WASHINGTON — The Federal Deposit Insurance Corp.'s quarterly banking profile showed banks' second-quarter profits were high by historical measures, but it also revealed greater unrealized losses, shrinking net interest margins and declining deposits.
Even amid those challenges, FDIC Chairman Martin Gruenberg said, asset-quality metrics were favorable and the banking industry was well capitalized.
"Despite the period of stress earlier this year, the banking industry continues to be resilient," Gruenberg said in prepared remarks. 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."
The FDIC's report noted the banking industry produced $70.8 billion of net income in the second quarter, a $9 billion decrease from the previous quarter. That drop was driven by declines in noninterest income and net interest income as well as increases in loan-loss provisions.
Gruenberg noted that the 11.27% linked-quarter decline in net income was severe after three failed-bank acquisitions in the past two quarters but should not obscure the year-over-year increase of nearly 10%. When one accounts for such abnormalities, he said bank net income remained healthy by historical standards.
"After excluding nonrecurring accounting gains on failed-bank acquisition that occurred in the first and second quarters, net income was roughly flat from the prior quarter," he said. "This adjusted level of net income does remain relatively high by historical measures and was 5.7% higher than the same quarter one year ago."
At the 4,198 FDIC-insured community banks, quarterly net income rose by $236.2 million — or 3.4% — from the first quarter to $7.1 billion in the second quarter. Community banks' noninterest income rose and losses on securities sales shrank, more than offsetting lower net interest income and higher noninterest expense.
Overall banks' net interest margin shrunk by 3 basis points from the first quarter to 3.28% due to costs of funds outpacing yields on assets. This was the second straight quarter of decline after net interest margins shrank by 7 basis points in the first quarter. However, net interest margin was still 48 basis points greater than in the second quarter of 2022 and exceeded the 3.25% pre-pandemic average.
Banks reported an 8.3% increase in unrealized losses on securities portfolios in the second quarter, totaling $558.4 billion. Some $309 billion of those losses were on held-to-maturity securities, and $248.9 billion were on available-for-sale securities.
FDIC's report also indicated a notable increase in loan balances. Total loan and lease balances rose by $86.5 billion — or 0.7% — compared with the previous quarter thanks to increases in credit card loans and loans to nondepository financial firms. Total loan and lease balances increased by $526.8 billion, or 4.5%, from the same quarter a year earlier, which the agency said was mostly led by family residential loans and credit card borrowing.
Loan balances at community banks increased by 2.6% from the previous quarter and 12.5% from a year earlier, a development that FDIC attributed to an increase in family residential mortgages and commercial real estate mortgages.
Total deposits declined for a fifth consecutive quarter, dropping by $98.6 billion — or half a percent — between the first and second quarter of 2023. That decline was driven by a flight of uninsured deposits, which were down $180.6 billion, or 2.5%. Insured deposits actually increased by $84.9 billion — or 0.8% — over the last quarter.
Gruenberg pushed back on narratives that uninsured depositors were fleeing from regional banks to larger banks. He said the evidence suggested higher yields were driving the flight, and most of these uninsured deposits were leaving the regulated banking system altogether.
"Global systemically important banks reported a 1.2% quarterly decline in total deposits, primarily driven by a 3% decrease in uninsured deposits," he said. "This suggests that the deposit story of the second quarter was more about pricing pressures, with depositors seeking higher yields, often from nonbank financial institutions, particularly money market mutual funds."
The Deposit Insurance Fund balance was $117 billion as of June 30, an increase of $897 million from the end of the first quarter after banks paid higher assessments in the wake of the bank failures this spring. However, the reserve ratio declined 1 basis point to 1.10%. Nevertheless, Gruenberg indicated the agency sees the DIF replenishing on schedule.
"The reserve ratio currently remains on track to reach the 1.35% minimum reserve ratio by the statutory deadline of September 2028," he noted.
Two banks opened, one bank failed, and 27 institutions merged during the second quarter. No banks were added to the problem bank list.
