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Introduction | State of the District | Commercial Real Estate Spotlight | National Banking Trends

State of the District


U.S. and Sixth District commercial bank performance improved in the second quarter of 2010 as earnings increased, primarily because of declines in loan-loss provisioning, while revenues remained flat. Asset quality remained weak, but charge-off rates and noncurrent loan shares retreated slightly from peak levels. Loan growth was largely elusive, presumably because of tight underwriting and as borrowers remained cautious as a result of continued weak labor market conditions and an uncertain economic outlook.

Note: This section includes commercial banks with assets of less than $10 billion. Historical data exclude banks consolidated under a single charter by Synovus during the first half of 2010.

Asset Concentrations :: Asset Quality :: Bank Failures :: Earnings Performance :: Loan Growth :: Liquidity
Asset Concentrations

Total District lending as a share of assets continued to decline in the second quarter of 2010. Persistent stress in housing markets was reflected by the continued decline in construction and development (C&D) lending. As a share of assets, aggregate C&D loan exposures fell to 9.2 percent at midyear 2010, nearly half the levels of just two years earlier (see the chart). Even so, more than one-quarter of District banks have exposures in excess of 10 percent (see the table). District aggregates also remain well above their peers out-of-District. Over the past year, increasing exposures in District loan portfolios have been noted only in commercial and residential mortgages.

Asset Quality

Asset quality metrics in the District improved during the first half of 2010. Annualized net charge-offs retreated from year-ago levels, while the percent of loans that were noncurrent (more than 90 days past due or nonaccrual) declined from their peak of 6.1 percent in the first quarter of 2010. However, it is important to note that asset quality remains distressed compared with pre-recession and pre-financial crisis levels as well as with the share of noncurrent loans out-of-District, which was 3.9 percent. At an annualized $3.1 billion in the second quarter, net charge-offs were more than twice the level reported three years ago (see chart 1). Similarly, the share of loans that were noncurrent three years ago was just 0.9 percent compared with 5.9 percent at midyear 2010 (see chart 2).

On a year-ago basis, all major segments of District loan portfolios saw worsening asset quality in the second quarter; however, some improvement was reported from earlier this year. Nearly 18 percent of District construction and development (C&D) loans were noncurrent in the second quarter of 2010, up over 300 basis points from a year earlier and well above out-of-District (see the table).

Improving asset quality may be partially the result of increased levels of loan modifications by Sixth District banks. In the second quarter of 2010, banks restructured nearly $2.5 billion in loans, of which $600 million was for 1–4 single-family residential loans. Although up by more than half from a year earlier, the percentage increase in the District is far eclipsed by the more than doubling of restructured loans out-of-District. Despite modification of terms, restructured loans display a high amount of recidivism. In the second quarter, one-third of restructured loans were noncurrent (see chart 3).

Sixth District bank reserves' allowance for loan and lease losses (ALLL) declined on a year-ago basis in the second quarter of 2010, falling by $509 million ( –11 percent) in contrast with the 11 percent increase occurring out-of-District. The ratio of Sixth District reserves to total loans and leases rose slightly to 2.2 percent from a year earlier as loan growth remained elusive (see chart 4). The ratio for out-of-District reserves rose by 35 basis points from a year earlier to 2.2 percent. The "coverage ratio" for Sixth District banks is at 37 percent in the second quarter of 2010, its lowest level during the past decade.

Bank Failures

Since 2007 through late August 2010, nearly 300 insured institutions nationwide have failed. Georgia and Florida have led the nation in bank failures (see the table). Failures in 2008 were concentrated in Southwest Florida, one of the first areas where housing markets began to decline, and in north Georgia (Atlanta) (see the figure). This decline was followed in 2009 by a proliferation in closings across Florida and continued failures in Georgia. Conventional wisdom has suggested that perhaps younger banks accounted for the majority of recent failures. However, just one-quarter of the failures were of banks established during the previous decade, while nearly one-third were established prior to 1980 (see the chart). Loan exposures may have played a greater role in determining bank failures, as the median construction and development-to-assets exposure of failed institutions is greater than the peak median for all banks. Given that the FDIC's problem bank list has climbed to more than 800 institutions (or to 11 percent of all institutions) in the second quarter, further bank failures are anticipated.

Earnings Performance

Sixth District bank performance remained weak with an aggregate return on average assets (ROAA) of –0.10 percent during the second quarter of 2010. Despite remaining in negative territory, aggregate ROAA was a distinct improvement from –0.50 percent reported one year ago (see the chart).

Median ROAA during the second quarter was 0.35 percent (see table 1). The fact that the median was positive suggests that industry weakness may be concentrated in the District's larger community banks, which depressed the aggregate measure. Banks in each of the District's states all showed improvement, with only Florida posting a negative median ROAA. Despite widespread modest improvement, the median ROAA continued to lag out-of-District peers with over one-third of banks still reporting negative ROAAs compared with less than 20 percent outside the District (see table 2).


Uncertainty over the economy, rising savings rates, and perhaps limited investment opportunities have had a positive effect on general bank liquidity in the Sixth District. After reaching a trough at 52 percent in early 2008, core deposits to assets have rebounded to 60 percent in midyear 2010. Still, current levels remain below those that existed early in the prior decade. Similarly, District bank reliance on noncore funding has retreated from its high of over 30 percent in 2008 to less than 25 percent in the second quarter of 2010 (see the chart). However, bank dependence remains above its out-of-District peers.

Loan Growth

District lending levels continued to decline through midyear 2010, with total loans down by just over $30 billion from a year earlier, representing a worsening in activity from the first quarter (see chart 1). In percentage terms, lending by District banks has fallen by nearly 14 percent over the course of the year through the second quarter of 2010, which was double the rate of decline that occurred out-of-District. Moreover, loans declined across all major lending lines in the District. However, the drop in loan levels was worse in construction and development (C&D) lending, both in terms of absolute and percentage declines. Since peaking in early 2008, District C&D loan levels have fallen by just over half. Continued weakness in housing construction activity likely will limit any recovery in C&D lending. Consumer and commercial and industrial (C&I) lending saw the second- and third-worst year-over-year declines in loan levels. As a subset to C&I lending, loans to small businesses (defined as C&I loans with original amounts of less than $1 million) fell just over 14 percent from a year earlier, nearly twice the out-of-District rate of decline (see chart 2).