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Quarterly Report: District Banks: Profits Steady, But Problem Loans Mount


Michelle Clark Neely
Tuesday, July 1, 2008

Eighth District banks and their national peers continue to face pressure on earnings amid rising asset quality problems and weakness in the regional and national economies. First-quarter results illustrate these pressures, yet indicate that banks in the District have been remarkably resilient thus far.

Return on average assets (ROA) increased slightly in the first quarter at District banks. They posted an average ROA of 0.96 percent compared with 0.94 percent at year-end 2007. The District's first-quarter performance substantially exceeded that of U.S. peer banks (banks with average assets of less than $15 billion), which, as a group, recorded an average ROA of 0.81 percent. ROA for both sets of banks is down markedly from year-ago levels, though the drop at peer banks is more substantial at 36 basis points.

District banks' average net interest margin (NIM) declined in the first quarter, but this drop was offset by a decline in net non-interest expense. U.S. peer banks' average NIM declined, but net non-interest expense rose. A substantial increase in loan loss provisions also hurt profits at U.S. peer banks; loan loss provisions as a percent of average assets (LLP ratio) rose from 0.34 percent in the fourth quarter to 0.56 in the first quarter. This ratio has almost tripled at U.S. peer banks over the last year, reflecting rising asset quality problems at banks nationwide. The District LLP ratio has also risen, but at a lower level and rate of increase.

Asset quality is a continuing concern at both sets of banks. The ratio of nonperforming loans in the District to total loans increased 17 basis points to 1.72 percent in the first quarter and has doubled over the past year. The pattern is echoed at U.S. peers.

Most of the weakness remains concentrated in real estate loan portfolios. Slightly more than 2 percent of the District's outstanding real estate loans are nonperforming, as are 1.92 percent at U.S. peer banks. More than 5 percent of District construction and land development loans were nonperforming at the end of March.

On average, District banks remain well-capitalized. At the end of the first quarter, all District banks but one (which subsequently failed) met or exceeded the three regulatory capital ratios.

Tougher Times for District Earnings and Loan Quality

  1st Q 2007 4th Q 2007 1st Q 2008
Return on Average Assets
District Banks 1.03% 0.94% 0.96%
Peer Banks 1.17 1.05 0.81
Net Interest Margin
District Banks 3.85 3.90 3.79
Peer Banks 3.92 3.99 3.85
Loan Loss Provision Ratio
District Banks 0.18 0.36 0.38
Peer Banks 0.20 0.34 0.56
Nonperforming Loans Ratio
District Banks 0.86 1.55 1.72
Peer Banks 0.73 1.24 1.63

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 assets) in the denominator. Nonperforming loans are those 90 days or more past due or in non-accrual status.