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Introduction | Spotlight: Banking Outlook Conference | Spotlight: Net Interest Margin Performance, Part II | State of the District | National Banking Trends

State of the District

Asset Quality :: Balance Sheet Growth :: Bank Failures :: Capital :: Earnings Performance :: Liquidity
Asset Quality

Asset quality continued to improve in the fourth quarter, reflecting that the majority of institutions have moved beyond a recovery mode. The fourth quarter had fewer charge-offs than the prior year.

More interesting is that they had fewer charge-offs than the prior quarter. Typically, charge-offs increase during the final quarter of the year, when banks complete a final evaluation of their loan portfolios. Over the past three years, the fourth quarter charge-off amounts have been higher than in the third quarter. In addition, noncurrent loans fell to their lowest level in four years (see the chart and table).

In-process foreclosures have also returned to the same level seen in the third quarter of 2008. There was some concern that banks would increase foreclosures as local real estate markets stabilized, but borrowers appear to have been able to reach workout arrangement in many cases. Restructured loans are gradually declining from high levels.

Balance Sheet Growth

While continuing to show strong loan growth year over year, the total loans outstanding in Sixth District banks declined on a quarterly basis in the fourth quarter. Compared with the prior year, loans grew by a little over 2 percent, with the majority of the growth coming from commercial and industrial (C&I) loans (see the chart).

The C&I portfolio grew 15 percent from the prior year but declined 10 percent from the prior quarter (see the chart).

In the fourth quarter, a series of events—including the presidential election, the fiscal cliff, and the debt limit—had businesses acting more cautiously. Also, the gap between cash available and planned capital expenditures is the widest it has been in over 20 years, so many businesses have paid down debt. Given the lack of interest in new debt from businesses, some banks have been willing to lower their margin in order to attract new business. This strategy has enabled some banks to increase the lines of credit; unfunded commitments are growing even as line utilization is declining. Although poised to start projects, businesses remain hesitant, preferring to wait for greater stability before moving forward. The next best performing portfolios were multifamily and residential mortgages (see the table).

The multifamily portfolio grew by nearly 10 percent. The multifamily segment remains the best-performing segment of commercial real estate (CRE) (see the chart), with most properties still being developed in urban areas.

Projects being financed by banks are receiving GSE guarantees, such as from Fannie Mae, which is one of the ways banks are willing to provide permanent financing. Unlike the C&I portfolio, outstanding multifamily loans increased slightly on a quarterly basis in the fourth quarter. The only other portfolio to grow between the third and fourth quarter was nonfarm, nonresidential lending. Residential mortgage lending at the end of 2012 was up 3 percent over year-earlier levels. Growth remains dependent on low mortgage rates and refinance activity. Low interest rates have fostered a small refinancing boom while stabilizing house prices are luring more borrowers into the market. Underwriting standards on mortgages remain tight, however. Subsequently, home sales remain dominated by cash transactions, as home buyers are finding it difficult to qualify for a mortgage, according to anecdotal information from some Sixth District markets. Underwriting standards may change in the coming quarters as new rules surrounding the mortgage market are finalized. Consumer loans, including revolving and nonrevolving credit, declined dramatically between the two quarters. One of the primary drivers of consumer lending in recent quarters has been automobile loans. Since the fourth quarter of 2011, automobile loans have increased 3 percent, even as total consumer loans have declined. The reason for the decline in consumer loans is centered on revolving debt, such as credit cards, as more people have avoided increasing credit card balances since the start of the financial crisis.

Bank Failures

Across the nation, bank failures came to a near stop in the fourth quarter of 2012. There were eight failures, half of which were in the Sixth District. Georgia has had nearly 90 failures since the beginning of the crisis with Florida being a distant second (see the table).

In 2012 alone, Georgia had 10 failures. More failures are expected to occur in 2013, as more than 600 banks remain on the FDIC troubled bank list, but the worst has passed.


Capital levels in Sixth District banks are at their highest levels since the beginning of the financial crisis (see the chart).

The median tier 1 leverage ratio for Sixth District banks reached 9.92 percent, which is on par with the fourth quarter of 2007. At the same time, the median tier 1 leverage ratio for banks outside the district declined. Earnings and improved asset quality continue to push the capital rates higher. Banks had been anticipating the implementation of Basel III at the start of 2013. However, the banking agencies have pushed off implementation to a date yet to be determined.

Earnings Performance

For Sixth District community banks (assets less than $10 billion), the year ended on a bittersweet note. With return on average assets (ROAA) rising on a year-ago basis and operating income up 8 percent, earnings ended one of their best years since the financial crisis in 2012. However, quarterly earnings displayed some weakness in the fourth quarter. Also, the improvement in earnings is still being driven more by cost cutting than increased revenues. And some of the revenue components declined from the prior quarter, which could signal that the rate of improvement experienced over the past year is slowing. On an aggregate basis, ROAA for the fourth quarter 2012 was 0.70 percent, a decline of 3 basis points (bps) from the prior quarter (see the table).

Net interest margin remains a source of concern for banks. Interest income has stabilized, as fewer loans are being classified as nonaccrual, but banks are losing their ability to push down their cost of funds. So the low interest rate environment and the inability to push deposit rates lower continue to put pressure on the margin. Improving asset quality has allowed banks to aggressively push down the level of provision expense. Over the past year, the provision expense has dropped from just over 1 percent of average assets to 36 bps. While the decline has benefited earnings, similar to the interest expense, banks are reaching a point where the provision expense cannot decline farther without a more significant improvement in the economy. Although concerned about the impact of the Durbin amendment, noninterest income has added overall to the net income at community banks. As the stock market has improved, fiduciary fees have increased. Noninterest income has increased by 10 bps over the past year, excluding securities gains. Service charges on deposit accounts have remained stable. Banks are recognizing more gains on sales of assets, such as loans and other assets, though losses are still being recognized on the sale of OREO, or real-estate owned. Mortgage refinance fees are also still adding to income. Overhead expenses remain problematic. Although many banks have specific plans to reduce expenses, their percentage of average assets continues to increase.


With the TAG program ending at the end of 2012, there was concern about deposits run-off at community banks. The expiration of the unlimited deposit insurance was expected to adversely affect net interest margins as the deposit mix shifted from non-interest-bearing to more expensive interest-bearing deposits while any deposits leaving community banks could result in greater liquidity pressures. However, core deposits as a percentage of assets remained stable through year-end and through the early weeks of 2013 (see the chart).

The level of core deposits has allowed banks to better manage the low interest rate environment (see the chart).

For more detailed information on banking trends in the Sixth District, see the Federal Reserve Bank of Atlanta's Regional Economics Information Network web page.