ByMichelle Clark Neely
Bank earnings were up moderately at the national level but were mixed in District states in the second quarter, while asset quality improved once again across all states. Overall, the District and national banking industries are in considerably better shape now than they were one year ago.
For all U.S. banks with assets of less than $15 billion, return on average assets (ROA) jumped 13 basis points between the first and second quarters to 1.06 percent and is up 41 basis points from a year ago. ROA dropped 2 basis points to an average of 0.91 percent for banks in District states; despite the decline, ROA in District states is still up an average of 36 basis points from a year ago. ROA increased between the first and second quarters at Arkansas, Illinois, Indiana and Missouri banks, while it declined just one basis point at Mississippi banks. ROA declined 26 basis points in Kentucky, primarily because of a seasonal decline in a line of business at one institution. Despite that drop, Kentucky banks still posted the highest ROA among District states, at 1.21 percent.
At the national level, the jump in ROA in the second quarter was almost solely due to a 15-basis-point increase in noninterest income. A slight uptick in net interest income and a small decline in loan loss provisions also contributed to profit increases. Within District states, there were generally small increases or decreases in the three major components of earnings—net interest income, net noninterest expense and loan loss provisions—but no consistent pattern that explains why ROA ticked up or down. Banks in Arkansas and Indiana outperformed their national peers in the second quarter, while Illinois, Kentucky (absent the one institution), Mississippi, Missouri and Tennessee banks posted lower average profit ratios. Although loan loss provisions have dropped significantly over the last year and have provided a boost to earnings, they have likely hit a trough, as many banks are now in a position of running off loan loss reserves in excess of required levels.
Asset quality measures continue to improve, nationally and in District states. The nonperforming assets ratio—nonperforming loans plus other real estate owned (OREO) to total loans plus OREO—dropped 36 basis points for all U.S. banks to 4.27 percent in the second quarter. One year ago that ratio topped 5 percent. The average nonperforming assets ratio for District states also declined more than 30 basis points in the second quarter to 4.71 percent. Within the District, Indiana banks posted the lowest nonperforming assets ratio in the second quarter (3.30 percent), while Illinois banks recorded the highest ratio (5.74 percent). Although problem loans remain stubbornly high, asset quality has improved at Illinois banks, with the nonperforming assets ratio down 50 basis points from the first quarter and 100 basis points from a year ago.
In general, nonperforming loan rates fell across all asset classes in all District states. The only exceptions to the general decline occurred in Kentucky, where nonperforming construction and land development loans edged up; in Arkansas, where nonperforming commercial and industrial loans rose slightly; and in Tennessee, where nonperforming consumer loans increased.
Lower nonperforming loan rates led to large increases in loan loss coverage ratios in the second quarter. U.S. peer banks had set aside about 67 cents for every dollar of nonperforming loans at mid year, up about 4 cents from the previous quarter and more than 8 cents from a year ago. The trend was similar in District states, with the average loan loss coverage ratio increasing about 3 cents between the first and second quarters and up almost 8 cents from a year ago. Among District states, Mississippi banks recorded the highest average coverage ratio (77.89 percent), while Illinois banks recorded the lowest (52.59 percent). Every District state but Illinois posted higher coverage ratios than the national average in the second quarter.
Tier 1 leverage ratios edged up again in the second quarter. Nationally, the tier 1 leverage ratio averaged 10.1 percent, up 13 basis points from the first quarter and 26 basis points from a year ago. The average for District states in the second quarter increased a more modest 4 basis points to 9.61 percent. Arkansas and Kentucky banks had average leverage ratios that topped 10 percent, while Missouri banks (9.33 percent) and Illinois banks (9.36 percent) posted ratios that trailed the District state and national averages.
|2011: 2Q||2012: 1Q||2012: 2Q|
|Return on Average Assets2|
|All U.S. Banks||0.65%||0.93%||1.06%|
|All Eighth District States||0.55||0.93||0.91|
|Net Interest Margin|
|All U.S. Banks||3.90%||3.88%||3.89%|
|All Eighth District States||3.83||3.85||3.84|
|Loan Loss Provision Ratio|
|All U.S. Banks||0.62%||0.37%||0.36%|
|All Eighth District States||0.74||0.41||0.40|
|2011: 2Q||2012: 1Q||2012: 2Q|
|Nonperforming Assets Ratio2|
|All U.S. Banks||5.15%||4.63%||4.27%|
|All Eighth District States||5.42||5.03||4.71|
|Loan Loss Coverage Ratio3|
|All U.S. Banks||58.37%||62.49%||66.56%|
|All Eighth District States||56.52||61.02||64.04|