42 JULY / AUGUST 2022 Banks Finished Strong in 2021 Nationwide and in Indiana FEATURE Carl D. White II Senior Vice President, Supervision Federal Reserve Bank of St. Louis Carl.White@stls.frb.org Commercial banks throughout the United States 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 Indiana fared better too, with profitability, asset quality and regulatory capital ratio averages largely in line with national peers. Despite a slight dip between the third and fourth quarters of 2021, return on average assets for U.S. banks increased a robust 51 basis points from its year-end 2020 level to 1.22%. Indiana banks fared even better, with average ROAA increasing from 1.29% in 2020 to 1.38% in 2021. 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 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 at Indiana banks. For 2021 as a whole, the average loan loss provision ratio in Indiana dipped to -0.01%. The loan loss provision reductions 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. The average NIM at Indiana banks declined by a similar amount. 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. The same pattern is observed in Indiana, where the nonperforming loan ratio declined 20 basis points in 2021, remaining well below the national average. 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. Banks, including those in Indiana, remain well capitalized.* The average tier 1 leverage ratio at year-end 2021 stood at 8.71% for U.S. banks overall and at 9.46% in Indiana. Liquidity levels remain strong and continue to be elevated. Average loan-to-deposit ratios nationally and in Indiana are still well below pre-pandemic levels, indicating ample room to support increased loan demand.
RkJQdWJsaXNoZXIy MTg3NDExNQ==