ViewPoint: State of the District

Introduction | Spotlight: Net Interest Margin Performance | Spotlight: TAG Program | State of the District | National Banking Trends

State of the District

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

As earnings have improved and capital has stabilized, Sixth District banks appear to have become more aggressive in charging off problem loans. Throughout 2012, the level of charge-offs has gradually risen, though they remain far below the heights experienced during the crisis (see the chart).

Charge-offs increased in the second quarter, to $1.7 billion, while the amount of noncurrent loans has been declining (see the chart).

Total noncurrent loans represent 4.02 percent of total loans, just over $7.6 billion. Overall, the percentage of noncurrent loans to total loans has fallen to its lowest level since the end of 2008 (see the table).

The level of decline again increased its pace after slowing at the end of 2011. Many of the banks that acquired impaired loans through loss share agreements appear to have worked through the portfolio. The majority of noncurrent loans remain in the construction and development portfolio, which may be causing banks to think twice before pursuing any new construction lending opportunities.

Balance Sheet Growth

Although continuing to complain about the lack of lending opportunities, banks in the District experienced their strongest loan growth in three years during the third quarter (see the chart).

The growth in loans is reflected in the decline, although slight, in the securities portfolio, which had been steadily growing. The banks' primary target of loan growth has been the commercial and industrial (C&I) portfolio, which continued its strong growth pattern, increasing by $8 billion over the prior year and comprising 78 percentage of total loan growth (see the chart).

The C&I portfolio now represents over 21 percent of banks' total assets, up 200 bps from four years ago. In the Sixth District, C&I lending showed a spike in lending due to the integration of thrift institutions, like Bank United. Competition for C&I remains fierce, with some business being generated, though banks are also taking existing customers away from other banks. Banks have expressed a willingness to lower their margins in order to attract new business. Banks reported in the third quarter Senior Lending Officer survey that there is a lessening of demand for C&I loans, particularly from large and middle-market firms. The second-strongest portfolio growth has come from residential lending. Low interest rates have pushed a small refinance boom, and stabilizing house prices are also encouraging more borrowers into the market. Although banks have been able to reap new business and additional fees from the mortgage portfolio, more banks are saying that they are increasingly less likely to approve Federal Housing Administration applications because of the concern over the higher put-back risk of delinquent mortgages. Bankers also have a greater concern about their exposures to residential real estate loans (see the table), given the interest rate environment and uncertainty about house prices, although housing prices are starting to stabilize in many submarkets in the Sixth District.

Residential real estate exposures have grown over the past four years to 14.3 percent, up 170 bps. Another concern that banks have expressed about residential real estate is the new risk-weighting proposals for mortgages contained in the Basel III Notice of Proposed Rulemaking released in June 2012. Community banks have expressed the concern that with the level of capital that will be required, offering mortgages will no longer be feasible for them. Originally slated to be effective in January 2013, the implementation has been delayed, perhaps leaving these banks in limbo. Demand for commercial real estate and consumer loans has remained weak but stable during the third quarter.

Bank Failures

The number of failures has declined rapidly over the course of 2012. There have been 49 failures through the first week of November in 2012, compared with 88 through the same point in 2011. Georgia continued to lead the nation in bank failures, with nine in 2012, followed closely by Florida (see the table).

Although still above 700, the number of banks on the FDIC problem bank list has decreased for five consecutive quarters.


Capital levels in Sixth District banks have improved to a level slightly higher than where they were in the third quarter of 2008, when the financial crisis started (see the chart).

The median tier 1 leverage ratio for community banks was 9.84 percent, a 34 bps improvement over the same quarter in the prior year. Sixth District banks have reached parity with Out-of-District banks. Improved earnings from higher margins and lower provision expenses have pushed capital ratios higher. In addition, the third quarter was the first time banks had a clearer idea of how Basel III might be implemented. Some banks may have started thinking of how they will achieve these higher capital levels.

Earnings Performance

Sixth District community banks' (assets less than $10 billion) earnings for the third quarter increased significantly over the prior quarter and prior year, the result of a stronger margin and lower provision expense. On an aggregate basis, ROAA for the third quarter of 2012 was 0.73 percent compared with 0.55 percent in the second quarter (see the chart).

Although the District's ROAA has been continually improving, it lags far behind the ROAA for Out-of-District banks, which—on an aggregate basis—rose above 1 percent in the third quarter.

One of the reasons for the improving ROAA is a stronger net interest margin (NIM) (for more on net interest margin, see the Spotlight article). Banks' interest income have been pressured by nonperforming loans and a low interest rate environment. However, aggregate interest income has stabilized in 2012 at around 3.48 percent as a percentage of average assets (see the table).

In addition, over the past two years, banks have been able to push their interest expense much lower than the low rates they receive on loans. Interest expense has dropped by 23 basis points (bps) since the third quarter of 2011. Deposits have been plentiful, so banks have not had to rely on higher cost noncore funding options. Also, improving asset quality conditions have allowed banks to reduce the amount of provision expense, which has been one of the biggest expenses that banks have had for the past four years. As a percentage of average assets, provision expense has declined by 35 bps since third quarter 2011 (see the chart).

Noninterest income has increased by 10 bps over the prior year, excluding securities gains. New fees, from refinanced loans and deposit products, are starting to add to banks' net income. As the market has slowly healed during the past four years, banks have also increasingly turned to securities sales as a means of boosting income, rather than just a source of needed liquidity. Despite efforts by banks to reduce overhead expenses, they continue to increase. One of the biggest sources driving up noninterest expenses remains the expenses related to an elevated OREO portfolio.


The end of the Transaction Account Guarantee (TAG) program is a real concern for community banks, especially in the Sixth District. (For more about the potential effects of the end of the TAG program, see our Spotlight article.) Over the past two years, banks became flush with deposits, which allowed them to lower the rate paid on deposits, reduce their reliance on noncore deposits, and improve their margins. However, in the third quarter, community banks' deposit growth flattened, which could signal the beginning of a gradual decline over the fourth quarter (see the chart).

In the third quarter of 2012, core deposits represented 66.6 percent of assets in the Sixth District, basically unchanged from the second quarter. Out-of-District banks are also seeing their deposit growth flatten. The reduction in the rate of growth comes at the same time when loan growth has finally returned. Given the level of deposits banks have, they can absorb some loss in deposits before they would need to turn to noncore funding. In fact, noncore funding reliance remains at its lowest level in eight years (see the chart).

But a significant flight on deposits may force banks to turn back to the type of noncore funding that caused liquidity problems during the financial crisis.

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.