Quarterly Banking Profile - Third Quarter 2024

Good morning and welcome to our release of third quarter 2024 performance results for FDIC-insured institutions. 

The banking industry continued to show resilience in the third quarter. Though the industry’s net income declined from the previous quarter, the decline was driven by one-time gains last quarter that were absent from the results this quarter. The industry’s net interest income and net interest margin increased this quarter. Asset quality metrics deteriorated modestly but remained generally favorable despite continued weakness in several loan portfolios, which we are monitoring closely. 

The banking industry’s net income of $65.4 billion in the third quarter was a decrease of $6.2 billion, or 8.6 percent, from the prior quarter, mainly due to the absence of one-time gains on equity security transactions of approximately $10 billion that occurred last quarter. The industry reported an increase in net interest income of $4.5 billion this quarter to partially offset the absence of those gains.

Community banks reported net income of $6.9 billion in the third quarter, an increase of 6.7 percent, driven by higher net interest income and noninterest income that more than offset higher noninterest and provision expenses.

The net interest margin increased for all size groups in the banking industry. For the first time since second quarter 2023, the industry reported an increase in loan yields that exceeded the increase in the cost of deposits. As a result, the industry’s net interest margin increased 7 basis points to 3.23 percent, reversing a three-quarter trend in which the industry’s margin fell by 14 basis points. For community banks, the net interest margin rose 5 basis points this quarter after increasing 7 basis points last quarter.

Unrealized losses on available-for-sale and held-to-maturity securities declined $149 billion to $364 billion in the third quarter. Longer-term interest rates, in particular the 30-year mortgage and the 10-year Treasury rates, declined significantly during the quarter, increasing the value of securities reported by banks. However, increases in longer-term interest rates since the end of the third quarter would likely reverse most of these improvements in unrealized losses if measured today. 

The industry’s total loans increased by $77 billion, or 0.6 percent, in the third quarter. The largest portfolio increase was reported in loans to non-depository financial institutions while consumer loans—mostly credit card loans—also drove loan growth. The industry’s annual rate of loan growth increased in the third quarter to 2.2 percent. 

Total loans at community banks increased 1.1 percent from the prior quarter and 5.5 percent from the prior year, led by commercial real estate and residential mortgage loans.¹  

The industry’s asset quality metrics continued to be generally favorable despite continued weakness in credit card, auto, CRE, and multifamily housing portfolios. The industry’s overall past due and nonaccrual rate increased 6 basis points from the prior quarter to 1.54 percent, a level still well below the pre-pandemic rate of 1.94 percent.² However, the industry’s credit card, auto, CRE, and multifamily past-due rates increased from the prior quarter and are above their pre-pandemic averages.³

Past-due loan balances continued to increase in the industry’s non-owner occupied CRE loan portfolio in the third quarter. Weak demand for office space continues to soften property values, and higher interest rates over the past few years are affecting the repayment and refinancing ability of office and other CRE borrowers. The industry’s past-due rate for non-owner occupied CRE loans increased in the third quarter—though at a much slower rate than in prior quarters—and was at its highest level since third quarter 2013. 

The increase in non-owner occupied past-due loans was largely driven by office loans at banks with more than $250 billion in assets. However, these banks tend to have lower concentrations of such loans in relation to total assets and capital than smaller institutions, mitigating the overall risk. The next tier of banks, those with between $10 billion and $250 billion in assets, have greater concentrations in non-owner occupied CRE loans and reported higher past-due rates than the pre-pandemic average in the third quarter. Banks with assets below $10 billion reported non-owner occupied past-due ratios near their pre-pandemic averages.

The industry’s quarterly net charge-off rate decreased slightly to 0.67 percent but remained elevated at 16 basis points higher than the prior year’s rate and 19 basis points higher than the pre-pandemic average. The credit card net charge-off rate decreased in the third quarter but remained 100 basis points above the pre-pandemic average.

Domestic deposits increased this quarter by $195 billion, or 1.1 percent, with growth widespread within the banking industry. Estimated uninsured deposits drove the increase as insured deposits were roughly flat quarter over quarter. Brokered deposits declined $47 billion, or 3.6 percent, from the prior quarter, contributing to the lack of growth in insured deposits. 

