Federal regulators have put a lot of attention on the banking system, with particular attention on and concern over banks that seem overexposed to commercial real estate loans.
Morningstar looked at community banks — the more than 4,100 institutions that represent 90% of all commercial banks in the U.S. According to the firm, the condition of these banks is stronger than it was before the pandemic.
The community institutions with up to about $2.2 billion in assets, comprise 11% of all FDIC-insured banking assets They also hold 15% of all loans and play an important part in the banking and finance systems.
In the second quarter of 2024, overall community banks made a 0.95% return on assets and a 9.60% return on equity. And 93% of them were profitable in the second quarter of 2024. Net income was up over the first quarter "despite higher loan loss provisioning with community banks generating positive operating leverage, said Morningstar. Net income interest and net non-income interest grew faster than non-interest expenses.
The portion of loans that were 90 days or more past due was 0.61% of all loans — still lower than the 0.96% pre-pandemic average from 2015 through 2019. The net charge-off ratio was low in the second quarter at 0.14%, compared to 0.12% in Q1 and 0.09% in 2023 Q2.
The amount of commercial and multifamily real estate loans was the sum of multifamily residential (7.52%), nonfarm nonresidential (30.54%), and construction and development (8.21%), or about 46.3% of the total loan mix. According to Morningstar, the CRE loans "have held up better than we have expected given higher interest rates, inflationary pressures, and lower valuations." It's unexpectedly good news given all the speculation about CRE loans that banks hold.
Morningstar speculates that strong knowledge of their markets and clients might explain part of the results. Another part is the willingness of local banks to work through payment problems.
One potential point of concern is unrealized losses on securities, which is what helped sink several banks early in 2023. Many banks bought Treasurys and mortgage-backed securities at a time when interest rates were near zero. When rates shot up as the Federal Reserve tried to bring down inflation, the values of the securities dropped like a heavy rock in a pond. Only categorizing the securities as hold-to-maturity allowed them to treat the bonds as not having lost value, which of course they have. About 97% of community banks reported such unrealized losses. However, that dropped 1.4% from the first quarter and 12.3% from the second quarter in 2023.