Q1 Banking Trends: Higher Net Income, Deposits, and Unrealized Losses

The Federal Deposit Insurance Corporation [FDIC] has played a vital role in the U.S. banking system since it was established following the Great Depression. The agency does this by insuring individual and business deposits at U.S. banks – up to the standard coverage limit.

In addition to their role as an insurer, the FDIC is tasked with examining and supervising member banks to preserve the strength of the system. As a part of this role, they collect data from member institutions and share it with the public in the Quarterly Banking Profile. This report is vast and extremely detailed, so we’ve summarized its key details for you below.

Bank Net Income Increased

One of the most significant changes in the banking industry during the first quarter was a massive 79.5% rise in bank net income. The majority of this change can be attributed to a substantial special assessment in the fourth quarter to replenish the FDIC’s reserves following the bank failures last year.

The graph below shows net income across the banking industry for each quarter since 2008. As you can see, first quarter net income was the lowest recorded in two years excluding Q4 2023 when special assessments drastically impacted results.

Deposit Levels Rose

Following rapid deposit growth during the COVID-19 pandemic, total deposits at U.S. banks fell for 6 straight quarters from Q2 2022 through Q3 2023. This troubling trend reversed in Q4 2023. Banks continued to attract more cash in the first quarter and total deposit levels rose by 1.1%.

Deposit levels are important to businesses because they are a key factor that determines how much interest banks are willing to offer for cash. When deposit levels are low, banks face more competition and generally pay more competitive interest rates. On the other hand, an influx of cash can cause deposit rates to stagnate or even fall – all other factors remaining constant. However, there are many other factors that determine deposit rates, so there are still opportunities for businesses to capture above-average returns.

The graph below shows the quarterly change in deposit rates across the banking industry since 2008. This visual representation clearly shows rapid deposit growth during the COVID-19 pandemic, a subsequent reversal of that trend, and the most recent two quarters of moderate growth.

Unrealized Losses on Investment Securities Increased

Across the banking industry, total unrealized losses from investments were $516.5 billion – an increase of 8.2% from the previous quarter. Higher unrealized losses for mortgage-backed securities made up 95% of the quarterly change. This shift occurred because mortgage rates rose, which devalued the securities.

Bank unrealized losses on investments have come under scrutiny in recent years – particularly on Held-To-Maturity securities. These losses don’t impact bank customers or investors unless the bank needs to liquidate an asset prior to maturity. However, when turmoil strikes and banks need to sell assets early, the unrealized losses can become a real issue. For example, devalued bonds were cited as one of the major issues that prevented Silicon Valley and Signature Banks from meeting obligations last year when depositors withdrew their cash.

The graph below shows the net unrealized gain or loss from investment securities for each quarter since 2008. As you can see, banks have reported substantial unrealized losses in the last nine consecutive quarters.

The FDIC Remains Well Positioned to Protect Depositors

Since the FDIC was established, no depositor has lost a penny of insured funds. The agency continues to be in a good position to keep that stellar track record.

When a bank fails, the FDIC either facilitates a transfer to a solvent institution or reimburses deposits from the Deposit Insurance Fund [DIF]. The balance of the DIF rose by $3.5 billion to $125.3 billion in the first quarter. This change was driven by assessment income of $3.2 billion, supplemented by net investment income of $0.8 billion, and partially offset by insurance losses and operating expenses.

With this change, the reserve ratio – which compares the DIF balance to insured deposits – rose by 0.02 percentage points to 1.17%. The FDIC stated that the ratio is on track to meet the 1.35% minimum reserve ratio by September 2028 according to the DIF restoration plan made in 2020.

While the FDIC remains well positioned to protect insured deposits, your business could still be at risk if you invest more than $250,000 in a single bank. Fortunately, there is a simple solution – deposit management services from ADM.

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At the American Deposit Management Co. [ADM], we provide weekly articles that cover important developments in the business and banking industries. Visit our Insights page to review our past articles and subscribe to our newsletter so you never miss an update.

In addition to valuable insights, we offer deposit management services that provide access to extended government insurance, nationally competitive returns, and liquidity to match your needs. Contact a member of our team today to learn more about how these services can benefit your business.

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