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Quarterly Report: District, U.S. Peer Banks Still Navigating Difficult Waters


Michelle Clark Neely
Friday, April 1, 2011

Profitability at the nation’s banks made quite a turnaround in 2010, but asset quality issues—linked primarily to commercial real estate—are still weighing heavily on the industry. Return on average assets (ROA) averaged 0.53 percent at District banks at year-end 2010, up 44 basis points from a year ago. ROA at U.S. peer banks—those with average assets of less than $15 billion—also rose substantially in 2010, but remains below the District’s average at 0.28 percent.

The year-over-year improvement in profitability is due in large part to marked upticks in the net interest margin (NIM), which rose 20 basis points in the District and 25 basis points at peer banks. Rising NIMs are due entirely to decreases in interest expense that exceed decreases in interest income. A substantial reduction (13 basis points) in net noninterest expense provided another boost to ROA at District banks in 2010. Earnings also increased because of significant declines in loan loss provisions in 2010 at both sets of banks, even though asset quality has improved modestly, if at all.

The ratio of nonperforming loans to total loans at District banks held basically steady between the third and fourth quarters at 3.27 percent, a worsening of 41 basis points from a year ago. In contrast, the nonperforming loan ratio fell 13 basis points in the fourth quarter at peer banks; the year-end ratio of 3.95 percent is 20 basis points below its year-ago level.

Real estate loans remain the driver for the performance of the overall loan portfolio both in the District and nationally, and market conditions—both residential and commercial—have not improved appreciably. Within the real estate portfolio, there were declines in nonperforming construction and land development (CLD) loans in the fourth quarter. In the District, the proportion of CLD loans that were nonperforming fell 21 basis points to 12.27 percent, while it fell 33 basis points at U.S. peers to 14.81 percent. Though this is certainly good news, these ratios remain near historic highs.

Nonperforming rates in the nonfarm nonresidential segment continue to rise at District banks of all sizes; the proportion of nonfarm nonresidential loans that were nonperforming at year-end was 2.93 percent, up 17 basis points from the third quarter. The nonperforming rate for these loans at peer banks actually declined slightly in the fourth quarter but remains well above the District’s average at 3.61 percent.

Although delinquency rates remain steady in the consumer segment, they continue to edge up in the commercial and industrial (C & I) portfolio; the nonperforming C & I ratio hit 2.19 percent at District banks and 2.40 percent at peer banks at year-end 2010.

Declining loan loss provisions and rising nonperforming loan levels in 2010 led to a 528 basis point drop in the average loan loss reserve coverage ratio at District banks. At year-end 2010, District banks had about 61 cents reserved for every dollar of nonperforming loans compared to 66 cents at year-end 2009. The average coverage ratio increased at U.S. peers in 2010 by more than 300 basis points, but it remains below the average at District banks at 56 cents.

Capital ratios rose at both sets of banks in 2010. The average tier 1 leverage ratio was 9.05 percent at District banks and 9.46 at U.S. peer banks at year-end 2010, significantly above the regulatory minimum level of 4 percent.

Steady as She Goes1

  2009: 4Q 2010: 3Q 2010: 4Q
Return on Average Assets2
District Banks 0.09% 0.57% 0.53%
U.S. Peer Banks -0.37 0.32 0.28
Net Interest Margin
District Banks 3.67 3.84 3.87
U.S. Peer Banks 3.65 3.87 3.9
Loan Loss Provision Ratio
District Banks 1.07 0.82 0.86
U.S. Peer Banks 1.6 1.06 1.06
Nonperforming Loans Ratio3
District Banks 2.86 3.3 3.27
U.S. Peer Banks 4.15 4.08 3.95

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.