The number of banks on the Problem Bank List, which encompasses banks that have a CAMELS composite rating of “4” or “5,” increased by two banks this quarter to 68 banks. The number of problem banks was within the normal range for non-crisis periods of 1 to 2 percent of all banks. Total assets held by problem banks increased $4 billion to $87 billion during the quarter. 

The Deposit Insurance Fund (DIF) balance increased approximately $3.9 billion from the end of the second quarter to $133.1 billion on September 30. The reserve ratio, the fund balance relative to insured deposits, increased 4 basis points to 1.25 percent this quarter. The reserve ratio currently remains on track to reach the 1.35 percent minimum reserve ratio by the end of 2026, before the statutory deadline of September 30, 2028.

In conclusion, the banking industry continued to show resilience in the third quarter. However, the industry still faces significant downside risks from the continued effects of inflation, volatility in market interest rates, and geopolitical uncertainty. These issues could cause credit quality, earnings, and liquidity challenges for the industry. In addition, weakness in certain loan portfolios, particularly office properties, credit cards, auto, and multifamily housing loans, continues to warrant close monitoring. These issues will remain matters of ongoing supervisory attention by the FDIC. 

Also, as many of you know, this is my last QBP. I would like to thank all of you for your attention to these reports. Since the QBP was established in 1986 under Chairman Bill Seidman, it has been a reliable source of information to the public, policymakers, and financial markets on the condition of the banking system. I am confident it will continue to serve that important public purpose and am grateful to you for your coverage of these reports.

With that, I am now happy to take your questions.

Chart 1:

This chart shows that the banking industry reported quarterly net income of $65.4 billion, a decrease of $6.2 billion, or 8.6 percent, from the prior quarter. The quarterly decline in income was mainly due to the absence of one-time gains on equity security transactions of approximately $10 billion that occurred last quarter. The industry reported an increase in net interest income of $4.5 billion this quarter to partially offset the absence of those gains.

Community bank quarterly net income increased 7 percent from the prior quarter to $6.9 billion, driven by higher net interest income, realized gains on the sale of securities, and noninterest income that offset higher noninterest and provision expenses. 
 

Chart 2:

This chart shows the breakdown of the changes in industry net income quarter over quarter. 

The quarterly decreases in the categories making up net income were largely driven by nonrecurring items that occurred last quarter, including gains on equity securities and the sale of a business unit. These one-time, negative effects to quarter-over-quarter net income were partially offset by a $4.5 billion increase in net interest income this quarter.
 

Chart 3: 

The next chart shows the net interest margin (NIM) for the industry and the five asset size cohorts for which the QBP reports. The industry’s NIM increased 7 basis points from last quarter to 3.23 percent after declining 14 basis points during the prior three quarters. The industry’s NIM is just below its pre-pandemic average of 3.25 percent. The NIM increased for all size cohorts in the third quarter, driven by higher consumer loan income at the largest banks and higher real estate loan income for the rest of the industry. 

The community bank NIM increased for the second straight quarter to 3.35 percent, up 5 basis points from prior quarter. Still, the community bank NIM remained below the pre-pandemic average of 3.63 percent.

Chart 4: 

The next chart shows the quarter-over-quarter changes in the industry’s average yield on loans and average cost of deposits. During the quarter, loan yields increased 13 basis points and deposit costs increased 8 basis points, which drove the increase the increase in the industry’s NIM this quarter. Loan yields increased faster than deposit costs for the first time since second quarter 2023. 

Community banks’ NIM increase in the third quarter was driven by a 17 basis-point increase in loan yields, outpacing a 12 basis-point increase in deposit costs.
 

Chart 5:

The next chart shows that the industry’s provision expense was $23.6 billion in the third quarter, up $253 million from the second quarter. The increase in provision expense reflects quarterly loan growth, the continued negative outlook for office markets, and elevated credit card charge-off rates. The industry’s provision expense has been higher than the pre-pandemic average for the past nine quarters. 

Chart 6: 

This chart shows that the banking industry’s share of longer-term loans and securities fell for the seventh consecutive quarter to 35.3 percent after peaking at 39.7 percent in fourth quarter 2022. The industry’s share of longer-term assets is still slightly above the pre-pandemic average of 35.0 percent.

