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Introduction | Spotlight: Loss-Share Agreements | Spotlight: Call Report Changes | State of the District | National Banking Trends


By Michael Johnson, Senior Vice President
Supervision & Regulation
Federal Reserve Bank of Atlanta

Mike JohnsonTime flies, doesn't it? It is hard to believe that we have already reached the halfway point of 2013. In the last two editions of Financial Update's "ViewPoint," we approached the issue of interest rate risk (IRR) from different angles. The issue certainly has not gone away, and we'll continue our discussion of IRR later this year, but this quarter, we thought we would shift our focus to Federal Deposit Insurance Corporation (FDIC) loss-share agreements and potential challenges for banks in the coming quarters. As well, we will explore some new Bank Call Report items and how they will add to the understanding of banks' allowance for loan loss. First, however, we take a look at recent banking trends in our recurring State of the District article.

State of the District
Results for community banks in the Sixth District remained mixed in the first quarter of 2013. More robust loan growth in the district remained elusive; the gains that have occurred have been primarily in commercial and industrial lending. On a national level, loan growth has declined. The lack of overall loan growth is putting pressure on net interest margins, which tightened further as interest rates remained stable and the cost of funds remained near historic lows. As a result, the return on average assets (ROAA) declined slightly when compared to the same period last year. However, asset quality is trending in a positive direction, with net charge-offs falling back to pre–financial crisis levels. Going forward, improving loan growth and the net interest margin remains key challenges facing Sixth District banks.

Loan loss-sharing agreements
The expiration dates on loan loss-sharing agreements between the FDIC and purchasers of banks that failed in the early days of the financial crisis are fast approaching. Loss-sharing agreements on commercial loans expire after five years, while coverage on residential loans lasts for 10 years. Currently, the FDIC loss-share agreement is accounted for as an indemnification asset on the balance sheet. As the agreements expire and the accounting treatment changes, banks could face higher impairments and an increase in problem loans.

New Call Report items
Coming out of the financial crisis, regulators and other bank data users realized that more information was needed about a key estimate on the balance sheet, the allowance for loan loss. In the first quarter, a new schedule was added to the Call Report that focuses on the allowance. This schedule provides additional insight into the credit quality of the loan portfolio and will allow users of the data to conduct additional analyses and spot trends that could reveal problems in particular portfolios before they become overwhelming to banks. Overall, we believe the new schedule is a helpful addition to the Call Report.

Interested in further exploring issues that affect the banking community?
Let me recommend Community Banking Connections, a quarterly publication of the Federal Reserve System. Topics in this quarter's edition include "Considerations When Introducing a New Product or Service at a Community Bank,"" Effective Asset/Liability Management," and "An Examiner's Thoughts About Negative Provisions and the ALLL." I encourage you to sign up for a free electronic or a hard-copy subscription.

While you're there, you can also register to receive FedLinks, a single-topic bulletin prepared for community banks. Each bulletin provides an overview of a supervisory topic and explains how supervisory staff typically address that topic.

As always, I look forward to hearing from you, and I hope for continued steady improvement for banks through the end of 2013 and beyond. Please share your feedback with me at

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