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Quarterly Report: Earnings and Asset Quality Trending Up in District, Nation


Michelle Clark Neely
Sunday, July 1, 2012

Bank earnings and asset quality measures continued to improve within District states and nationally in the first quarter of 2012. Return on average assets (ROA) averaged 0.95 percent in District states, up 36 basis points from year-end 2011 and 33 basis points from a year ago. This result virtually mirrors the 0.94 percent national average and the improvement from its quarter-ago and year-ago averages.

Within the District, banks in Arkansas, Indiana and Kentucky posted average ROA ratios above the District and national averages.[1] Illinois banks had the lowest average ROA at 0.74 percent, but that result is a huge turnaround from the -0.09 percent ROA recorded two years ago.

Lower loan loss provisions are primarily responsible for the earnings improvements, both nationally and in District states. Loan loss provisions as a percent of average assets fell 24 basis points to 0.36 percent between year-end 2011 and the end of the first quarter of 2012 for U.S. banks as a group; the ratio is also well below (down 26 basis points) its first-quarter 2011 level, meaning the improvement is not just the result of seasonally higher loan loss provisions in the fourth quarter of the year.

The average loan loss provision (LLP) ratio for banks in District states as a group was slightly higher than the national average in the first quarter at 0.40 percent but showed the same trend as far as large declines from year-end and year-ago levels.

The average loan loss provision ratios were below the all-District and national levels in Arkansas, Indiana, Mississippi and Tennessee. Illinois banks, still recovering from a larger-than-average asset quality problem, posted the highest average LLP ratio: 0.55 percent.

Net Interest Margins Down

The drops in loan loss provisions were more than enough to offset declining net interest margins (NIMs). The average NIM fell 4 basis points for U.S. banks as a whole to 3.89 percent and 5 basis points for District state banks to 3.86 percent. Among District states, all states but Kentucky and Tennessee recorded declines in the average NIM. Arkansas and Missouri banks posted the largest declines in NIMs, 15 basis points and 12 basis points, respectively. Their rather large declines in NIMs were the result of much sharper declines in interest income than interest expense. Five of the seven District states reported higher average NIMs than the national average. (See Table 1.)

Table 1

Earnings Performance1

  2011: 1Q  2011: 4Q  2012: 1Q 
Return on Average Assets2
All U.S. Banks 0.61% 0.68% 0.94%
All Eighth District States 0.62 0.59 0.95
Arkansas Banks 1.00 1.08 1.16
Illinois Banks 0.46 0.39 0.74
Indiana Banks 0.41 0.90 1.06
Kentucky Banks 1.28 0.68 1.48
Mississippi Banks 0.56 0.73 0.91
Missouri Banks 0.64 0.66 0.90
Tennessee Banks 0.36 0.04 0.89
Net Interest Margin
All U.S. Banks 3.87% 3.93% 3.89%
All Eighth District States 3.83 3.91 3.86
Arkansas Banks 4.21 4.31 4.16
Illinois Banks 3.68 3.75 3.66
Indiana Banks 3.81 3.97 3.90
Kentucky Banks 4.36 4.08 4.27
Mississippi Banks 3.83 4.01 3.99
Missouri Banks 3.62 3.79 3.67
Tennessee Banks 3.83 3.89 3.92
Loan Loss Provision Ratio
All U.S. Banks 0.62% 0.60% 0.36%
All Eighth District States 0.69 0.71 0.40
Arkansas Banks 0.50 0.50 0.31
Illinois Banks 0.89 0.96 0.55
Indiana Banks 0.82 0.45 0.30
Kentucky Banks 0.52 0.56 0.37
Mississippi Banks 0.67 0.55 0.23
Missouri Banks 0.51 0.58 0.38
Tennessee Banks 0.63 0.95 0.34

Compiled by Daigo Gubo

SOURCE: Reports of Condition and Income for Insured Commercial Banks

1 Because all District banks except 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.

Falling net noninterest expenses also provided a boost to first-quarter profits. For the seven District states, the ratio of net noninterest expenses to average assets declined 16 basis points to 1.86 percent. Five of the seven states experienced drops in this ratio, with Arkansas banks showing just a 1-basis-point uptick and Mississippi banks recording a 5-basis-point increase. In most cases, the trends in the two components of the ratio—noninterest income and noninterest expense—were both favorable as noninterest income rose while noninterest expense fell.

