U.S. and Eighth District Banks Face Challenges but End 2024 on Solid Footing

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

The U.S. commercial banking industry posted satisfactory earnings, asset quality and capital in 2024, with several indicators up from their 2023 levels. Banks in Eighth District states also fared well, with most states posting solid earnings that are on par with or surpass national averages, and asset quality and capital measures that exceeded those of their national peers.

Earnings

Return on average assets (ROA), a key indicator of bank profitability, increased 2 basis points to 1.10% in 2024 for U.S. banks as a group.Unless otherwise specified, ratios cited throughout this post are computed as weighted averages rather than averages of individual bank results (unweighted averages). (See the first table.) Average ROA also increased in three of the seven states in the Eighth District in 2024 and exceeded the national average in five District states: Arkansas, Illinois, Indiana, Mississippi and Missouri.

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 declined 9 basis points in 2024 to 3.11%. The average NIM declined in 2024 for banks in five District states but still exceeded the national average in all states but Illinois.

Nationally, average ROA increased in 2024 because a drop in noninterest expenses more than offset declines in net interest income and noninterest income. Loan loss provisions—funds set aside to cover potential loan losses that are subtracted from earnings—were unchanged in 2024 at 0.37% of average assets. In the District, noninterest income rose or was flat in five of the seven states; noninterest expenses declined or were flat in all but two states. And although loan loss provisions increased in three District states, the amounts were modest, and the ratio of loan loss provisions to average assets is low by historical standards in the U.S. and District states.

Asset Quality and Capital

The ratio of nonperforming loans—loans that are 90 days or more past due or in nonaccrual status—to total loans ticked up 11 basis points in 2024 to 0.95% at U.S. banks overall. (See second table below.) While that increase indicates a decline in asset quality, the ratio is still low by historical standards and below the levels during the COVID-19 pandemic. The ratio also rose in all seven District states but remained at or below the U.S. average in all of them. Despite concerns about the health of commercial real estate (CRE) following the pandemic, nonperforming CRE loan rates remain below nonperforming loan rates overall in the nation and in most Eighth District states.

Average Tier 1 capital ratios remain well above regulatory minimums for U.S. banks overall and banks in District states.Tier 1 capital consists primarily of a bank’s common stock and retained earnings.

The Year Ahead

U.S. banks and their District state peers are generally in sound financial condition, with solid profit rates, asset quality and capital. As always, bankers will have to navigate around economic factors outside their control in 2025, such as loan demand and interest rates. Prudent asset and liability management and noninterest cost containment are key to a financially sound year.

Notes

1. Unless otherwise specified, ratios cited throughout this post are computed as weighted averages rather than averages of individual bank results (unweighted averages).
2. Tier 1 capital consists primarily of a bank’s common stock and retained earnings.