National, Regional Banking Conditions Detailed in Latest "ViewPoint"

June 28, 2019

Asset Quality :: Balance Sheet Growth :: Capital :: Earnings Performance :: Liquidity :: National Banking Trends 

Asset Quality

Overall asset quality remained strong in the Sixth District. Both other real-estate-owned and total nonperforming assets (NPAs) continued at low levels compared to those during the financial crisis. The median NPA as a percent of net loans improved to 1.23 percent, compared to 1.33 percent in the prior period (see the chart).

The median coverage ratio for community banks in the Sixth District has grown to 1.8 percent, the highest level since before the financial crisis. The coverage ratio is a measure of a bank’s ability to absorb losses from nonperforming loans (see the chart).

Looking ahead, community banks are starting to discuss their plans for implementing the new current expected credit losses (CECL) methodology for allowances. Larger community banks are reportedly close to starting parallel runs, while smaller banks are still working with external vendors to develop models. Banks that are public business entities must start reporting under CECL beginning in the first quarter of 2020.

Balance Sheet Growth

Annualized asset growth for community banks in the Sixth District was 4.14 percent in the first quarter, fueled by increasing loan balances, and securities growth declined for the fourth consecutive quarter. Despite the decline, government securities remain in the top five asset categories on banks’ balance sheets, ahead of consumer loans (see the chart).

With the exception of consumer loans, all other loan categories continued to increase, though the pace is weakening. Commercial real estate (CRE) continues to be the largest exposure for community banks in the District. However, loan growth declined in the first quarter. Banks are facing more competitive pressure from nonbanks such as real estate investment trusts. During the last two years, nonbank CRE lending has surged as banks have pulled back. Atlanta-area CRE contacts note that in addition to a slowdown in lending, they are also concerned about market volatility, yield curve inversion, and the potential impact of increasing tariffs on the cost of building materials (see the chart).

Commercial and industrial (C&I) loans and construction and development (C&D) loans exhibited the strongest growth. With the softening of CRE growth, community banks are turning once again to C&I loans, a trend consistent with community banks’ lending since the last financial crisis. An increase in C&I lending can also be linked to economic strength, as businesses seek additional capital to meet increased demand. While the majority of small business loans are held by banks, an article in the Atlanta Fed’s Economy Matters noted that online lenders are increasing their presence.

On a national basis, 32 percent of small business applicants approached online lending companies in 2018, up from 19 percent in 2016. In the Sixth District, the online markets were strongest in Florida and Georgia, where 40 percent of small business applicants sought funds. Banks’ consumer loan balances as a percentage of capital dropped to the lowest level in three years during the first quarter of 2019 despite increased demand. Community banks have tightened their underwriting standards in response to rising consumer delinquencies. Even if delinquencies stabilize, community banks may continue to lose consumer loans to fintech firms. According to TransUnion, fintechs now have the largest market share of consumer loan balances. In 2018, fintechs captured approximately 38 percent of the market, compared to just 5 percent in 2013.

Total residential lending increased just over 4 percent in the first quarter, on par with the prior three quarters. A slight decline in mortgage rates during the first quarter helped spark some refinancing activity, but new originations remained slow. Affordability issues have spread beyond Miami’s residential market to several others across the Sixth District, including Atlanta and Nashville. Interestingly, despite higher home prices and higher consumer debt levels, a much smaller share of homeowners are taking out home equity lines of credits (HELOCs) now, compared with 10 and 20 years ago. At the same time, given the losses experienced during the financial crisis, banks remain cautious about underwriting HELOCs.


Capital provides a buffer against losses resulting from unexpected events. Sustained earnings growth and relatively low dividend payouts have contributed to high capital levels in the postcrisis period. According to the call report, in the first quarter of 2019, Sixth District community banks had a median Tier 1 common capital ratio of 15.46 percent, the highest level in four years (see the chart).

