Bank profitability holds steady

Return on assets, the greatest predictor of profitability for FDIC-insured banks across the country, reached 1.20% in the second quarter of 2024, up 12 basis points from the first quarter of 2024, but down 1 basis point from the second quarter of 2023, according to the latest statistics from the Federal Deposit Insurance Corp. Community banks, which represent 90% of insured institutions, reported a pretax ROA of 1.24%, up 1 basis point from the previous quarter.

In Colorado, bank profitability held pretty steady in the second quarter of 2024, ending June 30, with Colorado-chartered institutions seeing an average return on assets of 0.98%, so almost right at 1 percent, said Jenifer Waller, president and CEO of The Colorado Bankers Association. 

“We finished 2023 at 1.01, we finished 2022 at 1.11 so we have been holding steady at that 1% mark,” she said. “If you look nationwide, it looks like we are right in line. The nationwide ROA is 1.09, so Colorado is right there.”

That 1% target or higher is what most banks aspire to when it comes to profitability. The ROA ratio is a company’s net, after-tax income divided by its total assets, according to Investopedia, “so even a relatively low ROA of 1 to 2 percent may represent substantial revenues and profit for a bank.”

The past year has seen several Northern Colorado banks drop below that target, including 17 banks in Boulder County, five banks in Broomfield County, 14 banks in Larimer County and nine banks in Weld County.

Among large national banks, Wells Fargo recorded an ROA of 1.33% and JPMorgan Chase Bank held steady at 1.54% as of Sept. 30, 2024. Bank of America posted an ROA of 1.06%.

Independent Bank, which is headquartered in Texas and has branches in Boulder, Larimer and Weld counties, has an ROA of -3%.

Shawn Osthoff, president of Bank of Colorado, said that prior to 2022, the Fed Funds rate moved up so quickly that the yield curve became inverted and if banks had three- to five-year fixed-rate loans on their books, they got caught in a bad spot. Depositors also wanted a higher rate, so banks raised deposit rates, which squeezed net interest margins. 

“Many were compressed and that is the biggest driver of earnings for banks,” he said. “Banks didn’t experience the return on assets or return on equity they were accustomed to in the years leading up to 2022, when we saw the rate increase.”

In the last quarter of 2024, rates have stabilized, he said. “We’ve seen short-term rates decrease with the Federal Reserve reducing the Fed Funds target rate by 75 basis points so far. That certainly allowed banks to reduce some of their short-term deposit rates, so they’ve improved margins here recently.”

Most banks have investment portfolios in which they buy Treasury bonds. The Treasuries are typically short-term in nature and can be out to five or six years. “Those yields they have on the books are well below market. They might have had a Treasury yielding 2% and the market is 5% or 6% so they didn’t have the earnings on their security portfolio they would have had otherwise, so that also compressed net interest margins,” Osthoff said.

Interest rates have had the biggest impact on ROA in the past few years. “In the previous year, we had a 500-basis point increase within six months making it hard for the market to adjust to it, and portfolios were struggling,” Waller said. “We recovered from that. We saw our rates fluctuate a little, and I expect we may see minor tweaks but not drastic jumps. It is harder for the industry and the market to absorb drastic swings. It is easier to do incremental changes.”

Gerard Nalezny, chairman of Verus Bank of Commerce, said that from where he sits in Fort Collins and Northern Colorado, which are “relatively solid economies, our activity is certainly steady. We’re seeing demand.” As a small community bank that specializes in commercial lending, Verus has a “luxury that larger institutions don’t. Our loan policy is we do stuff that makes sense. You can’t do that as a large institution,” he said.

Banks like Verus make their money on net interest spread, what they have to pay out and what they can earn. “Understanding where the rates are moving is important,” he said. “Most banks’ goal is to be interest rate neutral, where our profitability doesn’t change if rates go up or down. What is challenging is where short-term and long-term rates move. They may not move in the same direction.”

Northern Colorado’s retail market continues to be solid, as are the industrial and residential markets. Office occupancy rates are very high in Fort Collins, and the city hasn’t built a lot of office space in the past five to 10 years so there is not a lot of inventory.

“We don’t have the same work from home pressures in Fort Collins as they do in Denver,” he said.

The other impact to ROA is credit quality and the ability to repay, Waller added. “Ever since the pandemic started, we’ve been expecting an economic downturn that would impact the ability to pay. We haven’t seen that … credit cards showing delinquency and auto loan delinquency but that hasn’t come to fruition yet.”

Asset quality is measured by the credit risk associated with it, such as past due and non-accrual loans to total loans. For Colorado-headquartered institutions, that is below 1% at 0.82%, which is “pretty healthy,” Waller said. “It is higher than it was in 2022 and 2023, but we still had COVID money supporting that. It started dwindling in 2023. Being less than 1% is a healthy asset quality. Asset quality in this instance is specific to loans that would be delinquent or nonperforming.”

Osthoff said, “the good news is I think banks in Colorado in general have terrific asset quality and have liquidity and capital and are in a great position to lend for new projects, construction and home purchases. I think banks are in a great position, from the ability to lend and a desire to grow deposits and loans.”

Waller agreed. 

“It looks like things are very stable in the industry. Capital levels are still high. Delinquencies are still low. We expect minor fluctuations in interest rates but nothing to shock the market,” she said. “We are plugging along just fine.”

As far as 2025 is concerned, a lot remains to be seen with the new administration and new heads for banking’s regulatory agencies and how that will impact the economy, she said.

“We are seeing a lot of optimism and hearing a lot of optimism. They expect the economy to fall in line more and inflation to be reduced but it is way too soon to be predicting anything.”

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