FDIC: Increase in provision expense drives bank net income down

FDIC-insured banks and savings associations earned $59.7 billion in the first quarter of 2022, a 22.2% decrease from the year prior, the FDIC reported yesterday in its Quarterly Banking Profile. The decrease was driven by an increase in provision expense. Despite the decrease, FDIC Acting Chairman Martin Gruenberg said that “capital and liquidity levels remain strong” and that “loan growth and credit quality metrics remain generally favorable.”

The average net interest margin edged down one basis point from the previous quarter to 2.54%, four basis points higher than the record low in the second quarter of 2021. Net interest income rose 6.4% from the fourth quarter to $138 billion—the fourth consecutive increase. Meanwhile, a 65.9% decline in income from loan sales drove a reduction in noninterest income from the same quarter last year. Community banks reported a $1.1 billion decline in first quarter net income year-on-year, the FDIC said.

American Bankers Association Chief Economist Sayee Srinivasan emphasized the continued strength of the banking industry. “Credit quality is exceptionally strong and lending continues to gain steam following robust growth in the previous quarter,” Srinivasan said. “Banks increased loan-loss provisions in the first quarter due to heightened uncertainty, which lowered industry net income. Nonetheless, banks are well capitalized and the industry remains well positioned to handle the challenges caused by the Fed’s efforts to combat inflation.”

The average net charge-off rate fell 12 basis points year-on-year to 0.22%, and the noncurrent loan rate fell five basis points to 0.84%. During the first quarter, three banks opened and no banks failed. The number of banks on the FDIC’s problem bank list declined by four to 40, a new record low.

FDIC weighing raising assessment rates

In June, the FDIC will consider “options to amend [the 2020 Deposit Insurance Fund]restoration plan, including increases to assessment rates,” FDIC Acting Chairman Martin Gruenberg said today in remarks following the release of the QBP report.

That statement came after the DIF balance fell $102 million in the first quarter to $123 billion—the first DIF balance decline in more than a decade. The decline was attributed to unrealized losses on available-for-sale securities in the DIF portfolio, driven by rising interest rates, which offset insurance assessment income. At the same time, industry-insured deposits continued to grow at an elevated pace. These two factors dropped the DIF reserve ratio to 1.23% as of March 31.

After the DIF reserve ratio dipped below the statutory minimum reserve ratio of 1.35% in June 2020, the FDIC announced a plan to restore the fund by September 2028 with no anticipated increase in the assessment rate schedule. However, Gruenberg noted that “a key assumption surrounding the restoration plan was that insured deposit growth would normalize and the surge of insured deposits associated with the pandemic would recede over time. However, more than one year after the most recent round of pandemic-related fiscal stimulus, the industry has continued to report strong insured deposit growth.”