National, Regional Banking Conditions Detailed in Latest "ViewPoint"

December 30, 2019

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

Asset Quality

Asset quality in the Sixth District remains stable. For the most part, with the notable exception of weakening covenants, underwriting remains stronger than in 2006–07, despite increased competition from nonbanks. Other-real-estate-owned (OREO) and total nonperforming assets remain near the lowest levels experienced since the end of the financial crisis. The percentage of loans past due 30–89 days was unchanged from the prior quarter. However, there was a 3-basis-point increase over the prior quarter in the percentage of loans past due 90 days, 2 basis points over the prior year. New nonperforming assets represent just over 2 percent of total loans. Reserve levels continue to build as few banks are releasing reserves at this point in the credit cycle (see the chart).

The median coverage ratio remains at 1.7 percent, on par with the prior quarter and three times the level from the depths of the financial crisis (see the chart).

The current allowance for loan loss, as a percentage of loans, was just under 1.3 percent in the third quarter. The level has remained basically unchanged over the last 10 quarters.

Balance Sheet Growth

In the Sixth District, community banks experienced stronger asset growth than their counterparts in other districts, aided by rapid growth in Atlanta, Chattanooga, Huntsville, Miami, and Nashville. Annualized asset growth remained above 4 percent for the third consecutive quarter and continues to be primarily a function of loan growth (see the chart).

Securities balances continued to decline, though not as sharply as the previous two quarters, when interest rates started to fall. Loan growth continues to slow, dropping below 5 percent, on a median basis, for the first time since 2014, according to call report data. However, with the exception of consumer loans, all of the major loan portfolios continued to grow in the third quarter. Growth was strongest in the construction and development (C&D) portfolio, as many markets in the Sixth District continue to experience heightened development, especially in more urban locations. Despite the steady growth, C&D still ranks far below commercial estate (CRE) among the community banks’ top exposures (see the chart).

Median CRE growth for the quarter was just under 5 percent, the slowest in more than three years, as banks have indicated an unwillingness to match the loan terms offered by nonbank competitors. Commercial and industrial lending also rose despite concerns of an economic slowdown. The median balance of consumer loans declined during the quarter as nonperforming credit card balances spiked again. Consumer balances, excluding mortgages, have declined period-to-period consistently over the last five quarters as banks tighten lending standards and face increasing competition from nonbanks and credit unions. Median mortgage loan growth remains positive, at 3.5 percent year over year, but the level of growth continues to decline. Mortgage lending has grown for 24 consecutive quarters. Growth is being driven by refinancing activity rather than new originations, due to a lack of inventory in many markets as well as concerns about affordability.


Capital levels at community banks remain healthy as the median tier 1 common capital ratio remains above 15 percent. An estimated 99 percent of community banks in the district are considered well capitalized based on their current capital ratios. Both positive earnings growth and strong asset quality kept capital levels high during the quarter (see the chart).

Net income and changes in other comprehensive income were the largest contributors to capital growth in the quarter, with business combinations having a small impact. At the same time, median risk-weighted asset growth remains slow, increasing by less than 1 percent in the third quarter. However, on an aggregate basis, the dividend payout ratio increased year over year to 37.9 percent, up from 29.1 percent in 2018.

Earnings Performance

The median return on average assets for community banks in the Sixth District with assets under $10 billion was 1.2 percent in the third quarter of 2019, the highest median level since the third quarter of 2006 (see the chart).

Two-thirds of community banks in the district had ROAAs above 1 percent for the first time since 2006, although the number of banks has declined significantly over the past 13 years. A little more than 3 percent had net losses in the quarter. Although net interest margin (NIM) still drives bank earnings, roughly 43 percent of community banks in the district reported a decline in the NIM for the third quarter of 2019, down by 2 basis points from the prior quarter (see the chart).

