ViewPoint: State of the District


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State of the District

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

Asset Quality

In terms of asset quality, banks have become much more optimistic. In the most recent regional Senior Loan Officer Opinion Survey, most Sixth District banks responded that they expect asset quality to remain stable. The reason for optimism is reflected both in the level of nonperforming assets and in the allowance for loan loss levels. Noncurrent loans have fallen to their lowest level, as a percentage of total loans, since the first quarter of 2008.

A vast majority banks believe problems with commercial real estate have been put in the past. Problems remain though with construction and development loans, as more than 5 percent of that portfolio is noncurrent.

Those two portfolios were the biggest drivers of loss in the Sixth District. As home prices have increased, the level of noncurrent home equity loans (HELOCs) has declined. Payments of principal on HELOCs and second liens taken out 10 years ago prior to the crisis are coming due, significantly increasing the level of payments for many borrowers, which could force them to start missing payments. Another portfolio of concern is "Other Consumer," where automobile loans are reported. In fourth quarter, there was an increase in nonperforming loans. Given the looser underwriting standards that have been applied, in general, with this portfolio, the increase in noncurrent loans could be an early warning indicator.

Balance Sheet Growth

As asset quality problems diminished, the key to banks moving forward from the crisis became revenue generated from loan growth. Consistent, widespread loan growth at Sixth District community banks had been elusive until recently. While some banks saw consistent loan growth begin in mid-2012, the majority of the banks did not experience loan growth until a year later. The good news is that loan growth has continued through the end of the year (see the chart).

Despite the good news, loan demand remains a concern as most banks indicate they have seen little change in the level of demand during the past couple of quarters.

Loan growth has been driven by three categories, commercial and industrial (C&I), consumer, and commercial real estate (see the chart).

C&I lending continues to be the biggest loan growth category, with year-over-year growth at 13 percent for the current quarter. Recent Senior Loan Officer Opinion Surveys indicate that banks have been easing credit standards to attract loans. Banks in the District have also started new programs connected with the Small Business Administration to expand their C&I portfolio. Small business lending in the District has outpaced the level of lending in other districts, though it remains below the level achieved in the second quarter of 2001.

Consumer lending is one of the sources that has provided the relatively recent increase in growth at community banks. Indirect automobile accounts for a substantial portion (roughly 45 percent) of consumer loans on the community bank balance sheet. By comparison, automobile loans represent only 35 percent of consumer loans for community banks outside of the district. One potential problem: To help drive growth, banks have been more willing to extend subprime auto loans, the type of loans blamed for problems with the residential housing market. Based on credit scores, nearly one third of new automobile loans have been made to these borrowers in the District. The other driver of consumer loans has been student loans as people have returned to school in order to enhance their prospects in the job market. To date, credit cards have not been a significant growth category for community banks. Instead, community banks have returned to one of their primary sources of loan growth prior to the crisis: commercial real estate (CRE).

They have been increasingly willing to make new CRE loans for multifamily-type properties like apartment complexes. There has beensome concern about the level of multifamily units under construction and whether sufficient demand will exist. In addition to multifamily projects, lending on other commercial properties, particularly owner-occupied properties, has grown.

While the total portfolio has grown, two loan categories continue to decline in aggregate. Construction and development (C&D) lending declined by nearly 2 percent year-over-year (see the table).

However, construction lending grew nearly 2 percent quarter-over-quarter, which may indicate that it will be a source of growth in 2014. Likewise, home equity lines also decreased from the prior year, yet growth during the prior quarter was stronger than C&D. Based on the growth in lending during the fourth quarter, 2014 may be one of the best years for loan growth for community banks since the financial crisis began.

Bank Failures

Bank failures bottomed out in the fourth quarter 2013. In the fourth quarter, only two failures occurred, only one of which was in Florida. That total brought the overall number of failures in Florida to 70 since in 2008. Some closures will continue to occur, but it's clear the broad wave of failures is over (see the table).

Earnings Performance

Aggregate return on average assets (ROAA) at community banks in the Sixth District increased slightly in the fourth quarter from the prior year (see the chart).

However, the median ROAA declined from the prior quarter. The percentage of banks in the District that were unprofitable rose to 18 percent, versus 11 percent in the prior quarter. By comparison, more than half of the banks were unprofitable in the fourth quarter of 2009. The increase is not wholly unexpected, as fourth-quarter declines are typical given that banks attempt to address lingering asset quality issues and accrue more noninterest expenses. Florida and Georgia, where some real estate markets have not improved significantly, have the highest portion of banks that remain unprofitable.

For more than two years, the story at the District level has remained the same. The improvement of bank earnings has been as much about cost cutting as it has been about new revenue. Banks have reduced their provision expense with the improvement in asset quality, which has pushed allowance for loan losses as a percentage of total loans back down to 2008 levels (see the chart).

At the same time, the coverage ratio has gradually increased as the level of nonperforming loans has declined. Other noninterest expense has gradually increased as a percentage of average assets during the past three years. A variety of factors are driving the increase, including other real estate (ORE) expenses and increased costs associated with new regulations. As the real estate market improves in the Southeast, the ORE expenses will decline, but banks will have to address other costs. Community banks are reviewing different options for controlling expenses, including the number of branches to keep open, outsourcing back-office functions, and assessing staffing levels (see the chart).

Noninterest income is flat compared with the prior year as mortgage refinance activity ground to a halt. Increasing noninterest income is viewed as one of the keys to improving ROAA and banks are expanding the activities on which fees are charged. Still, the net interest margin (NIM) continues to improve, aided by banks' increasing duration on assets held to boost their margin and a further decline in interest expense. A return to loan growth has also aided the NIM as banks have either expanded loan products being offered or returned to lending on old products like commercial real estate (CRE). Cost of funding has remained low because of the level of deposits retained coming out of the crisis.


A year after the Transaction Account Guarantee program ended, deposits on community banks balance sheets remain at a six-year high. Once the program ended, there was the possibility that many deposits would flow out of the bank to markets, such as the stock market. Yet with the stock market at a record high at year-end, deposits have remained at the banks (see the chart).

Having the additional deposits is helping the banks' net interest margin as new loans are still being issued at near historic low rates, and the core deposits have allowed the banks to keep their funding costs low. Going forward, there could be increased competition for core deposits as the banking agencies released new liquidity rules in the fourth quarter for the largest institutions.

For more detailed information on banking trends in the Sixth District, see the Federal Reserve Bank of Atlanta's Regional Economic Information Network web page. The Federal Reserve Bank of Atlanta also produces a variety of publications dealing with other economic and financial topics. These materials appeal to a wide range of readers, including bankers, businesspeople, economists, students, and economics teachers.