Drop in provision expense drives banks’ Q2 net income to $70.4 billion, FDIC says; net interest margin hits record low

Federally insured banks and savings institutions netted $70.4 billion in income during the second quarter of 2021, up $51.9 billion, or 281%, from the same quarter a year ago and due primarily to a $73 billion (117.3%) decline in provision expense, the federal bank deposit insurer reported Wednesday.

However, the Federal Deposit Insurance Corp. (FDIC) said net income declined $6.4 billion, or 8.3%, from first quarter 2021, driven by an increase in provision expense from first quarter 2021, which was up $3.7 billion to negative $10.8 billion.

The FDIC reported continued improvement in asset quality but a continued decline in average net interest margin, which fell 31 basis points from a year ago to 2.50%. The FDIC said that was the lowest net interest margin level on record and was accompanied by a $2.2 billion, or 1.7%, decline in net interest income from the same quarter a year ago.

“The banking industry reported strong earnings in second quarter 2021, supported by continued economic growth and further improvements in credit quality,” FDIC Chairman Jelena McWilliams said in a statement. She also noted the first, if modest, increase in total loan balances since second quarter 2020 and a record low net charge-off rate. She said persistent low interest rates contributed to the further contraction in average net interest margin.

The FDIC also reported:

  • Nearly two-thirds of all banks (66.4%) reported annual improvements in quarterly net income, and the share of profitable institutions increased slightly, up 1.4% year over year to 95.8%.
  • The banking industry reported an aggregate return on average assets ratio of 1.24%, up 89 basis points from a year ago but down 14 basis points from first quarter 2021.
  • The year-over-year reduction in earning asset yields continued to outpace the decline in average funding costs, both of which declined further from first quarter 2021 to record lows. Reductions in net interest income at the largest institutions drove the aggregate decline in net interest income; more than three-fifths of all banks (64.1%) reported higher net interest income compared with a year ago.
  • Community banks reported a 28.7% increase in quarterly net income year over year. More than half (53.1%) of the 4,490 FDIC-insured community banks reported higher quarterly net income. However, these banks’ net interest margin narrowed further, dropping 26 basis points to 3.25%. Community banks’ reported annual net income growth of $1.9 billion was supported by a decline in provision expense and an increase in net interest income.
  • Total loan and lease balances increased $33.2 billion (0.3%) from the previous quarter. This first quarterly increase in loan volume since second quarter 2020 was driven by an increase in credit card loan balances (up $30.9 billion, or 4.1%), supplemented by an increase in auto loan balances (up $18.9 billion, or 3.8%); year over year, loan volume declined $133.9 billion, or 1.2%, driven by a 13.4% reduction in commercial and industrial (C&I) loans. By contrast, community banks reported a 0.5% decline in loan balances from the previous quarter and a 0.3% increase year over year in total loans and leases.
  • Credit quality continued to improve. Loans that were 90 days or more past due or in nonaccrual status (i.e., noncurrent loans) continued to decline (down $13.2 billion, or 10.8%) from first quarter 2021; the noncurrent rate for total loans declined 12 basis points to 1.01%. Net charge-offs continued to decline (down $8.3 billion, or 53.2%) from a year ago; the total net charge-off rate dropped 30 basis points to 0.27% – the lowest level on record.

The FDIC also said the Deposit Insurance Fund (DIF) reserve ratio grew 2 basis points to 1.27% due to continued growth in the fund balance and decline in insured deposits. The fund balance was $120.5 billion as of June 30, up $1.2 billion from the end of the first quarter.

“In accordance with the Restoration Plan approved last year, FDIC staff continues to closely monitor the factors that affect the reserve ratio and will provide progress reports and, as necessary, modifications to the plan to the Board at least semiannually,” McWilliams said.

FDIC-Insured Institutions Reported Net Income of $70.4 Billion in Second Quarter 2021

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