Bank Health in the COVID-19 Pandemic - Updates from 2021 Q2 Data

Last week, the FDIC and NCUA released their reports of the second quarter health of the institutions they insure. They also released the 2021 Second Quarter Call Reports of all insured institutions. We use these reports to derive our financial health grades for each institution. We have finished importing this data, and all of the health grades for banks and credit unions have been updated to reflect the June 30, 2021 reports.

You can view the latest health ratings of your bank or credit union in our Bank Health Ratings page. This page also has a table of banks and credit unions ranked by Texas ratio, a standard financial health metric.

Details of the Q2 industry performance are available from the FDIC Quarterly Banking Profile page and from the NCUA Quarterly Data Summary Reports page.

Bank Financial Health in the COVID-19 Pandemic

Banks were able to make it through 2020 in a much better condition than had been feared when the pandemic first hit. It looks likely that 2021 won’t be nearly as bad for banks as the period after the Great Recession in 2009 and 2010. Government money from stimulus checks and unemployment checks kept most consumers from defaulting on their loans, and the government’s small-business support (via the Paycheck Protection Program) helped both businesses and banks, especially small banks.

At the start of the pandemic, banks built up their loan loss reserves in anticipation of higher loan defaults. That negatively impacted profits. Now the opposite is occuring. The wave of defaults did not occur, and banks are forecasting an improving economy which eliminates the need for those high levels of loan loss reserves. The reduction of loan loss reserves helped the banking industry post a large profit for the quarter ($70.4 billion) that was just below last quarter’s record profit ($76.8 billion).

The main problem banks have now is record-low net interest margin. This is the result of weak loan growth, record-low interest rates and record-high deposit levels. The net interest margin has been falling since the start of the pandemic. The FDIC press release described the record low net interest margin:

The average net interest margin (NIM) contracted 31 basis points from a year ago to 2.50 percent—the lowest level on record.

Since the start of the pandemic, record deposit growth was driven by record high personal savings rate. From March 2020 to April 2021, the personal savings rate ranged from 12.3% to 33.8%. Before the pandemic, there have only been three months in the last 30 years in which the personal savings rate had exceeded 10%. The personal savings rate has started to return to more normal levels. For May, June and July, the rate averaged 9.4%.

While deposit growth has been surging, loan growth has been weak. In fact, loan balances declined for the last two quarters of 2020 and the first quarter of 2021. This quarter, loan balances finally turned positive, but the growth remains weak, with loan balances increasing $33.2 billion (0.3%). The FDIC attributed the increase to higher credit card balances and auto loan balances.

In addition to driving down net interest margins, the surging deposits and declining loan balances have contributed to the record low deposit rates. I often look at the loan-to-deposit ratio as a barometer on deposit rates. The higher it is, the more banks need deposits which puts upward pressure on deposit rates. The lower it is, the demand for deposits declines, and banks have little reason to offer competitive rates to attract or maintain deposits. From the FDIC’s quarterly deposit and loan balance data for the banking industry, I generated the following table which shows how much the industry’s loan-to-deposit ratio has declined.

Note that the loan-to-deposit ratio has declined every quarter since the second quarter of 2019. Large declines occurred when the pandemic began in the first quarter of 2020. Unfortunately, there was another decline this quarter. However, it was the smallest decline since the start of the pandemic. That’s a positive trend, and hopefully, we’ll soon see increases in future quarters.

Credit Union Financial Health in the COVID-19 Pandemic

Overall, credit unions have fared a little better than banks. Loan balances haven’t declined and the loan-to-share ratio (equivalent to banks’ loan-to-deposit ratio) is higher. The following are excerpts from the NCUA Q2 Credit Union Data Summary:

Total loans outstanding increased $57 billion, or 5.0 percent, over the year to $1.19 trillion. The average outstanding loan balance in the second quarter of 2021 was $16,156, down $106, or 0.7 percent, from one year earlier.

The loan-to-share ratio stood at 69.6 percent in the second quarter of 2021, down from 76.3 percent in the second quarter of 2020.

Note, the loan-to-share ratio of 69.6% is much higher than the bank loan-to-deposit ratio (58.0%). Also, the credit union industry loan-to-share ratio increased in the last quarter from 68.8% to 69.6%. That suggests we may continue to see the best deposit rates at credit unions instead of banks.

Bank and Credit Union Failures

According to the FDIC Failed Bank List, no banks have failed this year as of September 13, 2021. Only four banks failed in 2020. As a comparison, after the 2008 Financial Crisis, 140 banks failed in 2009 and 157 failed in 2010.

The number of banks on the FDIC’s Problem Bank declined from 55 in Q1 to 51 in Q2. The FDIC does not name these problem banks.

According to the NCUA Conservatorships and Liquidations List, two credit unions were liquidated this year as of September 13, 2021. Four have been placed into conservatorship this year. One of those four was one of the liquidated credit unions. The other three remain active. In a conservatorship, the NCUA takes over the management of the credit union with the goal of resolving the issues. If the issues cannot be resolved, the NCUA will either arrange for a merger of the conserved credit union into a healthy credit union or liquidate the credit union. In 2020, only one credit union was liquidated and only one was placed into conservatorship. The credit union that was placed into conservatorship remains active.

Rankings of the Largest Banks and Credit Unions

In addition to the health grades, you can view how the banks and credit unions have changed in size in our table of the Largest Banks and Credit Unions by Assets. By default, the institutions are ranked by assets. Click on the column title and you can sort by total branches, number of states with branches, number of employees and number of customer accounts.

Chase Bank continues to be the largest bank based on assets. As of June 30, 2021, total assets were $3.190 trillion, which is up 11.54% from last year. However, it’s slightly down from the first quarter when assets were $3.208 trillion. Navy Federal continues to be the largest credit union. Total assets as of June 30th were $147.9 billion, up 17.77% from a year ago. Navy Federal is way ahead of other credit unions in size. The second largest is State Employees' Credit Union in North Carolina with total assets of $49.9 billion. In 2020, BECU grew past PenFed to take the #3 spot. BECU now has assets of $28.6 billion. PenFed remains in the #4 spot with assets of $27.7 billion.