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Quarterly Report: Earnings Growth Stalls in Second Quarter, Asset Quality Is Steady in District


Michelle Clark Neely
Saturday, October 1, 2011

After a large increase in the first quarter of 2011, earnings growth at District banks came to a standstill in the second quarter. Return on average assets (ROA) dropped 3 basis points to 0.74 percent at District banks, while it increased 4 basis points to 0.67 percent at U.S. peer banks (those with average assets of less than $15 billion). Still, earnings ratios at both sets of banks are up substantially from their year-ago levels.

Not Much To Cheer About1

  2010: Q22011: Q12011: Q2
Return on Average Assets2
District Banks 0.52% 0.77% 0.74%
U.S. Peer Banks 0.26 0.63 0.67
Net Interest Margin
District Banks 3.78 3.97 3.98
U.S. Peer Banks 3.84 3.88 3.91
Loan Loss Provision Ratio
District Banks 0.83 0.61 0.59
U.S. Peer Banks 1.09 0.61 0.61
Nonperforming Loan Ratio3
District Banks 2.97 3.27 3.26
U.S. Peer Banks 4.02 3.88 3.72

SOURCE: Reports of Condition and Income for Insured Commercial Banks.

1 Because all District banks except 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.

The drag on earnings was the result of a 5-basis-point increase in noninterest expense, and a 4-basis-point decline in noninterest income. The other main components of earnings—net interest income and loan loss provisions—had little effect. On the positive side, net interest income rose, while loan loss provisions fell.

The net interest margin (NIM) increased slightly at both sets of banks in the second quarter, rising 1 basis point to 3.98 percent in the District and 3 basis points to 3.91 percent at U.S. peer banks. The District’s ratio is up 20 basis points from its year-ago level, and is at its highest level since the start of the financial crisis. The NIM is being boosted especially by the performance of the District’s larger institutions; District banks with assets of less than $1 billion recorded a slightly lower average NIM of 3.94 percent.

Nonperforming Loan Ratio Is Down

Asset quality has yet to improve at District banks and is an even larger problem at U.S. peer banks. The ratio of nonperforming loans to total loans decreased slightly in the second quarter to 3.26 percent in the District, but is still up 29 basis points from its year-ago level. The nonperforming loan ratio fell 16 basis points in the second quarter at U.S. peer banks and is down 30 basis points from its year-ago level; however, at 3.72 percent, it remains well above the District’s average.

The increase in the District’s nonperforming loan ratio in the second quarter was driven by deterioration in the commercial and industrial (C&I) loan portfolio, rather than the real estate portfolio, as has been the case for most of the past three years. In the C&I portfolio, 2.49 percent of loans were nonperforming as of June 30, a 22-basis-point increase from the level at the end of the first quarter.

The ratio of nonperforming real estate loans to total real estate loans declined slightly in the second quarter in the District to 3.73 percent. This ratio remains very high by historical standards and is the major determinant of the overall nonperforming loan ratio.

Within the District’s real estate portfolio, the proportion of nonperforming residential mortgage as well as construction and land development loans declined, while the proportion of nonperforming multifamily and nonfarm nonresidential real estate loans increased.

The average loan loss coverage ratio declined somewhat at District banks in the second quarter. District banks have about 62 cents reserved for every dollar of nonperforming loans, down a penny from the first quarter level. The coverage ratio for U.S. peer banks stood at 58 percent at the end of the second quarter.

Despite the slight downtick in earnings in the second quarter of 2011, the average tier 1 leverage ratio increased 16 basis points to 9.26 percent at District banks. Buoyed by the increase in profits, the average tier 1 leverage ratio climbed 23 basis points to 9.86 percent at U.S. peer banks.