The FDIC quietly released its first-quarter 2024 performance results for FDIC-insured institutions on May 29th, unveiling a troubling mix of resilience and ominous risks that could spell disaster for the banking industry. Despite a sharp rebound in net income, driven primarily by reduced FDIC special assessment expenses and lower goodwill write-downs, the sector faces severe threats from plummeting net interest margins, soaring unrealized losses, and deteriorating asset quality.

Bank Failures Loom Amid Troubling Financial Trends
The FDIC’s first-quarter 2024 report reveals a stark reality: while the banking industry shows some resilience, significant underlying issues are paving the way for a potential wave of bank failures. The seemingly positive headline figures hide deeper, more alarming problems. Declining net interest margins, rising unrealized losses, and worsening asset quality metrics signal a storm on the horizon.

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Net Income and Margins
The banking industry’s net income surged to $64.2 billion, a 79.5% increase from the previous quarter. However, this uptick is deceiving. Net interest margins have plummeted by 10 basis points to 3.17%, falling below the pre-pandemic average of 3.25%. This decline, driven by intense competition for deposits and falling asset yields, is a red flag. Community banks also saw a margin decline, amplifying the crisis.

Rising Unrealized Losses
Unrealized losses on available-for-sale and held-to-maturity securities skyrocketed by $39 billion to a staggering $517 billion. This marks the ninth consecutive quarter of substantial unrealized losses, primarily due to higher mortgage rates. These persistent losses are eroding banks’ capital and threatening their very stability.

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Declining Loan Quality
Total loans fell by $35 billion, driven by seasonal declines in credit card and auto loans. The year-over-year loan growth rate of 1.7% is the slowest since Q3 2021. Noncurrent loan balances are surging, particularly in non-owner-occupied commercial real estate (CRE) loans. The noncurrent rate for these loans has hit its highest level since Q4 2013, driven by office loan issues at the largest banks.

Increasing Problem Banks
The number of banks on the FDIC’s Problem Bank List surged to 63 in Q1 2024 from 52 in Q4 2023. These banks, plagued by financial, operational, or managerial weaknesses, now hold $82.1 billion in assets, up $15.8 billion from the previous quarter. This trend suggests a growing instability that could precipitate widespread failures in the banking sector.

Asset Quality and Charge-Offs
Asset quality metrics have deteriorated significantly, with a notable decline in CRE and credit card portfolios. The noncurrent rate increased to 0.91%, still below pre-pandemic levels but increasingly concerning. Credit card net charge-offs have reached their highest rate since Q3 2011, reflecting severe financial stress on consumers and raising the specter of widespread defaults.

Liquidity Concerns
While domestic deposits increased for the second consecutive quarter, the shift from noninterest-bearing to interest-bearing deposits continues to escalate. This shift raises banks’ funding costs, further squeezing already thin net interest margins.

Despite the first quarter’s superficially positive figures, the banking industry faces existential risks. Runaway inflation, volatile interest rates, and geopolitical uncertainties threaten to exacerbate existing problems in loan portfolios, especially in office-related CRE loans and consumer credit. The surge in problem banks and deteriorating asset quality metrics signal a brewing financial storm, requiring immediate and decisive action by the FDIC to prevent an impending disaster.