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Spotlight: Small Business Lending
Asset Quality :: Balance Sheet Growth :: Bank Failures :: Earnings Performance :: Liquidity Asset Quality
Asset quality in the Sixth District has dramatically improved over the past year, although overall economic conditions remain subpar compared with some other parts of the country. Charge-offs have fallen to their lowest level since the financial crisis peaked (see chart 1), leading banks to reduce their provision expenses and drop their coverage ratio (see chart 2).
The coverage ratio is a measure of the level of reserves for nonperforming assets. Banks in the Sixth District now have reserves for less than 50 percent of their noncurrent loans, down from a height of 260 percent. However, banks may be decreasing their coverage ratio prematurely. For example, noncurrent loans slowed their downward trend in the third quarter after a steep decline in the second quarter (see chart 3).
The decline of noncurrent loans in the Sixth District reflects a similar trend among commercial banks across the nation (see chart 4), though the level of noncurrent loans at Sixth District banks is still higher than for peer banks.
Balance Sheet Growth
Banks remain unable to grow due to a lack of lending opportunities. Loan growth remains elusive for banks across the country, including the Sixth District (see chart 1).
In 2011, only large banks (in excess of $10 billion) had loan growth, but growth was limited to the first and second quarters (see chart 2).
Small community banks (under $1 billion) saw their total loan to total asset ratio fall from nearly 70 percent in the first quarter of 2009 to around 60 percent as of the third quarter of 2011 (see the table).
In the Sixth District, loans declined by 8 percent from the prior year, more than double the decline observed at out-of-District banks (see chart 3).
This decline occurred across all loan types. According to the Senior Loan Officer Survey, the District's lending environment remained unchanged through much of the year, primarily because of uncertainties in the banking sector and the overall economy. Banks in the Sixth District with a heavy concentration in construction and development loans continue to shed those loans but have been unable to find a type of loan to take their place on their balance sheets. Banks are putting more of their money into lower-yielding assets such as U.S. Treasuries while they wait for loan demand to return. As a result, securities now represent a greater percentage of the banks' balance sheets than their out-of-District peers. One reason for a lower net interest margin is the increased holdings of securities and more problem loans.
For more detailed information on small business conditions in the Sixth District, see the Federal Reserve Bank of Atlanta's Small Business website.Bank Failures
Although the pace has slowed, Georgia still leads the nation in bank failures (see the table), with 23 in 2011, with seven occurring between the beginning of August and the end of November.
Statewide economic conditions, especially in the Atlanta metro area, have been slow to recover, with state job growth still negative on a year-ago basis and unemployment rates above 10 percent in October 2011. Florida remains in second place in the District behind Georgia, with 12 bank failures in 2011. However, the number of stressed banks in the Sixth District is declining, albeit more slowly than out-of-District banks (see the chart), which should mean fewer failures in 2012 and beyond.
Nationally, the number of banks deemed troubled by the FDIC dropped by 21 to 844 in the third quarter. Through the end of 2011, the FDIC projects 102 failures nationwide.Earnings Performance
Building on the improving earnings performance from the second quarter, Sixth District community banks (assets less than $10 billion) posted positive earnings in the third quarter (see the table).
Return on assets (ROA) for the third quarter was 0.31 percent versus a ROA for out-of-District banks of 0.90 percent. The improvement in earnings was the result of a combination of factors that helped to push net income into positive territory. The net interest margin, boosted by earnings in the third quarter of 2011, increased 50 basis points over the previous year. Interest income was up slightly, but the margin was improved by the reduction of interest expense, as banks have pushed down interest rates on deposits and other funding.
The continued reduction in Sixth District banks' provision expense also helped improve earnings as the level declined 37 percent from the previous year and 23 percent from the previous quarter. Banks are expecting a significant impact to noninterest income starting in the third quarter. Although noninterest income declined 10 percent from the previous year, banks were still able to increase noninterest income slightly over the previous quarter. Banks are looking for new sources of noninterest income since new rules on interchange fees went into effect. Larger banks are considering new fees on debit cards to replace some of the income, though those fees will not show up in earnings until the fourth quarter. With the concern over the lack of loan growth and the loss of noninterest income, banks in the District once again were able to lower their noninterest expense, countering an upward trend in 2011. As asset quality improves, banks are realizing some cost savings, and closely monitoring other costs.Liquidity
Banks across the District and across the nation are flush with deposits. In fact, a few banks have started charging their customers for holding the deposits. Bank of New York Mellon started charging fees on large customer balances in August. Other banks have started passing along Federal Deposit Insurance Corporation premiums to their customers. The fees and premiums are partly the result of the lack of loan growth. Core deposits have steadily climbed at a time when banks have not been able to find a way to effectively use the money (see the chart).
In the Sixth District, core deposits represented just over 63 percent of assets, the highest level since 2002. By comparison, in the fourth quarter of 2008, core deposits represented only 52 percent of assets. Noncore funding still represents a higher percentage of assets for Sixth District banks versus out-of-District peers. Still, noncore funding has fallen from its peak of 30 percent, on a median basis, to just under 20 percent.