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2012 Annual Report

A Turning Point
for Southeast Banks

After several bruising years, 2012 was a pivotal one in the broad health and performance of depository institutions both in the Southeast and across the nation. "Last year really was a turning point, to a degree," said Michael Johnson, senior vice president and head of Supervision and Regulation at the Atlanta Fed. "In general, banks in the Sixth Federal Reserve District and across the nation gradually returned to health."

Issues remained, however, and further challenges likely await. The performance of southeastern banks continued to lag behind that of institutions nationally, as banks in this region collectively had further to go to regain a strong footing. Nevertheless, last year brought improving trends for the region's financial institutions in most important performance measures, including earnings, loan quality, and bank failures (see chart 1).

Importantly, there were signs that those trends should continue to improve.

Earnings highest since before financial crisis

Cumulative Southeast bank earnings in 2012 climbed to their highest level since 2007. Some of the improvement in bank earnings resulted from lower loan-loss provision expenses. But for Southeast banks with assets less than $10 billion—the bulk of the region's financial institutions—return on average assets (ROAA), a key profitability measure, improved as 2012 progressed. More than 80 percent of the banks in the region posted a positive ROAA, compared with 70 percent in 2011 and 57 percent in 2010.

For 2012, some 30 percent of Southeast banks reported ROAA above 1 percent, generally viewed as a benchmark for strong profitability. That figure is nearly double the level from each of the two previous years.

Banks' interest income for several quarters had been pressured by nonperforming loans and a low interest-rate environment. However, aggregate interest income stabilized in 2012, a hopeful sign that banking conditions in the Southeast have solidified.

As the year came to a close, low interest rates and weak loan demand pressured banks' interest margins. As the economic recovery strengthens, results should improve.

Capital also reached pre-crisis level

Meanwhile, capital levels at Southeast institutions reached a four-year high. In fact, capital levels exceeded those in place at the onset of the financial crisis, according to bank call reports and Atlanta Fed research. Tier 1 capital—or core capital—levels at Southeast banks in 2012 reached parity with banks outside the region. Improved earnings from key actions such as cost containment and lower provision expenses pushed capital ratios higher. In addition, during the third quarter, banks gained some clarity about how new capital standards, known as Basel III, might be implemented. Some banks, Atlanta Fed analysts concluded, may have started devising plans to achieve these new standards.

Improved bank performance was further highlighted by positive trends in asset quality, as well as slow but broadening loan growth across bank portfolios. Loan growth was evident in nearly every category except construction and development loans. These loans were a source of considerable trouble during the recession and did not rebound strongly as a category during 2012.

Commercial, industrial lending rose at healthy pace

Commercial and industrial loans continued double-digit growth during the year, and residential loans expanded more rapidly as housing markets recovered in many metropolitan areas. Although earnings and loan growth improved, charge offs trended higher, suggesting that some banks still had more problem loans to work through.

Another factor contributing to improved aggregate bank performance numbers last year was attrition. Many of the most troubled banks failed before 2012. During 2012, 22 institutions in the Southeast failed, bringing to 164 the number of failures in the region since the end of 2007 (see chart 2). The number of failures last year was the lowest since 2008. In another encouraging sign, the number of southeastern banks on the Federal Deposit Insurance Corporation's problem bank list declined in each quarter.

Underlying real estate conditions improved

In the Southeast especially, the condition of the banking industry has traditionally been closely tied to the health of real estate markets. One of the underlying reasons banking conditions improved last year was that real estate conditions improved. Across numerous categories—single-family houses, undeveloped land, multifamily properties, retail centers, office buildings—the value of real estate essentially stopped falling in many Southeast markets during 2011. Last year saw an accelerated pace of improvement, Johnson noted.

There were exceptions. But the region's largest property markets generally showed promising signs. Miami's residential market was particularly strong. Last year, the number of residential building permits issued in the Miami-Fort Lauderdale-Miami Beach metropolitan statistical area increased 68 percent from 2011, according to the U.S. Census Bureau. This number was more than triple the level of 2009, which marked the trough of the Miami housing market.

Even metropolitan Atlanta's housing market, among the slowest in the nation to recover, showed signs of stabilizing in certain areas by year's end. Permit issuance was up nearly two-thirds from 2011, and was more than double the level of 2009. However, the permit numbers in Miami and Atlanta remained far below the levels of the years immediately preceding the recession.