ViewPoint: State of the District

Introduction | Spotlight: Outlook Conference | State of the District | National Banking Trends

State of the District

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

News of an improving economy has perhaps lessened the concern about nonperforming loans, but they remain an issue for many banks in the district. Noncurrent loans barely dropped in the fourth quarter of 2011 compared with the prior quarter, which saw a significant drop. In contrast to the Sixth District, noncurrent loans at out-of-district banks continued a sharper decline (see the chart), which may signal how weak economic conditions remain in the district.

In aggregate, there were $9.4 billion in noncurrent loans in Sixth District banks in the fourth quarter, the lowest level since the fourth quarter of 2008. The ratio of noncurrent loans to total loans was 5.5 percent in the fourth quarter (see the table).

On a national level, the ratio of noncurrent loans to total loans remains near its peak because of the lack of new loan growth. Charge-offs of nonperforming loans ticked up during the quarter, although the increase was not unexpected (see the chart).

Sometimes charge-offs are higher at year end as banks evaluate their portfolios and decide to charge off certain loans in order to enter the new year with a cleaner balance sheet. The increase in charge-offs may also have contributed to the low coverage ratio in the Sixth District. The coverage ratio is a measure of the level of reserves for nonperforming assets. In the fourth quarter, provision for loan expense declined while nonperforming loans remained stable. As a result, banks have reserves for less than 50 percent of their noncurrent loans. Given the level of charge-offs and noncurrent loans, banks may need to be prepared to maintain their current allowance for loan loss by increasing their provision for loan loss expense through the first half of 2012.

Balance Sheet Growth

Much like the situation for banks under $10 billion on a national level, loan growth remains elusive for same-sized banks in the Sixth District. However, there was some success at generating commercial and industrial (C&I) loans during the fourth quarter. On an aggregate basis, C&I loans grew by $200 million over the prior year. C&I loans are a portfolio that banks have actively sought to grow to help offset the still-heavy concentration of real estate loans. While demand for C&I loans has been uneven over the past few quarters, according to the Federal Reserve Board's Senior Loan Officer survey, demand has generally trended upward (see the chart).

Sixth District banks also continue to lead their out-of-district peers in small business lending (see the chart).

It appears there has been some success in changing the basis on loans away from real estate collateral to more business assets, as commercial real estate lending continued to decline. In fact, while there has been some growth in certain parts of the loan portfolio, total loan growth remains anemic for Sixth District institutions (see the chart).

Loans now represent 62 percent of total assets on the balance sheet, down from 70 percent at the start of the crisis (see the table).

Without loan growth, banks continue to increase their securities portfolios, which have grown nearly 5.5 percent as a share of assets since the start of the crisis. While banks would like to get a higher yield on their securities, they are reluctant to invest in longer-term products because of the possibility of a rising-rate market and having the liquidity to make loans when demand returns.

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

It was a tough year for banks located in the Sixth District in 2011. Georgia led the nation in bank failures, with 23 in 2011 and 75 since 2008 (see the table), but it only had one failure between mid-November and mid-February after having seven failures between mid-August and mid-November.

Florida was a distant second. After being failure-free through most of the crisis, Tennessee had two failures in one week in early 2012 (see the table).

The number of Sixth District banks with high Texas ratios is declining (see the chart), which should mean fewer failures in the district this year.


Sixth District banks have improved their equity positions over the past year. Aggregate total equity was at its lowest point in five years in the first quarter of 2011. Over the year, total equity grew 6 percent. Tier 1 leverage ratios increased 52 basis points over the past 11 quarters. But Sixth District banks have fallen from having a Tier 1 leverage ratio 32 basis points (bps) higher than out-of-district peers to as much as 26 bps below out-of-district peers (see the chart).

Overall, the banking industry has been slowly building its capital levels. Aggregate total risk-based capital has increased nearly 300 bps since the fall of 2008 (see the chart).

Earnings Performance

Sixth District community banks (those with assets under $10 billion) continued to post positive earnings in the fourth quarter, representing a continuing trend in the second half of 2011 (see chart 1).

On an aggregate basis, return on average assets (ROAA) for the fourth quarter was 0.13 percent versus ROAA from the prior year of –1.58 percent (see the table).

Although much improved, ROAA remains far below the out-of-district peer ratio of 0.73 percent (see the table).

The improvement during the quarter came from both an increase in net interest margin—which is part of the banks' core earnings—and lower provision expense (see the table).

The boost from the net interest margin was not as significant as in the third quarter of 2011, but it remained better than the prior year. Interest income increased sharply in the fourth quarter even as interest expense continued to decrease. Banks have been very effective at pushing down their funding costs while trying to stabilize their loan pricing. Contrary to the concerns of the industry, noninterest income also improved, even as the Durbin Amendment became fully implemented in the fourth quarter. Many smaller banks feared that although they were exempt from the limits on interchange fees, they would still lose income from the fees as merchants sought out the lowest-cost option.

Provision expense continued to decline in the fourth quarter and the aggregate coverage ratio for banks in the Sixth District is the lowest it's been in a decade. While a limited reduction in provision expense has been warranted, the level of coverage has reached a point where banks may not be able to reduce it any further.


Core deposits continue to be both a source of strength and concern for banks. Core deposits represented just over 64 percent of assets in the Sixth District, its highest level in nearly a decade. Out-of-district banks had the same level of core deposits. Core deposits have contributed to banks' improving net interest margins, as they represent a lower cost of funding, but without any loan demand, banks have been unable to fully deploy the excess funding. On an aggregate basis for banks across the country, the ratio of loans to deposits has dropped to roughly 83 percent from a peak of 128 percent for large banks (see the chart).

Banks have had trouble using the deposits in a meaningful way and, in some cases, have been turning away deposits. There is a concern among community banks that the expiration of the Transaction Account Guarantee (TAG) program may cause some runoff of core deposits. Nationally, TAG now insures $1.2 trillion in deposits in excess of $250,000.

Community banks are advocating extending the program for another five years, with the extension paid for by an FDIC premium. The level of reliance on noncore funding continues to decline but not as quickly as it has in out-of-district peers. The aggregate net noncore funding dependence ratio for district banks fell to 18.91 percent, the lowest ratio sine the first quarter of 2006. By comparison, the same ratio for out-of-district peers was 12.55 percent.