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Quarterly Report: More Signs of Improvement for District, Peer Banks


Michelle Clark Neely
Friday, October 1, 2010

Although profitability at District banks dipped slightly in the second quarter, evidence continues to mount that banking conditions here and throughout the country are stabilizing. Return on average assets (ROA) at District banks fell 4 basis points to 0.53 percent in the second quarter (see table.), but was substantially above its year-ago level of 0.19 percent. For U.S. peer banks—banks with assets of less than $15 billion—ROA actually increased 6 basis points to 0.28 percent in the second quarter. One year ago, peer banks as a group lost money and posted an average of ROA of -0.33 percent.

The profit picture was brighter at smaller institutions. ROA rose 3 basis points to 0.79 percent at District banks with assets of less than $1 billion, and rose 2 basis points to 0.41 percent at U.S. peers of the same size.

At District banks, the net interest margin (NIM) was essentially unchanged in the second quarter at 3.78 percent, making it a nonfactor for the drop in ROA; net income declined because of increases in net noninterest expenses and loan loss provisions. For U.S. peers, net income received a boost from two sources: higher net interest income and lower loan loss provisions. The NIM at these banks rose 7 basis points to 3.84 percent, while the loan loss provision ratio fell 7 basis points.

The most notable result for both sets of banks in the second quarter is the decline in nonperforming loans, the first quarterly dip since mid-2008 for District banks and the first reduction since 2006 for U.S. peer banks. Nonperforming loans as a percent of total loans fell 11 basis points to 2.98 percent at District banks in the second quarter. The drop was twice as large at U.S. peer banks, where the nonperforming loan ratio declined 24 basis points to 4.01 percent. In the District, the declines in nonperforming loans all came from the real estate portfolio, as nonperforming loans fell for one-to-four family, multifamily and construction and land development loans. The improvement was more broad-based at U.S. peers: Nonperforming rates dropped in the consumer, commercial and industrial, and real estate categories.

While the rise in loan loss provisions hurt the bottom line somewhat at District banks, it halted the long lasting slide in the average loan loss reserves coverage ratio. The ratio of loan loss reserves to nonperforming loans rose 341 basis points to 65.88 percent in the District, meaning about 66 cents was reserved for every dollar of nonperforming loans. Just two years ago, District banks had almost 90 cents set aside for every dollar of nonperforming loans. The coverage ratio at U.S. peer banks also increased in the second quarter, but remains below the District average at 55.94 percent.

Capital ratios also rose at both sets of banks in the second quarter. The average tier 1 leverage ratio increased 13 basis points to 8.96 percent at District banks, and 16 basis points to 9.28 percent at U.S. peer banks. As with the earnings ratios, coverage ratios and capital ratios remain higher at banks with average assets of less than $1 billion.

Progress, Not Perfection1

  2Q 2009 1Q 2010 2Q 2010
Return on Average Assets2
District Banks 0.19% 0.57% 0.53%
U.S. Peer Banks -0.33 0.22 0.28
Net Interest Margin
District Banks 3.66 3.77 3.78
U.S. Peer Banks 3.57 3.77 3.84
Loan Loss Provision Ratio
District Banks 0.95 0.77 0.83
U.S. Peer Banks 1.52 1.14 1.07
Nonperforming Loans Ratio3
District Banks 2.44 3.09 2.98
U.S. Peer Banks 3.78 4.25 4.01

SOURCE: Reports of Condition and Income for Insured Commercial Banks


1 Because all District banks but one have assets of less than $15 billion, banks larger than $15 billion have been excluded from the analysis.

2 All earnings ratios are annualized and use year-to-date average assets or average earning assets in the denominator.

3 Nonperforming loans are those 90 days or more past due or in nonaccrual status.