Net income and other comprehensive income were the primary contributors to the improvement in capital levels. Risk-weighted assets (RWA) grew at a slower pace, also improving the ratio. Analysts have estimated that implementation of the current expected credit losses (CECL) methodology will have less of an impact on community banks under $10 billion than on larger institutions. To mitigate industry concerns, the banking agencies have approved a new rule that provides banks with a three-year phase-in period to absorb the day one capital impacts from implementation of the CECL methodology. In addition, the allowance for credit losses under CECL will be eligible for inclusion in Tier 2 capital, subject to the current limit for the allowance for loan and lease losses (1.25 percent of RWA).

Earnings Performance

Consistent with national trends, the median return on average assets for Sixth District community banks improved from 1.06 percent in the first quarter of 2018 to 1.11 percent in the first quarter of 2019. Overall, 97 percent of banks were profitable, despite an uptick in the number of banks that experienced a decline in the net interest margin (NIM). The first-quarter median NIM dropped from 4.09 percent in the prior period, to 4.02 percent. However, it was still higher than a year ago (see the chart).

Yields on loans have dropped slightly from year-end 2018, reversing an eight-quarter upward trend. Deposits rates across multiple markets across the Sixth District, including Atlanta, Birmingham, and Nashville, appear to be flat compared with three months ago, up slightly from six months ago and mixed year over year. Banks have expressed concerns about further interest rate increases and the pressure such increases would put on margins given current long-term rates. However, a decrease in rates might not provide much cushion if the current competitive climate continues.


Liquidity remains healthy for the District’s community and regional banks. In the last five years, as the economy recovered, the rate of loan growth has consistently outpaced deposit growth. The median loan-to-deposit ratio for banks in the District remained stable at 84 percent in the first quarter, as the rate of loan growth slowed. This ratio is just below the median for firms outside of the Sixth District (see the chart).

Net noncore funding dependence turned negative in the first quarter, suggesting that banks have not increased their reliance on other funding sources to drive balance sheet growth in the short term. Although interest rates have moved higher in recent quarters, the deposit mix has remained stable, with the majority of deposits in lower-cost nonmaturity products. Median on-hand liquidity for District banks was slightly higher, at 19 percent, than the prior period. This level was marginally stronger than the 17 percent for banks outside the District (see the chart).

National Banking Trends

In the first quarter, the aggregate return on average assets (ROAA) increased to 1.35 percent, versus 1.27 percent a year ago. ROAA for banks with assets under $10 billion grew slightly year over year. Banks with more than $10 billion in assets experienced a larger increase, partly as a result of tax adjustments related to the December 2017 tax reform (see the chart).

At 3.33 percent, the overall net interest margin (NIM) was higher year over year, though slightly lower than the previous quarter. Margins increased throughout 2018 as interest rates increased. However, longer-term rates have declined slightly since year-end, putting pressure on the NIM in the first quarter (see the chart).

Short-term interest rates, such as the three-month Treasury, increased 80 basis points (bp), while the benchmark 10-year Treasury dropped 33 bp from the first quarter of 2018 to the first quarter of 2019. Banks are closely monitoring deposit rates as loan growth slows and competition for deposits increases.

The pace of loan growth slowed in the first quarter following the solid growth in the fourth quarter of 2018 (see the chart).

Commercial real estate (CRE) growth rates in particular are slowing, though it remains one of the highest concentrations for smaller community banks. According to the latest Senior Loan Officer Opinion Survey (SLOOS), banks tightened standards across all three major CRE loan categories (construction and land development, nonfarm nonresidential, and multifamily) during the past three months. Additionally, CRE experts at the Atlanta Fed cite other CRE risks, such as the significant number of nonbank lenders that continue to finance transitional property with short-term loans. Nonbank CRE lending appears to be growing exponentially when compared to banks’ CRE activity.

Commercial and industrial (C&I) loans, which are held in higher concentrations by large banks, continued to grow. In the SLOOS survey, banks reported that standards for C&I loans to large-, middle-, and small-market firms were unchanged. However, some easing of loan covenants on C&I lines of credit was reported, allowing for higher credit limits and lower credit costs.

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