Quarterly Report: District Banks' Profits Are Up, Asset Quality Is Not

Michelle Clark Neely

Bank earnings rose dramatically at District and U.S. peer institutions in the first quarter of 2011, primarily because of a sharp drop in funds set aside to cover future loan losses.  Return on average assets (ROA) jumped 30 basis points at District banks to 0.81 percent and is up 24 basis points from its year-ago level.  The improvement at U.S. peer banks—those with average assets of less than $15 billion—was even more pronounced, with ROA increasing 40 basis points to 0.65 percent and up 44 basis points from a year ago.

In the District, the improvement in profitability came from all three primary components of earnings:  net interest income, net noninterest expense and loan loss provisions.  The net interest margin (NIM) increased 11 basis points to 3.97 percent, the net noninterest expense ratio dropped 4 basis points to 1.85 percent and loan loss provisions as a percent of average assets fell 30 basis points to 0.58 percent.  For U.S. peer banks, virtually all the boost in ROA came from a 49-basis-point drop in loan loss provisions as a percent of average assets.

The brighter profit picture contrasts with still stubborn asset quality problems in the District and across the nation.  The ratio of nonperforming loans to total loans remains well above the regulatory benchmark of 2 percent; for District banks, 3.27 percent of loans were nonperforming at the end of the first quarter, compared with 3.23 percent at year-end 2010 and 3.09 percent at the same time one year ago.  Real estate loans—especially those related to commercial properties—continue to be the primary source of problem assets.  Nonperforming rates in the consumer, and commercial and industrial portfolios are also up from a year ago, albeit at much lower levels than in real estate.

The nonperforming loan ratio declined 3 basis points at U.S. peer banks in the first quarter to 3.87 percent.  Though the peer ratio is still substantially above the District’s average, the gap between the two ratios has narrowed over the past year as they’ve gone in opposite directions.  Within the three major portfolios (real estate, consumer, and commercial and industrial), nonperforming loan rates remain higher at U.S. peers than at their District counterparts.

The average loan loss coverage ratio increased slightly at both sets of banks in the first quarter.  District banks now have about 63 cents reserved for every dollar of nonperforming loans, while peer banks have about 58 cents.  Banking regulators like to see coverage ratios at 80 cents or above. 

Capital ratios have risen along with earnings over the past year.  The average tier 1 leverage ratio was 9.11 percent at District banks at the end of the first quarter and 9.64 percent at U.S. peers.

First Quarter a Mixed Bag1

  2010: 1Q 2010: 4Q 2011: 1Q
Return on Average Assets2
District Banks 0.57% 0.51% 0.81%
U.S. Peer Banks 0.21 0.25 0.65
Net Interest Margin
District Banks 3.77 3.86 3.97
U.S. Peer Banks 3.77 3.90 3.88
Loan Loss Provision Ratio
District Banks 0.77 0.88 0.58
U.S. Peer Banks 1.15 1.08 0.59
Nonperforming Loans Ratio3
District Banks 3.09 3.23 3.27
U.S. Peer Banks 4.25 3.90 3.87

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.


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