Financial Update ViewPoint - 2011 Q2: State of the District

Introduction | National Banking Trends | State of the District | Spotlight: Fair Lending | Spotlight: Residential Real Estate

State of the District

Asset Concentrations :: Asset Quality :: Balance Sheet Growth :: Bank Failures :: Earnings Performance
Asset Concentrations

Lending as a share of assets contracted again in the first quarter of 2011, declining to 62 percent from 65 percent in the same quarter of the prior year (see the table).

In 2008, loans represented 70 percent of the banks' assets. The overall composition of the balance in the Sixth District is similar to out-of-District banks. Commercial real estate remains the largest asset group, but securities have now grown to be the second-largest asset group, exceeding 20 percent of assets. After declining last quarter, cash and "due from" balances increased and represent over 11 percent of assets. Five percent of assets in District banks represent nonperforming assets, either in the form of other real estate owned (OREO) or nonperforming loans.

In reflecting weaker demand and stronger underwriting standards, construction and development (C&D) loans have declined from 17 percent of the balance sheet in 2008 to 7.4 percent in District banks. Commercial and industrial (C&I) and residential loans have remained steady, although credit underwriting for C&I loans has loosened recently, according to the Federal Reserve Board's Senior Loan Officer Opinion Survey.

Asset Quality

According to the May 26 Consumer Distress Index from CredAbility (formerly the Consumer Credit Counseling Service of Greater Atlanta), all of the states within the District rank among the top 10 in the United States in terms of the most distressed consumers, with Georgia ranking second only to Nevada. The problems facing both consumers and businesses in the District are reflected in the asset quality data being reported. Although the District's noncurrent loans are trending slightly down from a year ago, the level remains well above the national level. As a percentage of total loans, noncurrent loans declined by 10 basis points (bps) from the prior year and remained the same as the prior quarter at 6 percent. In contrast, out-of-District noncurrent loans declined by 20 bps year over year and are well below Sixth District levels.

Some of the decline in noncurrent assets in the District is in part a result of the increased level of loan restructuring in which the banks are engaged. Given the importance of restructuring loans to restore stability to measurements of asset quality, additional data are now being collected to better segregate restructurings by loan type. Based on the initial reporting, banks in the District are mostly restructuring commercial real estate, including construction and development loans, and 1–4 family homes (see the chart).

Perhaps reflective of the banks' workout efforts, annualized net charge-offs in District continued to fall but are still higher than prerecession levels (see the chart).

With the level of noncurrent assets remaining basically the same as the prior quarter, the coverage ratio for the District also remained stable (see the chart).

The coverage ratio is a measure of the level of allowance for loan losses available for nonperforming loans. While the total dollar amount of reserves declined by 1.1 percent, total noncurrent loans declined by 1.4 percent, which caused the coverage ratio to increase slightly over the prior quarter (see the chart).

Overall, the Sixth District has a higher percentage of loan loss reserves to total loans than compared with out-of-District banks. However, the coverage ratio is much lower in the Sixth District, at 38.3 percent, compared with 59.2 percent out-of-District. Consistent with the prior quarter, 56 percent of District banks added reserves in the first quarter. However, the increases in the allowance were not weighted toward a particular size of bank.

Balance Sheet Growth

Outstanding loan balances for District banks are little changed from the prior quarter. In the first quarter of this year, loan balances dropped 1.7 percent from the fourth quarter of 2010. Compared with the prior year, loans have declined by 10 percent. Some of the decline is the result of loans being transferred to banks outside of the District because of bank failures. The declines in outstanding loan balances have been broad based, declining across every loan type compared with the prior year (see the chart). Construction and development loans continue to lead the decline. Over the past year, the outstanding balances for construction loans have declined by nearly $10 billion, which is reflective of the weak real estate market in many parts of the District.

The decline in construction loans in out-of-District banks has been more severe. Reflecting findings about stressed consumers in the District from CredAbility (formerly the Consumer Credit Counseling Service of Greater Atlanta), consumer and residential loans saw the second and third largest declines over the past year. With increased gas prices and weak housing prices in the District, consumer lending is likely to remain as constrained as construction lending.

The one bright spot for lending in the District was commercial and industrial (C&I) loans, which increased for the second consecutive quarter, increasing by 1.2 percent since last quarter. Banks have turned their attention to C&I loans as a means of generating new loan demand without adding to their existing real estate concentrations. The banks have indicated that demand for C&I loans has strengthened slightly over the past few months, especially for working lines of capital, in light of higher prices related to the increase in gas prices. (For detailed information on small business conditions in the Sixth District (see the chart), see the Federal Reserve Bank of Atlanta's Small Business Focus website.)

Since outstanding loan balances are not growing, banks are turning to their securities portfolio as a place to generate interest income.

Sixth District banks' securities portfolio increased 11 percent over the prior year. For out-of-District banks, the growth was not quite as strong, but the portfolio did increase by about 7 percent over the prior year.

Bank Failures

Since 2007, more than 300 insured institutions nationwide have failed. Georgia and Florida have led the nation in bank failures (see the table). Failures in the District started in 2008 in southwest Florida and spread across the state, also spreading into Georgia (mostly around metro Atlanta) in 2009 and 2010. In 2011, lingering economic concerns, low home prices, and a lack of strong loan demand have hurt banks that continue to struggle with poor performing loans. Through the middle of May 2011, 20 banks have failed in the Sixth District (12 in Georgia and five in Florida) for the year. The FDIC's problem bank list increased by four, to 888, the smallest increase in nearly four years. The problem bank list remains the highest its been since the savings and loans crisis in the early 1990s, which indicates further bank failures are likely.

Earnings Performance

Earnings performance among Sixth District community banks (assets less than $10 billion) came the closest to being positive since the third quarter of 2008. Banks in the first quarter of 2011 posted an aggregate negative quarterly annualized net income of $10.5 million. Net income was assisted by a stronger net interest margin and a lower provision expense. The overall net loss experienced by Sixth District banks contrasted with that of out-of-District banks, whose aggregate net income more than doubled.

The reliance on reducing provision to improve the Sixth District's aggregate return on average assets (ROAA) may mean the improvement will not be sustained over the short term (see the table).

The District still has an elevated level of noncurrent assets (see the Asset Quality section), and there are concerns about the strength and durability of the economic recovery. In addition, noninterest income declined for the quarter and continued to be stressed ahead of proposed changes being made to the debit interchange fees. Many banks have publicly said they will seek to increase fees charged to customers to offset the lost interchange revenue. Noninterest expense in the first quarter was up sharply, in part as a result of staff expenses related to managing problem loans. Banks in the District have turned their focus to working out more of their loan problems, rather than taking additional collateral onto their balance sheet.

On a median basis, Sixth District ROAA continues to improve (see table 2), although not as rapidly as at out-of-District banks. For the first time since the second quarter of 2008, all of the states within the District are reporting positive ROAA on a median basis. However, on an aggregate basis, 27 percent of District banks reported a negative ROAA compared with just 12 percent out-of-District.