Quarterly Report: Banking Conditions on the Upswing in District, Nation

Michelle Clark Neely

After stalling in the second quarter of 2011, bank earnings rebounded slightly in the third quarter, with both District and similar-sized U.S. banks recording increases in average profitability ratios. Return on average assets (ROA) jumped 10 basis points to 0.84 percent at District banks, up 27 basis points from a year ago. At U.S. peer banks—those with average assets of less than $15 billion—the increase in ROA was slightly smaller at 6 basis points; the third quarter ROA of 0.72 percent was 40 basis points higher than its level one year ago.

The rise in earnings at both sets of banks can be traced to improvements in the average net interest margin (NIM) and declines in loan loss provisions. At District banks, the average NIM increased 4 basis points to 4.02 percent and now stands 18 basis points above its year-ago level. For U.S. peer banks, the increase was also 4 basis points, with the NIM rising to 3.94 percent in the third quarter, a 7-basis-point gain from one year ago. At both sets of banks, the increase in average NIMs was due to increases in interest income and declines in interest expense.

Loan loss provisions continued their steady yearlong decline in the third quarter. For District banks, loan loss provisions as a percent of average assets fell 6 basis points to 0.53 percent. For U.S. peer banks, the loan loss provision ratio declined 2 basis points to 0.59 percent. The drop in loan loss provisions mirrors the mostly continual decline in nonperforming loans that has occurred since mid-2010.

Asset quality remains stable in the District and across the nation. At District banks, the ratio of problem assets (nonperforming loans and other real estate owned (OREO) to total loans plus OREO fell 6 basis points to 4.88 percent at the end of the third quarter. The decline in the problem assets ratio was more substantial for U.S. peer banks, at 18 basis points. At both sets of banks, most of the improvement in the aggregate ratio is related to the real estate loan portfolio, where the portion of nonperforming loans fell 9 basis points to 3.64 percent in the District and declined 20 basis points to 4.28 percent at U.S. peer banks. Although the drops in real estate loan delinquency rates were widespread at U.S. peer banks, not all categories of real estate loans at District banks experienced declines in nonperforming rates. Nonperforming loan rates for multifamily and nonfarm, nonresidential real estate loans rose in the third quarter in the District.

District banks had about 62 cents in reserves for every dollar of nonperforming loans at the end of the third quarter—unchanged from the second quarter and one cent more than at the same time a year ago. The loan loss coverage ratio at U.S. peer banks was slightly lower at 60 cents, up a penny from the second quarter and a nickel from a year ago.

District and U.S. peer banks remain, on average, well-capitalized. At the end of the third quarter, the average tier 1 leverage ratios for District banks and U.S. peer banks were 9.50 percent and 9.98 percent, respectively. Both ratios are up from their quarter-ago and year-ago levels.

On the Mend1

 2010: Q32011: Q22011: Q3
Return on Average Assets2
District Banks 0.57% 0.74% 0.84%
U.S. Peer Banks 0.32% 0.66% 0.72%
Net Interest Margin
District Banks 3.84% 3.98% 4.02%
U.S. Peer Banks 3.87% 3.90% 3.94%
Loan Loss Provision Ratio
District Banks 0.82% 0.59% 0.53%
U.S. Peer Banks 1.06% 0.61% 0.59%
Problem Assets Ratio3
District Banks 4.84% 4.94% 4.88%
U.S. Peer Banks 5.38% 5.13% 4.95%

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.