In Louisiana, with its French roots, they have a saying that dates back to the 1940s: "Laissez les bons temps rouler.” Translation: let the good times roll. It could be an apt motto for community banks at the moment. Community banks are enjoying a favorable financial tailwind that has given them an edge. Community banks saw improved results in Q3 2024, including higher net interest income and higher net operating revenue. There were also no community bank failures in the third quarter. In fact, things have been going so well that small banks outperformed the industry as a whole in several key areas. Promising Q3’2024 ResultsEach quarter, we review the FDIC’s quarterly banking profile and provide an update on trends in community banking. According to the FDIC third-quarter 2024 banking profile, which was released in December, momentum is with community banks. Here are some key takeaways for community banks as a group:
- Net income increased. Net income hit $6.9B for the quarter, up $463MM (6.7%) from the previous quarter and 3.9% from Q3’2023. More than 58% of community banks reported a QoQ net income increase. By comparison, the banking industry as a whole saw Q3 2024 net income decline by $6.2B (8.6%) from the previous quarter. However, that drop in income for the industry was mostly due to an unusually high income level for the second quarter, which saw a windfall $10B gain on equity transactions for certain banks.
- NII and NIM improvements. Net interest income (NII) rose $574.5MM (2.7%) over the previous quarter. The banking sector as a whole saw improved net interest income and margins, but again community banks performed slightly better than the aggregate in one key metric. While the banking industry saw net interest margins (NIMs) rise to 3.23%, community banks’ NIM increased by 6bp to 3.35%, thanks to rising yields on earning assets.
- Net operating revenue rose. Net operating revenue (net interest income plus noninterest income) increased $622.6MM (2.4%) in Q3. By contrast, industry net operating revenue rose a scant 0.3%, dragged down by a decrease in noninterest income.
- Unrealized losses dropped. Unrealized losses on securities fell 27.3% from the previous quarter and 47% from one year ago. Rates on long-term securities like 30Y mortgages and 10Y Treasury notes declined during the quarter and that helped boost the value of those securities already held. The industry as a whole did well here, too, with unrealized losses down 29%.
- Securities improvements boosted income. The securities turnaround did wonders for CFI income. In Q3 2024, CFIs recorded an income gain of $79MM on securities; in Q3 2023, they suffered a loss of $388MM.
- Charge-off ratio is better than industry average. One area to keep an eye on is the charge-off ratio, which rose 2bp from the previous quarter and is up 4bp YoY. The ratio now stands at 0.16%, which is 1bp higher than the pre-pandemic average of 0.15%. Still, community banks are faring better than the banking industry as a whole. Although the industry net charge-off ratio fell 1bp in the third quarter, at 0.67%, it’s still up 16bp YoY and 19bp above the pre-pandemic average.
Predicting the financial future is always tricky, but early readings point toward a continued positive outlook well into 2025. Community banks posted solid results in the third quarter, often outperforming the industry as a whole. That trend may continue well into 2025. Community banks would do well to try to capitalize on the things that are working now while also preparing for new economic pressures in the future.
