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Quarterly Report: A Mixed Bag for District, Peer Banks


Michelle Clark Neely
Friday, January 1, 2010

Profitability rose at the District’s banks in the third quarter, although average asset quality worsened after showing some improvement at mid-year 2010. Return on average assets (ROA) at District banks increased 6 basis points to 0.58 percent in the second quarter (see table), putting ROA 33 basis points above its year-ago level. For U.S. peer banks—banks with assets of less than $15 billion—ROA advanced 7 basis points to 0.33 percent in the third quarter. Average ROA for smaller institutions showed a similar trend at both District and peer banks; ROA increased 2 basis points to 0.80 percent at District banks with assets of less than $1 billion, and rose 4 basis points to 0.42 percent at U.S. peers of the same size.

At District banks, a boost of 6 basis points in the net interest margin (NIM) to 3.84 percent was the primary determinant for the increase in profits. The increase was split evenly between a rise in interest income and a decline in interest expense. Loan loss provisions also declined while net noninterest expense rose just one basis point. For U.S. peers, the increase in net income was due to a 4 basis point rise in the NIM and an equivalent drop in loan loss provisions. Profit ratios also increased because of shrinking balance sheets; average assets declined somewhat at both District and U.S. peer banks.

The drop in loan loss provisions at District banks is surprising given the sharp rise in nonperforming loans in the third quarter. Nonperforming loans as a percent of total loans climbed 32 basis points to 3.30 percent at District banks after a drop of 11 basis points in the second quarter. Nonperforming loans also rose at U.S. peer banks, but by a more modest 7 basis points to 4.09 percent. All major categories of loans at District banks posted increases in nonperforming rates, but once again, deterioration in the real estate portfolio drove the overall results. The nonperforming construction and land development loan and nonfarm nonresidential real estate loan ratios were both up substantially over second quarter levels. Although the deterioration in loan performance was less significant at U.S. peer banks, overall nonperforming rates remain higher than those of District banks across all asset categories.

The combination of rising nonperforming loans and falling loan loss provisions led to declines in the average loan loss reserves coverage ratio at both sets of banks. The ratio of loan loss reserves to nonperforming loans fell 544 basis points to 60.57 percent in the District, meaning about 60 cents was reserved for every dollar of nonperforming loans. The coverage ratio at U.S. peer banks also fell in the third quarter, but by a more modest 120 basis points. U.S. peer banks have about 55 cents set aside for every dollar of nonperforming loans.

Capital ratios improved at both sets of banks in the third quarter. The average tier 1 leverage ratio jumped 12 basis points to 9.07 percent at District banks, and 18 basis points to 9.45 percent at U.S. peer banks. Rising capital ratios were the result of increased profits and a smaller asset base.

Profits, Asset Quality Diverge1

  2009: 3Q 2010: 2Q 2010: 3Q
Return on Average Assets2
District Banks 0.25% 0.52% 0.58%
U.S. Peer Banks -0.30 0.26 0.33
Net Interest Margin
District Banks 3.67 3.78 3.84
U.S. Peer Banks 3.61 3.83 3.87
Loan Loss Provision Ratio
District Banks 0.95 0.83 0.81
U.S. Peer Banks 1.51 1.09 1.05
Nonperforming Loans Ratio3
District Banks 2.62 2.98 3.30
U.S. Peer Banks 4.03 4.02 4.09

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.