Community banks’ share of longer-term loans and securities was 46.3 percent in third quarter 2024, down from 48.2 percent last quarter and below the pre-pandemic average of 48.9 percent. 

Chart 7:

The next chart shows the level of unrealized losses on held-to-maturity and available-for-sale securities portfolios. Total unrealized losses of $364.0 billion decreased $148.9 billion (29.0 percent) from the prior quarter. This is the lowest level of unrealized losses for the industry since first quarter 2022. Longer-term interest rates such as the 30-year mortgage rate and the 10-year Treasury rate declined significantly during the quarter, increasing the value of securities reported by banks and reducing unrealized losses. However, increases in longer-term interest rates since the end of the third quarter would likely reverse most of these improvements in unrealized losses if measured today.

Chart 8:

The next chart shows the change in loan balances on a quarterly and annual basis. The industry reported an increase in total loans of $76.9 billion, or 0.6 percent, in the third quarter. The largest quarterly increase was reported in loans to non-depository financial institutions, but some of that growth appears to be a reclassification of existing loans from other loan categories. Consumer loans, mostly credit card loans, also drove to the quarterly increase. All other major loan categories except construction and development and commercial and industrial loans showed quarterly growth.

The industry’s annual rate of loan growth increased in the third quarter to 2.2 percent. The annual increase was also led by growth in loans to non-depository financial institutions and credit card loans.

Total loans at community banks increased 1.1 percent from the prior quarter and 5.5 percent from the prior year. Growth in CRE loans and 1-4 family residential mortgage loans drove both the quarterly and annual increases in loan and lease balances.

Chart 9: 

The next chart shows that asset quality metrics for the industry remained generally favorable despite modest deterioration in some portfolios. The overall PDNA rate increased 6 basis points from the prior quarter to 1.54 percent, a level still well below the pre-pandemic rate of 1.94 percent. But the industry’s credit card, multifamily, CRE, and auto loan PDNA rates increased quarter over quarter. The PDNA rates for credit cards increased 20 basis points to 3.36 percent from the previous quarter. The multifamily PDNA rate increased 8 basis points from the prior quarter, the CRE PDNA rate increased 7 basis points, and the auto loan rate increased 5 basis points. These portfolios’ PDNA rates were above their pre-pandemic averages by 66 to 95 basis points. 

The industry’s quarterly net charge-off rate of 0.67 percent decreased 1 basis point from last quarter but was 16 basis points higher than the year-ago quarter. The industry’s net charge-off rate was also 19 basis points higher than the pre-pandemic average. Credit card and CRE charge-offs drove the quarterly decrease in the net charge-off rate, partially offset by increases in commercial and industrial charge-offs. The credit card net charge-off rate was 4.48 percent in the third quarter, down 34 basis points quarter over quarter but still 100 basis points higher than the pre-pandemic average. The net charge-off rate for CRE loans decreased by 9 basis points quarter over quarter to 0.29 percent but are 25 basis points higher than the pre-pandemic average.

Chart 10: 

Looking deeper into the CRE portfolio, the upward trend in PDNA non-owner-occupied property loans continued in the third quarter, though at a slowing pace. The industry’s volume of PDNA non-owner-occupied CRE loans increased $558 million, or 2.3 percent, quarter over quarter. The rate of growth in this portfolio was 9.6 percent last quarter.

As seen in this chart, the greatest weakness in non-owner-occupied CRE loans continued to be reported by the largest banks, those with greater than $250 billion in assets. These banks reported a non-owner occupied CRE PDNA rate of 4.99 percent, up from 4.85 percent last quarter and well above their pre-pandemic average rate of 0.58 percent. However, these large banks tend to have lower concentrations of such loans in relation to total assets and capital than smaller institutions, mitigating the overall risk. 

The next tier of banks, those with between $10 billion and $250 billion in assets, have greater concentrations in non-owner occupied CRE loans and reported some stress in this portfolio. This cohort’s non-owner occupied PDNA rate was 1.69 percent in the third quarter, up from 1.65 percent in the second quarter and above its pre-pandemic average of 0.66 percent. Banks in size cohorts below $10 billion in assets reported non-owner occupied PDNA ratios near their pre-pandemic averages.