A decline in interest income appears to be the source of the overall decrease, as funding costs remained stable for the quarter. Changes in interest income were evenly divided between rate and volume. Several banks took on higher cost deposits just as the target interest rate was reduced. Provision expenses remain stable due to the current strength of asset quality. Instead of higher NIMs, loan origination fees and expense containment drove the improvement in earnings. Specifically, refinance mortgage originations provided additional noninterest income. Although increasing house prices and shrinking inventory have slowed the demand for new mortgages, falling rates have boosted refinancings. Noninterest expenses remain a top concern for bank management, who continue to seek new ways to reduce long-term costs. In the third quarter of 2019, the efficiency ratio for community banks stayed below 60 percent.


Consistent deposit growth has aided banks in maintaining strong liquidity levels. Community banks historically receive a large proportion of their cash from deposits, which is the most cost-effective way to fund asset growth. Recent rate cuts by the Federal Reserve do not appear to be negatively affecting deposit levels. However, there is usually a lag between interest rate changes and deposit level changes. Deposit growth for community banks in the Sixth District in the third quarter was close to 4 percent on a median basis, slightly below the rate of loan growth (see the chart).

Deposit growth has fluctuated between 3 percent and 4 percent per quarter since 2015. On average, loans are 80 percent of total deposits, a much lower percentage than 10 years ago, when loans represented 92 percent of deposits. Growth is occurring primarily in non-interest-bearing transaction accounts. Transaction accounts represent 32 percent of total deposits, compared to just 15 percent in 2008. The ability to increase deposits in the current rate cycle has kept dependence on noncore funding extremely low compared with historical levels. Median on-hand liquidity for community banks remained at 18.6 percent for the second consecutive quarter, slightly higher than the 17.4 percent ratio for banks outside the Sixth District.

National Banking Trends

On a national level, the return on average assets (ROAA) for community banks with less than $1 billion in assets remained the same as the prior year (see the chart).

However, changes in the interest rate environment are affecting larger banks’ earnings. Margin pressures continued to extend through the third quarter. The net interest margin (NIM) at community banks remained unchanged, and larger regional banks with assets greater than $10 billion reported a lower NIM, down 15 basis points (see the chart).

Among the factors affecting NIMs are slower loan growth and increased payoffs. In addition, competition continues to put pressure on loan pricing. Interest expense increased slightly as banks are relying more on borrowings to fund loan growth as higher cost deposits are being allowed to run off. Earnings were boosted by noninterest income (notably mortgage originations) and continued expense control.

Overall asset growth was positive again in the third quarter of 2019, with an annualized growth rate of 4.9 percent, more than 200 basis points higher compared with the third quarter of 2018. However, asset balances declined at the smallest banks—those with assets less than $1 billion—while growth at banks with more than $10 billion in assets was near 6 percent. Loan growth continued to drive total asset growth, though at a slower pace, particularly for consumer and commercial real estate (see the chart).

Loan growth at smaller banks has been volatile during the last 10 quarters, with three of the last four seeing a decline in loan balances. Smaller community banks are facing competition from large banks and nonbanks in certain portfolios. Meanwhile, large banks are increasing their securities portfolios at a pace similar to that in 2008, when interest rates started declining.

Asset quality remains stable. Nonperforming assets have decreased and continue near historic lows. Charge-offs declined slightly from the prior quarter but increased 6 basis points year over year (see the chart).

However, firms reported that agriculture risk increased through the summer and early fall. Additionally, according to the October 2019 Senior Loan Officer Opinion Survey, some banks have tightened standards on commercial real estate loans. Banks appear to have maintained underwriting discipline through the current credit cycle, although competition from nonbanks continues to grow. However, an increasing number of loans are being underwritten with fewer covenants, which reduces credit protections. Despite strong asset quality, the allowance for loan loss as a percentage of noncurrent loans remains at the highest level since the end of the financial crisis.

Positive earnings, slower growth, and strong credit quality have kept regulatory capital ratios healthy. The average total risk-based capital is 14.46, well above the regulatory minimum. Less than 1 percent of banks are not considered well capitalized. The dividend payout ratio declined in the third quarter from the prior quarter, which tends to be the case in the third quarter of each year. Stock repurchases continue to exceed stock sales.

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