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Quarterly Report: Two Steps Forward, One Step Back for District Banks in Fourth Quarter


Michelle Clark Neely
Thursday, April 1, 2010

After two straight quarters of slight improvement, profitability at Eighth District banks dipped in the fourth quarter of 2009. Return on average assets (ROA) declined 9 basis points to 0.16 percent because of increases in net noninterest expenses and loan loss provisions. (See table.) For U.S. peer banks (those with assets of less than $15 billion), the fourth quarter profitability ratio was a “good news, bad news” story. The good news was that ROA rose 2 basis points; the bad news was that it was still negative (-0.28 percent) as the industry continued to rack up losses.

For both District and national peer banks, the results were once again better for smaller institutions: District banks with average assets of less than $1 billion earned 0.49 percent on average assets, while similar-size banks elsewhere earned just 0.01 percent. As with the slightly larger banks, ROA declined between the third and fourth quarters.

The net interest margin (NIM)—the main driver of bank earnings—held steady at District banks in the fourth quarter at 3.67 percent. The profit setback can be traced to declines in noninterest income, slight increases in noninterest expense and increases in loan loss provisions. Loan loss provisions as a percent of average assets rose to 1.02 percent at District banks and to 1.54 percent at U.S. peer banks in the fourth quarter. While some of the increase in loan loss provisions reflects typical year-end adjustments, it also reflects continued deterioration in asset quality, especially in the real estate portfolio.

Asset quality problems show no sign of abating soon. The ratio of nonperforming loans to total loans at District banks jumped 22 basis points to 2.84 percent at year-end 2009; the increase in the ratio for U.S. peer banks was smaller—11 basis points—but the national ratio remains well above that of District banks at 4.14 percent.

Problem real estate loans are the source of most of the weakness in asset quality. In the District, the ratio of nonperforming real estate loans to total real estate loans jumped 29 basis points to 3.34 percent. Within the portfolio, the sharpest increase occurred in construction and land development (CLD) loans; nonperforming CLD loans to total CLD loans surged 128 basis points to 9.84 percent. Increases occurred in all other segments of the real estate portfolio, although they were much smaller. The picture is substantially worse for U.S. peer banks. Nonperforming real estate loans make up nearly 5 percent of total real estate loans, and the nonperforming CLD loan ratio is approaching 15 percent.

Despite large increases in loan loss reserves, the coverage ratio of loan
loss reserves to nonperforming loans continues to sink. For District banks, it dropped almost 300 basis points to 64.8 percent, meaning about 65 cents was reserved for every $1 of nonperforming loans. Though the coverage ratio actually increased somewhat for U.S. peer banks, it remains well below the District’s level at a weak 52.3 percent.

Despite the industry’s earnings and asset quality problems, on average District banks and their U.S. peers remain well-capitalized. The average leverage ratio was 8.84 percent at District banks and 9.07 percent at U.S. peer banks at year-end 2009.

It's Still Tough Out There

  4Q 2008 3Q 2009 4Q 2009
Return on Average Assets
District Banks 0.40% 0.25% 0.16%
Peer Banks 0.04 -0.3 -0.28
Net Interest Margin
District Banks 3.78 3.67 3.67
Peer Banks 3.82 3.61 3.66
Loan Loss Provision Ratio
District Banks 0.78 0.95 1.02
Peer Banks 1.08 1.51 1.54
Nonperforming Loans Ratio
District Banks 1.76 2.62 2.84
Peer Banks 2.71 4.03 4.14

SOURCE: Reports of Condition and Income for Insured Commercial Banks

Note: 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 average earning assets in the denominator. Nonperforming loans are those 90 days or more past due or in nonaccrual status.