46 JULY / AUGUST 2021 FEATURE Commercial Banks Appear Resilient Despite pandemic challenges Carl D. White II Senior Vice President, Supervision Federal Reserve Bank of St. Louis Carl.White@stls.frb.org Commercial banking in the United States, like many sectors of the economy, appears to be bouncing back after a challenging 2020. Return on average assets averaged 1.38% in the first quarter of 2021, up 67 basis points from its year-end 2020 level and 100 basis points from one year earlier. U.S. banks finished 2019 with an average ROA of 1.3%. The pattern was much the same in states within the Eighth Federal Reserve District. Banks in Illinois, Mississippi, Missouri and Tennessee recorded average ROAs at or just below the national average in the first quarter of 2021, while banks in Indiana and Kentucky posted averages that exceeded the national average. The average ROA at Arkansas banks hit 1.68%, a level significantly above that of their district and national peers. An Earnings Roller Coaster The significant shifts in ROAs over the past 15 months can be traced in large part to pandemic-related set-asides banks made to offset potential loan losses, which counted as expenses and thus reduced earnings. The low ROA all U.S. banks averaged in the first quarter of 2020 (0.38%) reflects the large loan loss provisions the nation’s largest banks took at the start of the crisis. Similarly, the big upswing in ROA the past two quarters reflects, in part, the reversal of those provisions as economic conditions improved.1 This pattern is similar, though less pronounced, at banks in Eighth District states. The pandemic also increased pressure on interest income. Net interest margins have been eroding for several years, as banks faced increased competition and a low interest rate environment. Since the pandemic began, banks have benefited from an influx of deposits, but also faced a substantial decline in loan demand, notwithstanding the popularity of the Paycheck Protection Program. The downward effect on interest income has more than offset the decline in interest expense, reducing net interest margins. The net interest margin for all U.S. banks fell 62 basis points between the first quarter of 2020 and the first quarter of 2021, the largest year-over-year decline since the end of the Great Recession of 2007-09. For banks in Eighth District states, net interest margins did not fall as steeply; they declined by 25 to 43 basis points. Asset Quality, Capital and Liquidity Loan performance, as measured by the percentage of loans that are 90 days or more past due or in nonaccrual status, exceeded expectations during the pandemic. Nonperforming loans did increase as a percentage of total loans in 2020, but only modestly. As illustrated in the Nonperforming Loan Ratio chart, the nonperforming loan ratio for all U.S. banks peaked at 1.19% in the fourth quarter of 2020 before declining somewhat in the first quarter of 2021. The pattern was similar for banks in Eighth District states, although for four states (Arkansas, Kentucky, Mississippi and Missouri) the nonperforming loan
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