Financial Update (Second Quarter 2009)

Atlanta Fed Magazine Examines State of Southeast's Banks

photo of bank teller and customer For years leading up to the current recession, Southeastern banks enjoyed steady growth and expansion, but their performance has suffered with financial market turbulence and a weak real estate market. An article in the second quarter 2009 issue of the Atlanta Fed's EconSouth magazine examines the state of banking in the region, the events leading up to the sector's current struggles, and prospects for a return to normalcy.

Real estate at the root of the problem
The turmoil in the banking sector has played a central role in the current recession, and when instability struck the financial system, the region's banks were vulnerable because of factors including heavy exposure to real estate investments, according to Scott Hughes, a senior financial analyst in the Atlanta Fed's Supervision and Regulation Department, who wrote the article.

"Southeastern Banks: In the Eye of the Storm"

"The deeper and more rapid deterioration in the performance of Southeastern banks is likely the result of their greater exposure to the effects of the housing downturn," he said in the article, which also talks to bankers, industry professionals, and academics.

Hughes said that for Southeastern banks, the return on assets (ROA)—a standard metric of bank performance that measures annualized net income as a percentage of total assets—had begun to outpace the ROA of banks in the rest of the country in 2006 (see the chart). But when instability hit, it hit the region's banks especially hard. Return on assets for banks in the region and the rest of the nation fell as loan delinquencies, which had been at historic lows, began to rise.

Southeastern Bank Performance Weakened Through the End of 2008
chart of Southeastern Bank Performance Weakened Through the End of 2008
Source: Bank Call Reports

"As the recession progressed, Southeastern banks' performance weakened further, especially in Florida, where more than half of banks were unprofitable by the end of 2008," Hughes wrote. "Across the Southeast, nearly one in two banks was losing money, and more than 6 percent of all loans were delinquent by the end of 2008."

Looking for clearer skies
Most indicators show that banks in the region and nationally will continue to face headwinds for the rest of 2009 as consumers face financial distress stemming from unemployment and constrained loan demand by hesitant consumers and businesses. But Hughes said that reasons for optimism exist. He said that mortgage interest rates remain low, and banks are willing to lend to onsumers with good credit histories.

"When the economy recovers and consumers and businesses become more confident, the health of banks in the Southeast will improve," Hughes wrote. "However, even post-recovery, lessons learned from this decade will likely shape the future financial landscape in fundamental ways."


June 30, 2009