ViewPoint: State of the District

Introduction | State of the District | National Banking Trends | State & Local Government Finances Spotlight

State of the District

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

Total district lending as a share of assets continued to fall in the fourth quarter of 2010, dropping to 64 percent from 70 percent just two years earlier (see the table).

This drop in loan share has been replaced by rising securities holdings, which have climbed to just over 20 percent of assets. Foreclosure activity also has boosted other real estate owned (OREO) by banks. However, unlike earlier trends, district banks started to see a decline last year in balances due from Federal Reserve Banks (reserves plus excess reserves).

The ongoing lack of interest by lenders from construction projects is clearly reflected by the sharp decline in construction and development (C&D)-to-assets ratio in recent years (see the chart).


Nonetheless, 10 percent of district banks continue to have C&D exposures in the double digits. Commercial and industrial loans and commercial and residential mortgages have begun to see rising shares over the past year. However, the increase in commercial mortgages as a share of assets may be, in part, a result of the conversions of C&D loans to more permanent means of financing.

Asset Quality

Although improving somewhat, asset quality in the Sixth District remains stressed. Annualized net charge-offs have fallen sharply from a year earlier but remain well above prerecession levels.


Furthermore, district business bankruptcy filings (12-month ending) also have edged downward from a year earlier. However, consumers remain under pressure as personal bankruptcy filings actually rose 11 percent year-over-year.

District noncurrent loans have fallen moderately from year-ago levels but, as a share of total loans, remain quite elevated at 6 percent.


With the exception of consumer lending (credit card plus other consumer loans), the rise in noncurrent loans occurred across all major lending lines. For example, nearly 20 percent of construction and development (C&D) loans were past due in the fourth quarter of 2010. The share of out-of-district noncurrent loans rose 10 basis points year-over-year but, at 3.8 percent, remained well below Sixth District levels. Asset quality would have been a lot worse were it not for loan restructurings. However, despite modifications, restructured loans displayed a high degree of fall back into noncurrent status. For instance, in the fourth quarter of 2010 nearly 40 percent of restructured loans were noncurrent.

In the fourth quarter, just over half of all district banks recorded a year-over-year increase in the percentage of loans that were noncurrent. Geographically speaking, Georgia was the only state in the district to experience an aggregate increase in noncurrent loan percentages.

The Sixth District's coverage ratio, which measures how well banks have reserved funds for nonperforming assets, has remained virtually flat.


Reserves fell 1.2 percent and 1.3 percent, respectively, during the later part of 2010 following the much larger declines that had occurred earlier in the year. Similar to the third quarter, however, the possibility for divergent stress levels among small and mid-tier community banks continued. With 56 percent of district banks adding to reserves in the fourth quarter, the aggregate decline in total reserves appeared to be weighted more toward larger community banks. The ratio of loan loss reserves to total loans has remained static over the past three quarters as both reserves and loans have declined in tandem.

Bank Failures

From 2007 through February of 2011, well over 300 insured institutions nationwide have failed. Georgia and Florida have led the nation in bank failures (see the table). This failure rate is in excess of 10 percent for both states based on the number of banks that existed at the end of 2007. Failures in 2008 were mostly concentrated in southwest Florida, which was one of the first areas where housing markets began to decline, and north Georgia, more specifically Atlanta. The failures of 2008 were followed in 2009 and 2010 by a proliferation of closings across Florida and Georgia. Thus far in 2011, eight banks have failed in the Sixth District (six in Georgia and two in Florida). Furthermore, given that the FDIC's problem bank list for the nation rose from 860 institutions to 884 institutions in the fourth quarter of 2010, further bank failures are likely.

Earnings Performance

Earnings performance among Sixth District community banks (assets less than $10 billion) worsened in the fourth quarter of 2010 from the prior quarter, with banks posting negative quarterly annualized net income of $2.1 billion. Losses, however, were actually less than half of those suffered one year earlier. The Sixth District experience has contrasted with that of its out-of-district peers, whose earnings remained in positive territory during the fourth quarter.

Although worsening on a quarter-to-quarter basis to –0.70 percent, the Sixth District's aggregate return on average assets (ROAA) in the fourth quarter of 2010 did improve from a year earlier (see table 1).

Similar to trends observed nationwide, the decline from the prior quarter was mostly driven by an increase in noninterest expenses and a decrease in fee income. Fee income could remain an area of risk for District banks. Although exempt from the so-called Durbin Amendment related to debit interchange fees, many community banks feel that "card networks will effectively subject their institutions to fee caps. To the extent that the exemption is enforced by the networks, a number of... banks fear that merchants would actively steer business towards the lower-cost cards issued by the larger banks," as stated in the blog post "Banks, Thrifts and Credit Unions Sound Off on Debit Interchange" (SNL Financial, February 23, 2011).

On a median basis, Sixth District ROAA increased in the fourth quarter from one year ago but continued to lag out-of-district banks by a rather wide margin (see table 2).

The rise occurred across all district states with only Florida and Georgia remaining in negative territory. More than 40 percent of district banks reported a negative ROAA compared to just 22 percent out-of-district.


Economic uncertainty, rising savings rates, and perhaps more limited investment opportunities have actually had a positive effect on general bank liquidity in the Sixth District. After reaching a trough of 52 percent in 2008, core deposits-to-assets steadily rebounded to over 60 percent by the fourth quarter of 2010. Still, current levels remain well below those seen early in the prior decade. Similarly, district bank reliance on brokered deposits as a source of funding has fallen sharply in recent years. At its peak, the median share of brokered deposits-to-total deposits was in excess of 10 percent (see the chart).


Since its peak, the median share has fallen to just over 5 percent. Nevertheless, district reliance on brokered deposits still remains above its out-of-district peers.

Loan Growth

Total district loan levels fell 1.6 percent on a quarterly basis during the fourth quarter of 2010 (see chart 1).


On a year-ago basis, lending was down nearly $25 billion, or just over 11 percent. Although led by persistent drops in commercial 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; this drop is not surprising given the fact that district single-family permit issuance was still 82 percent below its peak by December of 2010 despite some recent improvement. Without a recovery in residential real estate, any rebound observed in C&D lending will remain constrained.

Although declining from one year ago, commercial and industrial (C&I) lending in the Sixth District actually edged upward by 0.8 percent on a quarterly basis in the fourth quarter of 2010. C&I was the only major area of bank loan portfolios to witness a quarterly rise. The uptick in credit outstanding closely matched the results of the most recent Senior Loan Officer Opinion Survey, which suggested that underwriting has moderated and loan demand, especially for midsized and larger firms, has increased. However, as a subset to C&I lending, loans to smaller businesses continued to slide through the fourth quarter (see chart 2).


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