Quarterly Report: Bank Performance Continues on Meandering Path

Michelle Clark Neely

The slight uptick in bank earnings experienced by District banks and their U.S. peers in the third quarter did not carry over into the final quarter of 2011. Asset quality measures did continue to improve, however. Real estate loans—especially those backed by commercial properties—remain the primary source of nonperforming assets.

Return on average assets (ROA) at District banks fell 3 basis points in the fourth quarter to 0.79 percent, but the ratio was still 29 basis points above its year-ago level. ROA also declined at U.S. peer banks—those with average assets of less than $15 billion—but by a smaller amount, to 0.70 percent. Although earnings ratios at U.S. peers still fall below those of District banks, the gap between the two sets of banks has narrowed in recent quarters. Two years ago, District banks outperformed their U.S. peers by 45 basis points when measured by ROA; by year-end 2011, that gap had fallen to 9 basis points. A more dramatic decline in funds set aside to cover nonperforming assets by U.S. peers than those by District banks explains the closing of this difference.

In the District, the decline in ROA can be traced to a slight increase in loan loss provisions that is typical of the fourth quarter and a slightly larger increase in noninterest expenses, primarily personnel expenses. The net interest margin (NIM) increased 1 basis point in the fourth quarter to 4.03 percent. The margin is up 17 basis points from a year ago thanks to a much larger decline in interest expenses than in interest income.

For U.S. peer banks, ROA declined a bit because a small increase (2 basis points) in the average NIM was offset by a larger increase (4 basis points) in noninterest expenses. An uptick in personnel expenses was responsible for half the increase in overall noninterest expenses. The loan loss provision ratio rose just 1 basis point in the final quarter to 0.60 percent. The ratio is about half its year-ago level of 1.10 percent, reflecting in part the steady improvement in asset quality since year-end 2010.

Asset Quality Picks Up in District and Nation

Asset quality improved somewhat in the final quarter of 2011 at both sets of banks, with nonperforming loans and other real estate owned (OREO) declining from the third quarter. The problem assets ratio—nonperforming loans plus OREO divided by total loans plus OREO—fell 22 basis points to 4.66 percent in the District. The chief reason for the decline in this ratio was the sharp drop in nonperforming construction and land development (CLD) loans, which make up more than a quarter of the District’s total nonperforming loans. The nonperforming CLD loan ratio fell below 10 percent for the first time since late 2009, hitting 9.73 percent at year-end 2011. Nonperforming rates also fell in other parts of the real estate portfolio, as well as in the consumer loan and the commercial and industrial (C & I) loan categories.

The asset quality picture is much the same at U.S. peer banks. Declines in nonperforming real estate loans, especially CLD loans, brought down the aggregate problem asset and nonperforming loan ratios. Nonperforming C & I loans also fell, though nonperforming consumer loans—credit card and other consumer loans—rose. Nonperforming ratios for all categories of loans are higher at U.S. peers than at District banks, in part reflecting less volatile real estate markets and a predominant “lending local” lending strategy in this region of the country.

Coverage Ratios Are Up and Capital Ratios Are Steady

Although loan loss reserves declined at year-end at both sets of banks, loan loss reserve coverage ratios actually rose because nonperforming loans fell more. The coverage ratio at District banks increased by 310 basis points to 65.01 percent, meaning District banks had on average 65 cents in reserves for every dollar of nonperforming loans. The coverage ratio rose 144 basis points to 61.63 percent at U.S. peer banks.

Capital ratios stayed basically flat in the fourth quarter, and the average tier 1 leverage ratio was well above the regulatory minimum at 9.46 percent for District banks and 9.90 percent for U.S. peer banks.

Earnings Zig, Asset Quality Zags1

  2010: Q4 2011: Q3 2011: Q4
Return on Average Assets2
District Banks 0.50% 0.82% 0.79%
U.S. Peer Banks 0.22 0.72 0.70
Net Interest Margin
District Banks 3.86 4.02 4.03
U.S. Peer Banks 3.9 3.94 3.96
Loan Loss Provision Ratio
District Banks 0.88 0.54 0.55
U.S. Peer Banks 1.10 0.59 0.60
Problem Assets Ratio3
District Banks 4.84 4.88 4.66
U.S. Peer Banks 5.27 4.95 4.68

SOURCE: Reports of Condition and Income for Insured Commercial Banks

  1. Because all District banks but one have assets of less than $15 billion, banks larger than $15 billion have been excluded from the analysis.
  2. All earnings ratios are annualized and use year-to-date average assets or average earning assets in the denominator.
  3. Problem assets are loans 90 days or more past due or in nonaccrual status plus other real estate owned (OREO). The ratio is computed by dividing problem assets by total loans plus OREO.


Keep up with what’s new and noteworthy at the St. Louis Fed. Sign up now to have this free monthly e-newsletter emailed to you.

Subscription Options

Additional Fed Publications

Fed in Print: An index of the economic research conducted by the Fed.