Despite some headwinds going into 2024, the U.S. commercial banking industry posted satisfactory earnings, asset quality and capital in 2023, although several indicators were down from their 2022 levels. Banks in Eighth Federal Reserve District states also fared well, with most states posting average earnings and asset quality measures that exceeded those of their national peers. The industry faced several challenges in 2023, including three large regional bank failures, stiff competition for deposits and concerns about commercial real estate performance. Some of these challenges will remain in 2024.


Return on average assets (ROA), a key indicator of bank profitability, declined 2 basis points to 1.09% in 2023 for U.S. banks as a group.1 (See the table below.) Average ROA also declined at banks in all Eighth District states in 2023, but still exceeded the national average in three of the District’s seven states.

Return on Average Assets
Bank Group 2022:Q4 2023:Q3 2023:Q4
All U.S. 1.11% 1.24% 1.09%
Arkansas 1.27% 1.21% 1.15%
Illinois 0.94% 0.78% 0.71%
Indiana 1.32% 1.26% 1.21%
Kentucky 1.18% 1.09% 1.05%
Mississippi 1.08% 1.04% 1.07%
Missouri 1.31% 1.33% 1.29%
Tennessee 1.23% 1.14% 1.09%
SOURCE: Reports of Condition and Income for Insured Commercial Banks (Call Reports).

The main driver of bank earnings is net interest income—the difference between interest income from loans and other assets and the interest expense of deposits and other liabilities. The average net interest margin (NIM)—interest income less interest expense divided by average earning assets—for U.S. banks rose from 2.89% in 2022 to 3.21% in 2023, an increase of 32 basis points. In the District, Illinois banks posted a 40-basis-point increase in average NIM, but at 2.93% it remains below those of other District states. All states but Illinois and Indiana recorded average NIMs in 2023 that exceeded the national average. It’s important to note that many banks faced sharp increases in the cost of funds in 2023, resulting in significant NIM compression, a result that won’t show up in group averages when performance by individual banks varies widely.

Although NIM increased, average ROA declined in 2023 in the nation and District states because of declining noninterest income and rising noninterest expenses. Loan loss provisions—funds set aside to cover potential loan losses—also increased. Nationally, loan loss provisions as a percentage of average assets increased 15 basis points to 0.37%. In the District, the ratio increased in all District states but Indiana, where it dropped slightly. Loan loss provisions as a percentage of average assets ranged from 0.11% in Missouri to 0.28% in Illinois. Despite the increases, provisions remain low by historical standards.

Asset Quality and Capital

Continued increases in interest rates and economic uncertainty in 2023 led to a slight deterioration in asset quality at both the national and Eighth District state levels. The ratio of nonperforming loans—loans that are 90 days or more past due or in nonaccrual status—to total loans ticked up 13 basis points to 0.88% between year-end 2022 and year-end 2023. (See the table below.) The average nonperforming loan rate in every District state was lower than the national average and ranged from 0.32% in Missouri to 0.76% in Illinois. While these ratios do not indicate widespread deterioration in asset quality, supervisors are closely monitoring banks with large exposures to commercial real estate, especially office loans, as that sector is experiencing declining demand and refinancing pressures.

Nonperforming Loan Ratio
Bank Group 2022:Q4 2023:Q3 2023:Q4
All U.S. 0.75% 0.84% 0.88%
Arkansas 0.41% 0.46% 0.45%
Illinois 0.52% 0.73% 0.76%
Indiana 0.48% 0.50% 0.55%
Kentucky 0.37% 0.42% 0.44%
Mississippi 0.51% 0.58% 0.65%
Missouri 0.26% 0.30% 0.32%
Tennessee 0.50% 0.56% 0.63%
SOURCE: Reports of Condition and Income for Insured Commercial Banks (Call Reports).

U.S. banks and their District state peers generally remain well capitalized. The average Tier 1 capital leverage ratio for U.S. banks rose 17 basis points over the past year, and measured 8.98% at year-end 2023. In the District, the average Tier 1 capital leverage ratio ranged from 9.39% in Illinois to 10.87% in Arkansas at year-end 2023. Banks in Kentucky and Tennessee also posted average capital ratios that exceeded 10%.

The Year Ahead

Generally, U.S. banks and their peers in Eighth District states started 2024 in sound financial condition, with above benchmark profit rates and solid asset quality and capital ratios. Although overall bank liquidity is satisfactory, average loan-to-deposit ratios and noncore funding ratios have increased, on average, for all U.S. banks. In addition, overall deposit costs continue to climb. Bankers will face a challenging environment in the coming year, but they are largely entering it in solid condition.


  1. Unless otherwise specified, ratios cited throughout this post are computed as weighted averages rather than averages of individual bank results (unweighted averages).