Download the article

By Mary Bongers

Current banking conditions are heavily influenced by recent economic trends, including changes in the interest rate environment. The two recent rate hikes by the Federal Open Market Committee (FOMC), as well as the announcement of further hikes, have had an impact on the financial position of banks and will continue to play an important role in shaping banking conditions throughout year round. Banks’ net interest margins (NIMs) remain compressed (see Charts A10-A11) as yields on earning assets continued to fall in the first quarter as rate hikes have yet to be fully priced in in the balance sheets. Recent increases in the fed funds rate have not been large enough to lift all variable rate loans above the floors, and competition for loans is aggressive limit increases in loan yields. In addition, balance sheets are overflowing with liquid but low-yielding assets, which puts continued pressure on margins. Although interest income remains depressed, interest expense in the Tenth Ward (district) is also low, totaling 0.17% of average assets, a record high. Most banks have not started increasing the interest paid on deposits due to the abundance of funds, resulting in low deposit betas.

Interest rate movements also impacted unrealized positions in available-for-sale (AFS) securities portfolios. Due to rising interest rates, district banks’ unrealized losses totaled 10.5% of Tier 1 capital in the first quarter, marking a record high (see Supplementary Chart 1 below). Balance sheet management during the pandemic has contributed to current unrealized positions, as many banks have extended the duration of the securities portfolio (see charts D3-D4) in search of higher yields in response to NIM compression due to lukewarm loan demand and increasing liquid assets throughout the health crisis. However, banks have since started to reduce their securities holdings, and investments with maturities of less than 5 years now constitute more than 50% of total securities for the first time since the third quarter of 2020.

Date All US Banks American Community Banks American regional banks major american banks All neighborhood banks District banks under $250 million District Banks $250 million – $1 billion District banks above $1 billion
1Q-17 -0.2 -0.5 -0.6 -0.1 -0.5 -0.5 -0.6 -0.4
2Q-17 0 0.3 -0.2 0 0.5 0.6 0.8 0.3
3Q-17 0 0.2 -0.2 0 0.3 0.4 0.6 0.2
4Q-17 -0.3 -0.6 -0.7 -0.1 -0.8 -0.9 -0.6 -0.9
1Q-18 -0.9 -2.2 -2 -0.4 -2.8 -2.6 -2.5 -3
2Q-18 -1.1 -2.5 -2.4 -0.4 -3.2 -2.9 -2.6 -3.5
3Q-18 -1.3 -3.1 -2.8 -0.5 -3.9 -3.5 -3.4 -4.3
4Q-18 -0.8 -1.8 -1.6 -0.3 -2.2 -2.2 -2.1 -2.2
1Q-19 -0.2 -0.4 -0.5 -0.1 -0.3 -0.5 -0.3 -0.1
2Q-19 0.4 1 0.7 0.2 1.7 1.1 1.5 2
3Q-19 0.6 1.4 1.1 0.3 2.3 1.6 1.9 2.7
4Q-19 0.4 1.2 0.9 0.2 1.9 1.4 1.7 2.1
1Q-20 1.6 1.7 2.7 1.3 3 1.1 1 4.5
2Q-20 2.1 3.3 3.4 1.6 5.2 3.8 4 6.1
3Q-20 2 3.3 3.3 1.4 5.3 3.9 4.1 6.1
4Q-20 2 3.5 3.1 1.4 5.2 3.8 4.3 5.9
1Q-21 0.6 1.4 0.8 0.4 2.4 1.7 1.9 2.7
2Q-21 0.9 1.9 1.3 0.6 3.1 2.1 2.6 3.5
3Q-21 0.5 1.4 0.7 0.3 2.3 1.9 2.2 2.4
4Q-21 -0.1 0.4 -0.2 -0.1 0.7 0.4 0.9 0.7
1Q-22 -4.1 -8.3 -7.4 -2.4 -10.5 -9.7 -9.8 -10.9

Unrealized losses are impacting banks’ liquidity positions, although balance sheets remain full of liquid assets, totaling 25% of assets (see charts D8-D9) and the loan-to-deposit ratio remains low at 64% (see graphs D5-D6). Quarterly deposit growth slowed to 1.3%, while total loan growth remained subdued at 2% and was partly funded by significant declines in cash and receivable balances (see Chart C3). Loan increases in the quarter were largely driven by growth in commercial real estate (CRE) and commercial and industrial (C&I) loans, offsetting the decline in agricultural loans (see Chart C4).

Asset quality remains stable as levels of arrears, non-recognition and imputation are low and declining (see charts B4-B5). Loans modified under Section 4013 of the CARES Act also declined, totaling just over 1% (see Supplemental Chart 2 below). Provision for loan and lease losses (ALLL) levels are directionally consistent with problem assets and have decreased to 1.3% of total loans, while the coverage ratio continues to increase (see charts B12 and B13 ). Despite the decline in ALLL to total loans, provisions have increased to support overall provisioning levels, following low or reverse provisioning throughout 2021. However, provisions remain historically low at 0.05 % of average assets in the district (see graphs B1-B2).

Date All US Banks American Community Banks American regional banks major american banks All neighborhood banks District banks under $250 million District Banks $250 million – $1 billion District banks above $1 billion
2Q-20 5.5 11 9.3 3 9.2 2.7 7.6 10.9
3Q-20 3.6 6.2 3.8 2.7 4.9 2.2 5.8 4.9
4Q-20 2.6 4 2.7 2.2 3.3 1.3 4.8 3.1
1Q-21 2.3 3.1 2.1 2.1 2.8 0.9 4.2 2.6
2Q-21 1.8 2.3 1.6 1.8 2.3 0.8 3 2.2
3Q-21 1.5 1.7 1.1 1.6 1.8 0.6 2.2 1.8
4Q-21 1.2 1.3 0.8 1.3 1.3 0.4 1.5 1.3
1Q-22 1 1.1 0.6 1 1.1 0.3 1.1 1.2

Higher provision charges, along with lower NIMs, impacted earnings performance in the first quarter. Return on average assets (ROAA) declined to 1.10% in district banks (see charts A4-A6). Lower non-interest income also hampered profits, although this was offset by continued efficiency gains in overhead (see charts A14 to A17).

Capital levels continue to be under pressure due to bloated balance sheets. The leverage ratio remained broadly balanced compared to the previous quarter, totaling 9.11% across all district banks (see charts A1-A2). While capital ratios are hampered by the growing size of balance sheets, growth has slowed and capital injections into district banks increased in the first quarter.

To view the full article, including key graphics, click PDFhere.

Mary Bongers is a risk specialist in the Risk Management and Oversight Division of the Federal Reserve Bank of Kansas City.

Previous

Facilitate the Federal Government's Mass Counting Program

Next

Obi v Federal Republic of Nigeria

Check Also