FDIC-Insured Institutions Reported Net Income Of US$70.8 Billion In Second Quarter 2023

 “Despite the period of stress earlier this year, the banking industry continues to be resilient. In the second quarter, key banking industry metrics were favorable. Net income remained high by historical measures, asset quality metrics were stable, and the industry remained well capitalized.  However, the banking industry still faces significant challenges from the effects of inflation, rising market interest rates, and geopolitical uncertainty. These risks, combined with concerns about commercial real estate fundamentals, especially in office markets, as well as pressure on funding levels and net interest margins, will be matters of continued supervisory attention by the FDIC,”according to FDIC Chairman Martin J. Gruenberg.

Reports from 4,645 commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reflect aggregate net income of US$70.8 billion in second quarter 2023.  Though second-quarter net income decreased by US$9.0 billion (11.3 per cent) from first quarter 2023, 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.  These and other financial results for second quarter 2023 are included in the FDIC’s latest Quarterly Banking Profile released today.

Highlights from the Second Quarter 2023 Quarterly Banking Profile

QBP Quarterly 2023 2nd Quarter

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 US$9.0 billion (11.3 per cent) from one quarter ago to US$70.8 billion in second quarter 2023.   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.  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 per cent higher than the year-ago quarter as growth in net interest income exceeded growth in provision expense and noninterest expense.

The banking industry reported an average return on assets (ROA) of 1.21 per cent in the second quarter, down from 1.36 per cent in first quarter 2023 but up from 1.08 per cent in second quarter 2022.

The Net Interest Margin Declined for the Second Straight Quarter:  Following a decline of 7 basis points in the first quarter, the net interest margin (NIM) declined 3 basis points to 3.28 per cent in the second quarter.  The NIM remains 48 basis points higher than the year-ago quarter and above the pre-pandemic average of 3.25 per cent.

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 per cent, while the cost of funds increased 43 basis points to 2.05 per cent.

Unrealized Losses on Securities Increased Quarter Over Quarter: Unrealized losses on securities totaled US$558.4 billion in the second quarter, up US$42.9 billion (8.3 per cent) from the prior quarter. Unrealized losses on held-to-maturity securities totaled US$309.6 billion in the second quarter, while unrealized losses on available-for-sale securities totaled US$248.9 billion.

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 US$236.2 million (3.4 per cent) from first quarter 2023 to US$7.1 billion in second quarter 2023.  Higher noninterest income and lower losses on the sale of securities more than offset lower net interest income and higher noninterest expense.  Second quarter net income rose US$50.6 million (0.7 per cent) 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 per cent but declined 7 basis points from a year ago. 

The community bank NIM declined 10 basis points from the prior quarter but increased 5 basis points from the year-ago quarter to 3.39 per cent.  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 US$86.5 billion (0.7 per cent) from the previous quarter.  An increase in credit card loans (up US$45.0 billion, or 4.6 per cent) and loans to nondepository financial institutions (up US$24.3 billion, or 3.2 per cent) drove loan growth.

Year over year, total loan and lease balances increased US$526.8 billion (4.5 per cent).  One-to-four family residential loans (up US$158.5 billion, or 6.7 per cent) and credit card loans (up US$124.4 billion, or 13.8 per cent) led loan growth during the year ending second quarter.

Community banks reported a 2.6 per cent increase in loan balances from the previous quarter and a 12.5 per cent 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.

Total Deposits Declined for a Fifth Consecutive Quarter: Total deposits declined US$98.6 billion (0.5 per cent) 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 US$180.6 billion, or 2.5 per cent) drove the quarterly decline. Estimated insured deposits (up US$84.9 billion, or 0.8 per cent) 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 per cent of total loans, up 1 basis point from the prior quarter.  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 7 basis points from the prior quarter and 25 basis points from a year prior to 0.48 per cent. 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 per cent: The Deposit Insurance Fund (DIF) balance was US$117.0 billion on June 30, 2023, up US$897 million from the end of first quarter 2023, largely reflecting increased assessment income.  When combined with insured deposit growth of 0.8 per cent over the quarter, the reserve ratio decreased 1 basis point to 1.10 per cent.

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 Call Report.