We would like to say a belated "Thank You" to all those that serve or have served in the US Armed Forces, particularly those that paid the ultimate price. The sacrifices that have been made by veterans and their families in order to protect the goals and values of this Nation are deeply appreciated.
Of all the armed services, the one that can best exemplify the current banking environment are the Marines. Their "first in, last out" attitude and their ability to "adapt, improvise and overcome" best sums up 2010. The 3rd quarter produced results that continue past trends for the year with some notable items we would like to highlight in our early data. This data is approximate and comes from all banks, less thrifts, that have filed already.
For starters, the average ROE came in 4.79%, down from 5.44% from last quarter, but up markedly from the 0.97% from the same period last year. ROA followed a similar trend and came in at 0.53%. Even on a pre-tax, pre-provision basis, earnings were down. Part of this decrease was due to lower net interest margin that went from 3.85% last quarter to 3.83%. Despite a cost of funds that dropped 6bp to 0.91% for the industry, loan pricing became more competitive and fell from its near term high of 4.84% back in March to 4.75% in 3Q. The largest driver of this lower profitability at most banks was the continued deleveraging as loans-to-deposits fell at its fastest pace in more than a year from 78% last quarter to 75%. On a secondary basis, overhead costs ticked up as bank's efficiency ratio dropped from an average of 55.34% to 58.23%.
Liquidity improved for most banks driven by the 1.5% reduction of loans (about a 6% annual rate) on the balance sheet. Lower net loans combined with a faster formation of transaction depository accounts, increased core liquidity by 4% for most banks. As a result, many banks too the opportunity to mature higher priced wholesale and local sources of funds, thereby improving margins. Non-interest income as a percent of both revenue and assets fell just slightly, largely driven by lower fees coming from checking accounts (mostly lower overdrafts). Branch expenses remained stable and while compensation increased (largely driven by higher benefit costs), productivity also increased keeping the net cost of employees largely unchanged. It also should be noted that the number of workers at banks also remained unchanged.
Asset quality continues to be at the tip of the spear and improved slightly in 3Q. Non-performing assets plus REO as a percent of total assets decreased from 3.30% to 3.13%, mainly driven by larger banks. Compared to capital, the average Texas Ratio in the industry fell from 40.30% to 37.40%. ALLL, as a percent of loans, fell from 3.51% to 3.39%.
As a result of a higher number of new equity raises, capital ratios improved across the board. For all banks, total risk-based capital increased from 14.94% to 15.11%. On the balance sheet side, while we mentioned that deposits increased and loans decreased, composition changed. Construction and CRE held stable, while C&I was the fastest growing loan class followed by residential and then consumer. "Other" or specialty loans had a large decrease. In addition, it should be noted that securities as a percent of total assets decreased from 18.7% to 17.2%, as many banks took gains in their longer term agencies and mortgage backed securities.
In come coming weeks, we will be highlighting community bank trends in addition to discussing the interesting difference in geographies that are developing. Until then, the takeaway from 3Q is that like the Marines, banks were the first into this financial crisis and at the rate of change looks like they will be one of the last out. The good news is that as an industry, we continue to make progress in adapting to a slow growth economy.