Chart 11: 

The next chart shows that the allowance for credit losses increased at a slower pace than the noncurrent loan balances, resulting in a decrease in the reserve coverage ratio. The ratio of the allowance for credit losses to noncurrent loans decreased from 194.3 percent in the second quarter to 184.8 percent this quarter. This is still a much higher coverage ratio than the pre-pandemic average.

The reserve coverage ratio at community banks was 185.9 percent, down 15 percentage points quarter over quarter as noncurrent loan balances increased faster than the allowance for credit losses. Community banks’ pre-pandemic average reserve coverage ratio was 129.4 percent.

Chart 12:

The next chart shows that domestic deposits increased $194.6 billion, or 1.1 percent, during the third quarter. Both savings and transaction deposits increased from the prior quarter, with declines in small time deposits partially offsetting the increases. Brokered deposits decreased for the third straight quarter, down $47.3 billion (3.6 percent) from the prior quarter. 

Insured deposits were roughly flat quarter over quarter as banks with assets greater than $250 billion reported declines, offsetting increases in other size cohorts. 

Estimated uninsured domestic deposits increased $201.7 billion, or 2.8 percent, quarter over quarter. Growth in estimated uninsured deposits was widespread; banks in all QBP asset size groups that report estimated uninsured deposits reported an increase in uninsured deposits from the previous quarter. 

Nondeposit liabilities decreased by $17.2 billion from the prior quarter, driven by a decrease in FHLB borrowings.

Chart 13:

This chart shows the number and total assets of banks on the FDIC’s “Problem Bank List.” Banks on this list have a CAMELS composite rating of “4” or “5” due to financial, operational, or managerial weaknesses, or a combination of such issues. The number of banks on the list increased by two in the third quarter to 68 banks, while total assets held by problem banks increased $3.9 billion to $87.3 billion. The number of problem banks represent 1.5 percent of total banks, which is within the normal range for non-crisis periods of 1 to 2 percent of all banks. 

No banks failed during the third quarter. 

Chart 14: 

The final chart shows that the DIF balance was $133.1 billion on September 30, 2024, up approximately $3.9 billion from the second quarter. Assessment revenue continued to be the primary driver of the increase, adding $3.3 billion to the DIF balance. Interest earned on investment securities, negative provisions for insurance losses, and unrealized gains on securities also contributed a combined $1.2 billion to the fund, partially offset by operating expenses of $594 million.

The net change in the DIF balance does not include the cost of protecting uninsured depositors pursuant to the systemic risk determination made for the two bank failures that occurred in March 2023, as the FDIC is required by statute to recover those losses through a special assessment. Similarly, the change in the DIF balance does not include collections associated with the special assessment. As of September 30, 2024, the total loss estimate for Silicon Valley Bank and Signature Bank was $22.1 billion, of which $18.9 billion is attributable to the protection of uninsured depositors pursuant to the systemic risk determination and will be recovered through the special assessment. As with all receiverships, loss estimates will be periodically adjusted as the FDIC as receiver of failed banks sells assets, satisfies liabilities, and incurs receivership expenses.

As previously discussed, insured deposits were roughly flat quarter over quarter while year-over-year insured deposit growth was 0.7 percent. The reserve ratio increased by 4 basis points in the third quarter to 1.25 percent as of September 30 and was 12 basis points higher than a year ago.

The FDIC adopted a DIF Restoration Plan on September 15, 2020, to return the reserve ratio to the statutory minimum of 1.35 percent by September 30, 2028, as required by law. Based on FDIC projections, the reserve ratio remains on track to reach 1.35 percent by the statutory deadline. The FDIC will continue to monitor factors affecting the reserve ratio, including but not limited to, insured deposit growth and potential losses due to bank failures and related reserves.

In conclusion, the banking industry continued to show resilience in the third quarter as net interest income increased and asset quality metrics remained generally favorable despite modest deterioration. However, ongoing economic and geopolitical uncertainty, continuing inflationary pressures, volatility in market interest rates, and continuing weakness in some loan portfolios pose significant downside risks to the banking industry. These issues will be matters of close supervisory attention by the FDIC.