning assets (i.e., the interest banks earn on loans and securities). The yield on earning assets increased 40 basis points from first quarter 2023 to 5.32%, while the cost of funds increased 43 basis points to 2.05%.”
Unrealized Losses on Securities Increased Quarter Over Quarter
Unrealized losses on securities totaled $558.4 billion in the second quarter, up $42.9 billion (8.3%) from the prior quarter. Unrealized losses on held-to-maturity securities totaled $309.6 billion in the second quarter, while unrealized losses on available-for-sale securities totaled $248.9 billion, the FDIC data show.
Community Bank Net Income Improved From the Prior Quarter and One Year Ago
Quarterly net income for the 4,198 community banks insured by the FDIC increased by $236.2 million (3.4%) from first quarter 2023 to $7.1 billion in second quarter 2023, the FDIC said.
“Higher noninterest income and lower losses on the sale of securities more than offset lower net interest income and higher noninterest expense,” according to the FDIC. “Second quarter net income rose $50.6 million (0.7%) from the year-ago quarter as higher net interest income offset higher noninterest expense. The community bank pretax ROA rose 1 basis point from one quarter ago to 1.28% but declined seven basis points from a year ago.”
In addition, the FDIC reported the community bank NIM declined 10 basis points from the prior quarter but increased five basis points from the year-ago quarter to 3.39%. The yield on earning assets rose 27 basis points quarter over quarter and 136 basis points year over year, while the cost of funds increased 37 basis points quarter over quarter and 131 basis points year over year.
Loan Balances Increased From Last Quarter and From One Year Ago
Total loan and lease balances increased $86.5 billion (0.7%) from the previous quarter.
“An increase in credit card loans (up $45.0 billion, or 4.6%) and loans to non-depository financial institutions (up $24.3 billion, or 3.2%) drove loan growth,” the FDIC report found. “Year over year, total loan and lease balances increased $526.8 billion (4.5%). One-to-four family residential loans (up $158.5 billion, or 6.7%) and credit card loans (up $124.4 billion, or 13.8%) led loan growth during the year ending second quarter.”
Community banks reported a 2.6% increase in loan balances from the previous quarter and a 12.5% increase from the prior year. Growth in 1-4 family residential mortgages and nonfarm, nonresidential commercial real estate mortgages drove both the quarterly and annual increases in loan balances, the report states.
Total Deposits Declined for a Fifth Consecutive Quarter
According to the report, deposits declined $98.6 billion (0.5%) between first and second quarter 2023.
“This was the fifth consecutive quarter that the industry reported lower levels of total deposits. A reduction in estimated uninsured deposits (down $180.6 billion, or 2.5%) drove the quarterly decline,” the FDIC said. “Estimated insured deposits (up $84.9 billion, or 0.8%) continued to increase during the quarter.”
Asset Quality Metrics Remained Favorable Despite Modest Deterioration
“Loans that were 90 days or more past due or in nonaccrual status (i.e., noncurrent loans) increased to 0.76% of total loans, up 1 basis point from the prior quarter,” the FDIC said. “Noncurrent nonfarm, nonresidential commercial real estate loan balances drove the increase in the noncurrent rate. Net charge-offs as a ratio of total loans increased seven basis points from the prior quarter and 25 basis points from a year prior to 0.48%. The industry’s net charge-off rate is now equal to its pre-pandemic average.”
The Reserve Ratio for the Deposit Insurance Fund Declined to 1.10%
The Deposit Insurance Fund (DIF) balance was $117.0 billion on June 30, 2023, up $897 million from the end of first quarter 2023, largely reflecting increased assessment income, according to the FDIC, which said when combined with insured deposit growth of 0.8% over the quarter, the reserve ratio decreased one basis point to 1.10%.
Merger Activity Continued in the Second Quarter
In the second quarter, two banks opened, one bank failed, and 27 institutions merged. In addition, one bank that failed during the third quarter did not file a second quarter 2023, the FDIC reported.
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