Strong Earnings and Asset Quality Put U.S. Banks on Solid Ground By Carl White, Senior Vice President of Supervision, Credit and Learning Division, Federal Reserve Bank of St. Louis U.S. banks are in good condition with solid earnings, sound asset quality and regulatory capital levels above required minimums. This assessment comes from the Federal Reserve Board of Governors in its semiannual Supervision and Regulation Report published in November. The report covers banking system conditions in the first half of 2024, as well as regulatory and supervisory developments for the institutions under the Fed’s supervisory umbrella. Supervision by the Numbers Although the Fed has supervisory authority over several large banks and all the nation’s bank holding companies, most banks under its supervisory umbrella are community banks — banks with assets of less than $10 billion. Of the 705 state member banks (SMBs) the Fed supervised at midyear 2024, 92% (650 banks) met that community bank threshold and were part of the Fed’s Community Banking Organization (CBO) portfolio. The next largest group — consisting of 42 SMBs — makes up the Regional Banking Organization (RBO) portfolio; banks in this group have total assets of $10 billion to $100 billion. At the St. Louis Fed, all our supervised banks fall into the CBO or RBO portfolio. Currently, we have direct supervisory responsibility for 129 SMBs in the two portfolios, representing nearly one-fifth of the Fed System’s supervised banks. Eight banks are in our RBO group and the remaining 122 are in the CBO group. In terms of assets under supervision, the RBO banks have a combined $256.1 billion, or about 70% of the total. The combined assets of the CBO banks total $108.2 billion. An Eye on Credit While banking fundamentals are currently strong, supervisors are keeping an eye on credit quality. The level of nonperforming loans remains low, and the ratio of nonperforming loans to total loans is below the 1% benchmark. However, delinquency rates for certain categories of consumer and commercial real estate (CRE) loans have risen. In the consumer loan segment, supervisors are watching credit card and auto loan delinquencies, both of which have ticked up in recent quarters; the auto loan delinquency rate was just below its five-year high in the second quarter. The nonperforming ratio for CRE loans is at its highest level since 2014, primarily driven by loans for office buildings in major cities. At large banks, the nonperforming loan rate for office loans hit 11% in the second quarter. And while the rate didn’t increase as much at small banks, they tend to hold a larger percentage of their loan portfolios in CRE loans, elevating the stakes for CRE market 26 | The Show-Me Banker Magazine
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