Nonperforming Assets Ratios Continue Declining

Asset quality remained on the upswing, both nationally and in District states. The nonperforming assets ratio—nonperforming loans plus other real estate owned (OREO) to total loans plus OREO—continued its steady decline in the first quarter. For all U.S. banks, the nonperforming assets ratio declined 7 basis points between year-end 2011 and the first quarter of 2012 to 4.64 percent; the ratio is down 66 basis points from its year-ago level.

For District states as a group, the nonperforming assets ratio remains higher than the U.S. average at 5.02 percent but is showing similar trends, with a 15-basis-point decline from year-end 2011 and a 41-basis-point decline from a year ago. All three major categories of loans—consumer, commercial and real estate—experienced drops in the portions that were nonperforming at both the national and District state levels. Deterioration in portfolios occurred in Kentucky’s commercial and real estate loans and Arkansas’ and Tennessee’s consumer loans. Illinois banks continue to lead the District in loan quality problems, especially in real estate, with a nonperforming assets ratio that still tops 6 percent.

Table 2

Asset Quality Measures1

  2011: 1Q  2011: 4Q  2012: 1Q 
Nonperforming Assets Ratio2
All U.S. Banks 5.30% 4.71% 4.64%
All Eighth District States 5.43 5.17 5.02
Arkansas Banks 5.58 5.67 5.34
Illinois Banks 6.77 6.22 6.25
Indiana Banks 4.02 3.64 3.49
Kentucky Banks 3.72 3.65 3.83
Mississippi Banks 4.64 4.52 4.19
Missouri Banks 4.87 4.81 4.64
Tennessee Banks 5.76 5.66 5.18
Loan Loss Coverage Ratio3
All U.S. Banks 57.92% 61.02% 62.40%
All Eighth District States 56.18 58.71 61.12
Arkansas Banks 62.6 60.06 65.46
Illinois Banks 45.04 49.68 49.87
Indiana Banks 71.57 64.11 67.05
Kentucky Banks 68.71 70.61 68.98
Mississippi Banks 60.26 69.12 74.69
Missouri Banks 68.27 67.19 73.40
Tennessee Banks 57.92 61.10 66.50

Compiled by Daigo Gubo

SOURCE: Reports of Condition and Income for Insured Commercial Banks

1 Because all District banks except one have assets of less than $15 billion, banks larger than $15 billion have been excluded from the analysis.
2 Loans 90 days or more past due or in nonaccrual status, plus other real estate owned (OREO), divided by total loans plus OREO.
3 Loan loss reserves divded by nonperforming loans.

Coverage Ratios Up a Little

Loan loss reserve coverage ratios continue to inch up, meaning bankers have set aside more funds to cover potential loan losses. At the end of the first quarter, U.S. banks had 62 cents reserved for every dollar of nonperforming loans, compared with 61 cents at year-end 2011 and 58 cents a year ago. District states had about 61 cents reserved for every dollar of nonperforming loans, versus 59 cents at year-end 2011 and 56 cents a year ago. Within the District, Mississippi banks posted the highest coverage ratio at 74.69 percent, up more than 500 basis points from year-end 2011. Missouri banks have the second highest coverage ratio of 73.40 percent. Illinois banks, with higher levels of nonperforming assets, have an average coverage ratio of just under 50 percent. Although these ratios have improved, they remain low compared with their pre-financial-crisis levels.

Tier 1 leverage ratios are still increasing nationally and in District states. The national average rose 11 basis points to just under 10 percent at the end of the first quarter, while the District state average increased 17 basis points to 9.58 percent. Arkansas banks posted an average tier 1 leverage ratio of 10.09 percent. Indiana banks lagged their District state peers just a bit, with an average leverage ratio of 9.34 percent.

Current Senior Loan Officer Survey


  1. Kentucky’s very high ROA of 1.48 percent can be attributed primarily to Republic Bank in Louisville, which is winding down a very lucrative income tax refund loan business. [back to text]