Dive Brief:

• Lenders reported a 70% decline in profit during the first quarter of 2020 compared to a year ago, as the coronavirus pandemic took its toll on the U.S. financial sector, the Federal Deposit Insurance Corp. (FDIC) reported Tuesday.

• The 5,116 FDIC-insured institutions reported aggregate net income of $18.5 billion during the three months ending March 31, a decline of $42.2 billion. The agency said the decline was "a reflection of deteriorating economic activity, which propelled the increase in provision expenses and goodwill impairment charges."

• "The FDIC was born out of a crisis, and we now find ourselves in the midst of another unprecedented period," FDIC Chair Jelena McWilliams said in a statement. "In spite of these anomalous shocks, the banking industry has proven to be a source of strength for the economy. Although bank earnings were negatively affected by increases in loan loss provisions, banks effectively supported individuals and businesses during this downturn through lending and other critical financial services."

Dive Insight:

The FDIC’s Quarterly Banking Profile shows how the banking sector has been affected by the coronavirus pandemic.

Banks set aside $52.7 billion during the quarter, an increase of 280% from the previous year, to prepare for potential loan losses and the implementation of the current expected credit loss (CECL) standards. The FDIC said 243 banks adopted the new accounting standards in the first quarter. 

More than half (55.9%) of institutions reported year-over-year declines in net income, the FDIC said. The share of unprofitable institutions increased to 7.3%, compared to the previous year, the regulator said. 

Total assets rose by $1.6 trillion (8.6%) from the previous quarter, driven by increases in cash and balances due from depository institutions, the FDIC reported. 

The agency's list of "problem banks," financial institutions with weak capital levels, increased from 51 to 54 during the quarter, the first quarterly increase since 2011, according to the regulator. Total assets of problem banks declined from $46.2 billion in the fourth quarter to $44.5 billion.

Despite the declines, McWilliams expressed optimism for the state of the banking industry. 

"Notwithstanding these disruptions, at the end of the first quarter, bank capital and liquidity levels remain strong, asset quality metrics are stable, and the number of 'problem banks' remains near historic lows," she said. 

The FDIC said two new banks opened, 57 institutions were absorbed by mergers and one bank failed during the quarter. 

Community banks reported quarterly net income of $4.8 billion, representing a decline of $1.3 billion, or 20.9%, the FDIC reported.

"Provision expenses grew to $1.8 billion — three times the amount reported in first quarter 2019, hampering community bank profitability despite an increase in net operating revenue," the agency said. Loan growth at community banks was steady at 5.8% year over year. 

Following the Federal Reserve's decision to cut interest rates to near zero in March, McWilliams said the low interest rate environment combined with the economic downturn "will present challenges to the industry over the near to mid-term."