Banking

Total district lending as a share of assets continued to decline in the third quarter of 2010, dropping to 64.4 percent from just over 70 percent two years earlier (see the table).

This drop in loan share has been replaced by rising securities holdings, which have climbed to just over 19 percent of assets, and the amount of reserves held at Federal Reserve banks, which has risen from just over 3 percent in early 2008 to 8 percent in the third quarter of 2010. The ongoing retreat by lenders from construction projects is readily reflected by the sharp decline in C&D-to-assets in recent years (see the chart).

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Nonetheless, 10 percent of district banks continue to have C&D-to-assets in excess of 15 percent. Only commercial and residential mortgages have seen rising shares over the past year. However, the increase in commercial mortgages as a share of assets may be, in part, the result of the conversions of C&D loans to permanent financing.

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Asset quality in the Sixth District remains stressed. Although trending downward from their peak, annualized net charge-offs remain well above prerecession levels (see chart 1).

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District personal and business bankruptcy filings (12-month ending) continue to climb as well but the year-ago rate of increase has moderated. Potentially troubling, however, is that district noncurrent loans increased moderately following two quarters of decline in the third quarter on both an absolute basis and as a percentage of total loans. With the exception of credit cards, this rise occurred across all major lending lines. Out-of-district noncurrent loans continued to fall in the third quarter (see chart 2).

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Asset quality would have been worse were it not for loan restructurings that rose to 1.3 percent of loans in the third quarter. Despite modification of terms, restructured loans display a high amount of recidivism. In the third quarter, over one-third of restructured loans were noncurrent.

Just under half of all district banks recorded a quarterly increase in the percentage of loans that were noncurrent in the third quarter. Geographically, increases in noncurrent loan percentages were widespread. However, an aggregate rise was particularly acute in some suburban Atlanta and central Florida counties.

The Sixth District's coverage ratio, which measures how well banks have reserved for nonperforming assets, continued to drift downward in the third quarter (see chart 3).

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Reserves fell 0.6 percent on the heels of the much larger decline that occurred in the second quarter, and noncurrent loans increased 2 percent after dropping during the two prior quarters. The continued decline in aggregate reserves was weighted toward larger community banks as 57 percent of district banks added to reserves in the third quarter. The ratio of loan loss reserves to total loans edged upward in the third quarter as the amount of outstanding loans fell.

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From 2007 through late November, more than 300 insured institutions nationwide have failed. Georgia and Florida have led the nation in bank failures. Failures in 2008 were concentrated in southwest Florida, one of the first areas where housing markets began to decline, and north Georgia (Atlanta). That spate was followed in 2009 by a proliferation in closings across Florida and continued failures in Georgia. Given that the Federal Deposit Insurance Corporation's problem bank list named 860 institutions in the third quarter of 2010, further bank failures are anticipated.

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Districtwide community bank (assets $10 billion) losses extended into their ninth consecutive quarter during the third quarter of 2010 with a negative quarterly annualized net income of $0.976 billion. On one positive note, however, losses this year have trended lower than in 2009. The Sixth District experience has contrasted with that of its out-of-district peers, where earnings have been positive for three consecutive quarters.

Although remaining slightly negative at 0.32 percent, the Sixth District's aggregate ROAA has improved on both a quarterly and year ago basis (see table 1). Stabilizing performance has been attributable to lower provision expenses and cost cutting.

On a median basis, Sixth District ROAA rose in the third quarter from a year ago but continued to lag out-of-district banks (see table 2).

The improvement occurred across all district states, with only Florida remaining in negative territory. More than one-third of all banks in the district continued to report a negative ROAA, compared with just 16 percent out-of-district. Some divergence between smaller and larger district community banks may be emerging. Though still outperforming their larger peers, banks with assets less than $1 billion saw median ROAAs fall modestly on both a quarterly and year-ago basis. Mid-tier banks moved solidly from negative to positive territory on a year-ago basis.

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Economic uncertainty, 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 just over 60 percent in the third quarter of 2010. Still, current levels remain below those that existed early in the prior decade. Similarly, district median bank reliance on noncore funding has fallen from its high of over 30 percent in 2008 to less than 25 percent during 2010 (see the chart). However, bank dependence remains above its out-of-district peers.

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Total district loan levels declined on a quarterly basis for the eighth consecutive quarter, falling 1.4 percent in the third quarter of 2010 (see chart 1).

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On a year-ago basis, lending was down nearly $34 billion or 11 percent. Although led by persistent drops in construction and development (C&D) loan levels, all major areas of banks' lending portfolios saw declines. Since its peak in early 2008, district outstanding C&D loans have fallen by more than half—not surprising, given the fact that district single-family permit issuance in September 2010 was 83 percent below its peak. Without a recovery in residential real estate, any rebound C&D lending will remain constrained.

Consumer and commercial and industrial (C&I) lending saw the second and third worst year-ago declines in loan levels, respectively. As a subset to C&I lending, loans to small businesses continued to slide through the third quarter as well with the Southeast business environment remaining challenging (see chart 2).

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(For more detailed information of small business conditions in the Sixth District, see the Federal Reserve Bank of Atlanta's Small Business website.)

Overall, loan growth in the Sixth District varied by bank performance. Over 75 percent of banks with a negative ROAA in the third quarter of 2010 saw a quarterly decline in loan levels, in contrast with 51 percent of banks with a positive ROAA.

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