Vulnerabilities for banks in the commercial real estate market persisted in the third quarter, though the pace of delinquencies showed some potential signs of easing according to the Federal Deposit Insurance Corp.'s Q3 Quarterly Banking Profile report.
The report released Thursday showed a generally stable outlook for the banking sector despite ongoing weakness in commercial real estate loans. Gains in core income metrics for banks coincided with lingering vulnerabilities in commercial real estate portfolios.
"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," said FDIC Chair Martin Gruenberg in his last set of remarks on the QBP before his
The FDIC attributes the rise in past-due loans for nonowner-occupied commercial real estate primarily to office loans held by banks with over $250 billion in assets. These institutions, however, face relatively lower overall risk because such loans represent a smaller share of their total assets and capital compared to smaller banks.
Midsize banks, with assets between $10 billion and $250 billion, carry higher concentrations of nonowner-occupied CRE loans. These institutions reported past-due rates above pre-pandemic averages in the third quarter, suggesting elevated risk in this tier. Meanwhile, smaller banks with assets under $10 billion saw their past-due ratios for nonowner-occupied CRE loans align closely with pre-pandemic levels, indicating more stability in this segment.
FDIC-insured institutions posted a combined net income of $65.4 billion for the third quarter of 2024, an 8.6% decrease from the
The decrease in net income varied by institution size, however, as smaller community banks reported $6.9 billion in net income, a notable increase of 6.7% from the previous quarter. This growth was driven by higher net interest income and a boost in noninterest income.
Interest income metrics turned around this quarter after declining 14 basis points over the last three quarters. Net interest income rose by $4.5 billion and the net interest margin increased to 3.23%, a seven basis point increase from the second quarter. Community banks experienced an even higher NIM of 3.35%, though both figures remain below pre-pandemic averages, suggesting that banks are still grappling with interest rate pressures.
Loan balances showed moderate growth in the third quarter of 2024, with total loans and leases increasing by $76.9 billion, or 0.6%, from the prior quarter. Key drivers included loans to nondepository financial institutions, which rose by $28 billion, consumer loans, which increased by $15.4 billion, and residential real estate loans, which climbed by $9.3 billion. The majority of banks reported quarterly loan growth, with notable increases in categories such as 1 to 4 family residential loans and commercial real estate. At the same time, construction, development and commercial-industrial loans declined. Year over year, loan balances rose by $275.5 billion, buoyed by a substantial increase in loans to nondepository financial institutions, as well as gains in residential and commercial real estate loans and consumer loans like credit card balances.
Domestic deposits increased from the previous quarter by $194.6 billion, or 1.1% — above the pre-pandemic average — assisted by a 2.7% increase in uninsured deposits. Growth in savings and transaction deposits helped offset declines in small time deposits, while brokered deposits fell by 3.6%. Equity capital across the industry rose by $81.6 billion, primarily due to a decline in unrealized losses on securities and retained earnings, which pushed the leverage capital ratio up by 4 basis points to 9.34%.
Despite overall stability, the number of problem banks rose slightly from 66 to 68, with total assets at these institutions increasing by $3.9 billion to $87.3 billion. However, problem banks still represent only 1.5% of all FDIC-insured institutions, which is within the normal range. Meanwhile, the Deposit Insurance Fund reserve ratio grew by 4 basis points to 1.25%. The total number of FDIC-insured institutions declined by 21, driven by mergers, voluntary closures and sales to credit unions, leaving 4,517 institutions in operation by the end of the quarter.
