Q2 by the Numbers: Loss Provisions, Asset Quality, NIM, and PPP

The ongoing COVID-19 pandemic’s impact on the banking industry is becoming more visible with the release of the latest FDIC Quarterly Banking Profile on Aug. 25. The report shows bank profits are down 70% from the prior year, demonstrating the massive impact of the COVID-19 pandemic on the banking industry. 

And the financial services sector got off easy. 

The U.S. office market saw the sharpest quarterly drop in demand since 2001, and leasing activity fell by 44% year-over-year, increasing the national office vacancy rate to 13%. For hotel/hospitality, revenue per available room (RevPAR, a key performance metric) is expected to drop as much as 80% over Q2 2019. 

The pandemic’s impact on commercial real estate and hospitality, in turn, has impacted the banking industry, with the numbers most visible in lending and loan-loss provisions, asset quality, net interest margin, and Paycheck Protection Program loan activity. 

Loan-Loss Provisions

The coronavirus pandemic continues to cause widespread economic uncertainty, stressing banks’ commercial loan portfolios in some areas. According to the FDIC, the decline in net income seen in the Q2 report is a continuation of uncertain economic conditions, which drove an increase in provision expenses. Banks’ loan-loss provisions grew from $49.1 billion to $61.9 billion, nationally (a 380% increase). In Wisconsin, noncurrent loans and leases increased 13%, while overall lending grew by 10.1% (C&I portfolios swelled from $14.8 billion to nearly $21 billion, a 41.4% increase, largely due to PPP loans). Another factor in the growth of loan-loss provisions is the ongoing industry implementation of CECL accounting standards. According to analysis of FDIC data by American Banker, among the 253 banks that have adopted CECL, loan-loss provisions swelled by nearly 420% over Q2 2019, while non-CELC banks reported an increase of 207%. 

Asset Quality

The FDIC report shows a 22% increase in net charge-offs over Q2 2019, the largest percentage increase since the first quarter of 2010. In Wisconsin, net charge-offs rose by over 30% to $91.6 million. According to the American Banker, the spike in charge-offs was driven mainly by C&I loan portfolios (up over 128% from a year earlier). However, overall noncurrent loan and net charge-off volumes remain relatively low and far below levels seen during the last recession. 

Net Interest Margin

The FDIC reported this quarter’s net interest margin (2.81%) is the lowest level ever reported in the Quarterly Banking Profile. It is the third consecutive quarterly decline. However, while net interest income fell by $7.6 billion (5.4%) nationally, Wisconsin institutions reported an increase of 0.5%. According to the FDIC, less than half of all banks (42.2%) reported annual declines in net interest income. 


Nationally, banks originated more than $480 billion in Paycheck Protection Program loans in the second quarter. Through Aug. 8 (the most recent available report from the SBA), Wisconsin banks processed over 89,000 PPP loans totaling nearly $10 billion. The Dairy State ranked 20th overall in loan count and 19th by net dollars. The program closed with nearly $134 billion in funding remaining, as demand dropped during the second wave of the stimulus.