The balance sheet composition of the US banking industry continued shifting in the third quarter toward wholesale funding on the liability side and loans and leases on the asset side.

That transformation is taking place as the industry gradually shrinks. Total assets for US commercial banks, savings banks and savings and loan associations were $23.406 trillion at Sept. 30, representing a 0.2% decline from June 30 and a 2.4% decrease since the all-time peak at March 31, 2022, according to data from S&P Global Market Intelligence.

Funding transformation

Non-brokered deposits totaled $17.256 trillion at Sept. 30, down 1.0% sequentially and representing the sixth consecutive quarterly decline.

Regional banks disclosed mixed results. Non-brokered deposits at Dallas-based Comerica Inc. unit Comerica Bank and Hicksville, NY-based New York Community Bancorp Inc. unit Flagstar Bank NA were down 6.8% and 5.8%, respectively, while the banking units of Phoenix-based Western Alliance Bancorp. and Kalispell, Mont.-based Glacier Bancorp Inc. had growth of 7.1% and 4.1%, respectively.

The results were more uniform for the primary banking subsidiaries for the Big Four US banks, each of which reported a quarterly decrease of at least 2.0%.

To compensate for fewer non-brokered deposits, most of the largest banks are increasing their reliance on wholesale funding. During the last year, brokered deposits plus total borrowings have more than doubled at Bank of America Corp. unit Bank of America NA and Wells Fargo & Co. unit Wells Fargo Bank NA. At JPMorgan Chase & Co. unit JPMorgan Chase Bank NA, the increase is 30.5%. Bucking the trend within the Big Four is Citigroup Inc. unit Citibank NA, with a 10.2% yearly decrease.

Asset transformation

During the last 18 months, banks have been replacing securities with loans and leases. Following a slight downturn in the first quarter, tepid loan growth resumed in the second quarter and continued in the third quarter, albeit at an even slower rate. Meanwhile, total securities have gone down for six quarters in a row. Since March 31, 2022, loans and leases are up 8.7%, while securities have fallen 15.3%.

In the regional banking space, Little Rock, Ark.-based Bank OZK is one of the top companies by recent loan growth. Its loans and leases grew 7.3% during the third quarter and were up 29.8% year over year.

On a third-quarter earnings conference call, Bank OZK President Brannon Hamblen said that the bank "is seeing a lot of opportunity in condos in the Miami markets." But, he added, "multifamily and industrial has been, for the most part, the big movers. We've had some good mixed-use in there as well."

Industrial and warehouse commercial real estate lending has been a significant growth driver for several banks during the last year. In contrast, many banks are cutting back on office exposure.

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Declining profitability

Pre-provision net revenue (net interest income plus noninterest income minus noninterest expense) fell to a four-quarter low of $108.47 billion. Quarter over quarter, a lower noninterest expense level was not enough to offset less noninterest income and flat net interest income.

On the bright side, the industry as a whole enjoyed margin expansion for the first time this year. The net interest margin on a fully taxable equivalent basis moved up 2 basis points from the second quarter to 3.23%.

Another boost to bottom-line profitability was lower provisioning. The provision for credit losses declined 11.1% quarter over quarter.

Going forward, the industry may not have the luxury of skimping on provisions. Net charge-offs to average loans crept up again in the third quarter to a three-year high, and problem asset ratios are on the upswing.