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Quarterly Report: District Banks Face Tough Times but Outperform U.S. Peers


Michelle Clark Neely
Wednesday, October 1, 2008

Earnings and asset quality at District banks and their national peers remained weak in the second quarter, reflecting general economic malaise and continued deterioration in housing markets.

In the District, return on average assets (ROA) hit a 20-year low in the second quarter of 2008. ROA averaged 0.81 percent-12 basis points below its first-quarter level and 25 basis points below its year-ago level. Still, District banks significantly outperformed their U.S. peers (banks with average assets of less than $15 billion); the latter group posted an average ROA of 0.61 percent in the second quarter, compared with 0.81 percent in the first quarter and 1.18 percent a year ago.

District banks' average net interest margin (NIM) held steady at 3.79 percent, while it declined two basis points at peer banks. Profitability ratios at both sets of banks were brought down by small increases in net non-interest expense and more substantial boosts in loan loss provisions. Loan loss provisions as a percent of average assets (LLP ratio) rose nine basis points to 0.52 percent in the District-almost triple the level of a year ago. At national peer banks, the increase was more pronounced (to 0.71 percent).

Loan loss provision increases reflect, of course, asset quality problems that continue to mount in the District and nation. The ratio of nonperforming loans to total loans was 1.53 percent at District banks and 1.92 percent at U.S. peer banks at the end of the second quarter. The proportion of nonperforming loans has nearly doubled at District banks and has more than doubled at peer banks over the past year.

Problems in the real estate portfolio are primarily responsible for the overall increase: At the end of the second quarter, 1.77 percent of real estate loans were nonperforming at District banks. Within the real estate portfolio, delinquency ratios were most pronounced in construction and land development loans (4.25 percent) and multifamily loans (1.60 percent). Delinquency rates have risen in C&I and consumer portfolios, too. The trends are identical at peer banks.

District banks remain on average well-capitalized. At the end of the second quarter, just one bank (out of 713) failed to meet one of the three regulatory capital ratios. District banks averaged a leverage ratio of 9.11 percent.


Tougher Times for District Earnings and Loan Quality

  2nd Q 2007 1st Q 2008 2nd Q 2008
Return on Average Assets
District Banks 1.06% 0.93% 0.81%
Peer Banks 1.18 0.81 0.61
Net Interest Margin
District Banks 3.87 3.79 3.79
Peer Banks 3.96 3.85 3.83
Loan Loss Provision Ratio
District Banks 0.19 0.43 0.52
Peer Banks 0.22 0.57 0.71
Nonperforming Loans Ratio
District Banks 0.89 1.71 [1] 1.53
Peer Banks 0.83 1.63 1.92

SOURCE: Reports of Condition and Income for Insured Commercial Banks

Banks with assets of more than $15 billion have been excluded from the analysis. All earnings ratios are annualized and use year-to-date average assets or earning average assets in the denominator. Nonperforming loans are those 90 days or more past due or in non-accrual status.


  1. Excluding data of ANB Financial brings the 1st quarter NPL ratio down to 1.54 percent. [back to text]