This post is part of a series titled “Supervising Our Nation’s Financial Institutions."

U.S. commercial banks continued their bounce back from pandemic-related challenges in 2021, recording satisfactory levels of earnings and asset quality measures well above industry benchmarks. Banks in Eighth Federal Reserve District states fared better too, with profitability and asset quality averages largely in line with national peers.

Despite a slight dip between the third and fourth quarters of 2021, return on average assets (ROA) for U.S. banks increased a robust 51 basis points from its year-end 2020 level to 1.22%. (See the table below.) The pattern was much the same in the states of the Eighth District; ROA at banks in these states ranged from 1.1% (Mississippi) to 1.55% (Arkansas) for the year. Five of the seven states posted an average ROA higher than the national average.

Return on Average Assets
Bank Group 2020:Q4 2021:Q3 2021:Q4
All U.S 0.71% 1.27% 1.22%
Arkansas 1.18% 1.65% 1.55%
Illinois 0.84% 1.16% 1.11%
Indiana 1.12% 1.35% 1.33%
Kentucky 1.19% 1.32% 1.27%
Mississippi 0.68% 1.24% 1.10%
Missouri 1.32% 1.38% 1.41%
Tennessee 1.21% 1.37% 1.35%
SOURCE: Reports of Condition and Income for Insured Commercial Banks (Call Reports).

Provisions Reversal Provides Earnings Boost

For a number of banks, one of the biggest contributors to the improvement in earnings in 2021 was the sharp reduction in—and in some cases, reversal of—loan loss provisions. Loan loss provisions were ramped up significantly in early 2020 at the start of the pandemic, when the economy shut down and massive loan losses were feared. As pandemic-related programs like the Paycheck Protection Program (PPP) bolstered consumers and businesses and economic conditions improved, banks began to unwind some of the precautionary measures they had taken in anticipation of losses.

For U.S. banks overall, loan loss provisions as a percentage of average assets declined 77 basis points between year-end 2020 and year-end 2021, falling from 0.64% to -0.13%; in aggregate, then, 2021 provisions added modestly to banks’ net income rather than subtracting from it. Provisions also fell significantly—though not as much as nationally—across banks in District states. At year-end 2021, the average loan loss provision ratio ranged from -0.13% in Tennessee to 0.06% in Kentucky.

PPP loan fees and fees related to mortgage activity also provided revenue boosts, especially for community banks.

The loan loss provision reductions and upticks in noninterest income masked continued weakness in net interest margins. Although steady between the third and fourth quarters of 2021, the average net interest margin at all U.S. banks has declined steadily from its last peak in early 2019. Nationally, the average net interest margin fell 26 basis points to 2.49% in 2021. Margins also declined in every District state but Tennessee; nevertheless, they remained above the national average in every state but Illinois. Higher loan demand and interest rates will likely lead to improvements in margins in coming quarters.

Asset Quality, Capital and Liquidity

Loan quality, as measured by the percentage of loans 90 days or more past due or in nonaccrual status, also continued to improve throughout 2021. The nonperforming loan ratio for all U.S. banks declined 6 basis points during the last quarter of the year to 0.89% and was down 30 basis points from its year-ago level. (See the table below.) The same pattern is observed in the seven District states. The average for each state was below the national average at the end of 2021, and ranged from a low of 0.38% in Missouri to a high of 0.66% in Illinois. Despite the economic hardship brought about by the pandemic, nonperforming loan ratios stayed well below those of the last several recessions and near historic lows.

Nonperforming Loan Ratio
Bank Group 2020:Q4 2021:Q3 2021:Q4
All U.S 1.19% 0.95% 0.89%
Arkansas 0.72% 0.53% 0.49%
Illinois 0.97% 0.74% 0.66%
Indiana 0.81% 0.67% 0.61%
Kentucky 0.72% 0.55% 0.51%
Mississippi 0.85% 0.64% 0.61%
Missouri 0.52% 0.44% 0.38%
Tennessee 0.70% 0.58% 0.52%
SOURCE: Reports of Condition and Income for Insured Commercial Banks (Call Reports).

Banks, including those in District states, remain well capitalized.1 The average tier 1 leverage ratio at year-end 2021 stood at 8.71% for U.S. banks overall. The ratios in District states exceeded the national average in every state but Illinois, which posted a modestly lower ratio of 8.51%. Arkansas and Kentucky banks posted average tier 1 leverage ratios of more than 10%.

Liquidity levels remain strong and continue to be elevated. Average loan-to-deposit ratios nationally and in District states are still well below pre-pandemic levels, indicating ample room to support increased loan demand.

What’s Next

U.S. banks, including those in Eighth District states, are healthy and well positioned to finance increases in loan demand. They weathered the pandemic, receiving assistance from government programs that financed loans to strapped customers and provided payments to consumers that helped boost deposit balances.

Notes and References

1 Banks are subject to four regulatory capital requirements. The minimum tier 1 leverage ratio requirement is 5%. Community banks—those with average assets of less than $10 billion—have the option of complying with one standard rather than four. That standard is called the Community Bank Leverage Ratio (CBLR). Provided they meet other requirements, community banks that maintain a CBLR in excess of 9% are considered adequately capitalized for regulatory purposes. During the pandemic, the standard was temporarily reduced to 8%. The vast majority of the nation’s banks are community banks.