Second Quarter 2020: In the Eye of the Storm

September 3, 2020

First Glance 12L provides a quarterly look at banking and economic conditions within the Federal Reserve System’s Twelfth District. During 2Q20, Paycheck Protection Program (PPP) activity spurred a record level of quarterly loan, deposit, and asset growth. This fed a shift in District bank balance sheet composition, weighed on margins and tier 1 leverage capital ratios, and distorted trends in several metrics. The District’s average quarterly return on average assets ratio increased slightly from 1Q20 in spite of net interest margin compression and higher credit loss provisions, mainly because asset growth far outpaced increases in noninterest and tax expenses. Problem loan ratios were generally stable given loan accommodations and PPP-fueled denominator growth, but metrics will likely deteriorate once forbearance and government programs expire. Although employment rebounded from April’s trough, unemployment rates remained well above year-ago levels. Further, COVID-19 case counts have proven volatile, potentially threatening the recovery. Home prices, permit volumes, and builder optimism improved despite jobless rates, supported by low interest rates, limited for-sale inventories, and pent-up demand unleashed after states re-opened. In contrast, commercial real estate prices came under pressure, and property markets face the prospect of declining rents and rising vacancy rates. Household financial stress varies by geography, income level, and demographic group, as noted in this quarter’s “Spotlight” feature.