While U.S. bank balance sheets were inundated with deposit inflows, the industry curtailed lending after accounting for Paycheck Protection Program loans.
According to regulatory filings, U.S. commercial banks, savings banks, and savings and loan associations reported an aggregate quarterly decline of 4.1% in total loans and leases, excluding about $481 billion in PPP loans. Growth was a mere 0.3% with the inclusion of PPP loans. Only one of the top 10 banks by total assets at June 30 — Toronto-Dominion Bank unit TD Bank NA — experienced non-PPP loan growth on a quarter-over-quarter basis.
Bank of America Corp. unit Bank of America NA shed about $72 billion in non-PPP loans in the second quarter, more than any other U.S. bank. On a July 16 earnings conference call, CFO Paul Donofrio said loans declined "as commercial borrowers repaid much of their lines."
Commercial loan paydowns impacted other big banks like Wells Fargo & Co. unit Wells Fargo Bank NA. "In March, our commercial customers utilized over $80 billion of their loan commitments during the market turbulence at the onset of the pandemic, and almost all of those loans were paid down in the second quarter," President and CEO Charlie Scharf on the bank's July 14 earnings conference call.
In addition to lower non-PPP commercial loan balances, banks slashed their credit card exposure by 7.4% in the second quarter. Credit card loans totaled $808 billion across the industry at June 30, representing the lowest level since Sept. 30, 2017. Credit card lender American Express Co. unit American Express National Bank reported a nearly 10% quarterly decline.
Total deposits for the industry were up 7.5% on a quarterly basis. JPMorgan Chase & Co. unit JPMorgan Chase Bank NA helped drive the increase, adding about $146 billion in deposits from March 31 to June 30. Some of the growth was COVID-19-related, including a reduction in consumer spending, delays in paying taxes and various government stimulus programs, CFO Jennifer Piepszak said on JPMorgan's July 14 earnings conference call.
"As the Fed grows the balance sheet, it's going to end up in deposits," Chairman and CEO Jamie Dimon said on the call. "For the most part, those deposits end up in securities because the loan growth usually going into a recession doesn't go up that much."
The industrywide deposit surge plus tepid non-PPP loan demand allowed banks to borrow less money. Federal Home Loan Bank advances declined 38.2% in the second quarter.
Overall profitability in the industry essentially duplicated first-quarter results. Net income was $18.78 billion in the second quarter, up from $18.46 billion. Return on average equity improved to 3.53% from 3.49%. Margin compression acted as a drag on profitability. Excluding PPP loans from average earning assets, the net interest margin was 2.81%, down from 3.16% in the first quarter.
Banks continued to bolster their balance sheets to cope with future loan losses. Excluding PPP loans, the reserves-to-gross loans ratio increased 51 basis points quarter over quarter to 2.31%. Second-quarter losses were subdued, with the net charge-offs-to-average loans ratio, excluding PPP loans, rising to 0.59% from 0.56%.