The State of Fifth District Small Community Banks Versus the Nation
Highlights Through the Second Quarter 2011: Banks With Assets Less Than $1 Billion*

By Ben Carter and Donna Thompson

*Note: The following analysis summarizes selected financial developments and trends at community banking organizations with total assets less than $1 billion as of June 30, 2011. For purposes of this analysis, financial institutions with total assets of less than $1 billion will be referred to as “small community banks.” An analysis between all small community banks (on a national level) and Fifth District small community banks was performed in order to compare how banks in this District perform relative to banks nationwide in this asset size. Supporting financial information is based on Consolidated Reports of Condition and Income data.

Financial ratios and trends presented in this article may not necessarily reconcile with those presented in the Fifth District Indicators table on page 3 of this publication because of differences in average calculation used (mean vs. median) and cohorts utilized.

As of June 30, 2011, there are approximately 5,800 banks nationwide with total assets of less than $1 billion. This population of banks represents 92 percent of all banking institutions in the U.S. Total footings of these 5,800 banks approximate $1.17 trillion. The Fifth District is home to nearly 300 financial institutions with less than $1 billion in total assets, and total footings approximate $87.7 billion. The preponderance of state member banks in the Fifth District (85 percent) has total assets of less than $1 billion.

Current newspaper articles and business commentary seem to indicate that the banking industry is beginning to rebound from the depths of the recent financial turmoil. In addition, the latest Consolidated Reports of Condition and Income show that there is some improvement in many key performance measures nationwide. However, this is in stark contrast to the data for Fifth District small community banks, which continue to lag the improvement reflected nationally.

The following “headline captions” reflect some of the positive data showcased by second quarter 2011 nationwide data:

Bank Earnings Post Gain

For the six months ended June 30, 2011, earnings for nationwide small community banks equaled $3.4 billion and exceeded the $2.3 billion reported during the same period of the prior year. Small community banks reported an average 0.58 percent return on assets versus 0.40 percent one year prior and 0.33 percent for end of year 2010. Nationwide earnings performance at small community banks appeared to benefit from a modest increase in net interest income, driven by continued reduction in funding costs and a significant reduction in provision for loan losses.

Profitability at Fifth District small community banks improved relative to 2010 levels; however, these institutions significantly lag nationwide trends, as they continue to report a cumulative loss. Fifth District small community banks reported an average net loss approximating 0.03 percent of average assets at June 30, 2011, compared to an average net loss approximating 0.13 percent at end of year 2010. These banks lag nationwide earnings performance as a result of significantly higher levels of loan loss provision, substantially lower levels of noninterest income, and slightly lower levels of net interest income. On a national level, approximately 15 percent of small community banks are operating at a financial loss versus 25 percent in the Fifth District. Additionally, on a nationwide basis, 34 percent of banks with assets of less than $1 billion report a return on average assets of greater than 1 percent, compared to only 15 percent of Fifth District banks.

Loan Provisions Continue to Fall

Provisions for loan losses nationwide at small community banks declined to 0.54 percent of average assets through the second quarter of 2011, down from 0.81 percent at year-end 2010. Fifth District small community banks also benefited from a decline in loan loss provisions from prior year levels; however, provisions remain far above those of national organizations and totaled 0.89 percent of average assets for the second quarter versus 1.17 percent at year-end 2010.

Loan Quality Shows Signs of Improvement

Nationwide, net charge-offs (as a percent of average loans for small community banks) declined to 0.85 percent at June 2011 versus 1.09 percent for year-end 2010. In addition, the level of noncurrent loans nationwide has remained fairly steady since early 2010, approximating 3.5 percent of total loans.

Based on June 2011 data, Fifth District small community banks are experiencing higher net charge-offs and heightened levels of nonperforming assets relative to nationwide peer banks. While net charge-offs as a percent of average loans lagged nationwide data through 2009, charge-offs now far exceed national levels (1.37 percent vs. 0.85 percent). The Fifth District’s level of noncurrent loans has been steadily increasing since 2006 and exceeds national peer data by 89 basis points at June 2011, totaling 4.34 percent. Fifth District loan performance ratios have also been adversely impacted by overall portfolio composition. Commercial real estate (CRE) relationships have approximated 50 percent of loan outstandings since 2007 for Fifth District institutions. Meanwhile, national data indicates that CRE relationships have trended downward and approximate 40 percent of total loans. Not only has a heavy CRE concentration adversely affected Fifth District loan performance, but the level of noncurrent loans across all sectors has exceeded national levels.

Risk-Based Capital Ratios Steadily Improve

While risk-based capital ratios have steadily improved for all small community banks, Fifth District banks lag the national average across all regulatory capital ratios (as illustrated in the following table).

June 30, 2011Tier 1 LeverageTier 1 Risk-Based CapitalTotal Risk-Based Capital
Nationwide Banks < $1 Billion in Assets9.88%14.40%15.60%
Fifth District Banks < $1 Billion in Assets9.22%12.86%14.21%

Liquidity Ratios Show Improvement

Small community banks, both nationwide and in the Fifth District, showed a decline in the volume of net loans relative to deposits (approximately 75 percent at nationwide banks and 82 percent at Fifth District banks), principally due to lower loan balances. In addition, cash balances have steadily increased at all small community banks since 2007, representing 8.3 percent of total assets for banks nationally and 7.2 percent for Fifth District banks as of June 30, 2011. This is up from a mid-3 percent range in 2006. On a national basis for institutions with less than $1 billion in total footings, reserve balances held at Federal Reserve Banks aggregated $2.4 billion at year-end 2007 and increased to an astonishing $43.7 billion at June 30, 2011.

In addition, there’s been a shift in the composition of deposit bases, both nationally and in the Fifth District, as banks have shown growth in nonmaturity deposits and a reduction in time deposits (as a percentage of total assets) since 2008. Reliance on wholesale funding sources has declined for all small community banks. Still, the level of borrowings at Fifth District institutions exceeds national levels.

Looking Ahead

So, what can we conclude from all of this data? Well, Fifth District banks didn’t experience the credit downturn as early as many organizations in other parts of the country; however, we were not immune, and the portfolio composition of many District banks has influenced the impact in our region. Noncurrent loan data indicate that we are likely to experience continued turbulence in the near term. As such, bank management teams are encouraged to continue to assess concentration risk, enhance credit risk management practices, and focus on problem loan resolution.

Profitability levels for District banks continue to be strained. While market uncertainty and a flight to quality have pushed down Treasury yields, financial institutions’ net interest margins may continue to be pressured as new lower-yielding assets replace maturing higher-yielding assets, and floating rate products reprice at lower rates.

Due to profitability concerns and the abundance of liquidity on many banks’ balance sheets, some institutions may be striving to support earnings through yield-enhancing strategies via the investment portfolio. Management is reminded to conduct considerable due diligence before entering into strategies that would expose bank earnings and/or capital levels.

Lastly, while the compositional shift from time deposits to nonmaturity deposits may reclassify a portion of these funds to core deposits from a regulatory reporting standpoint, banks are cautioned not to characterize all nonmaturity deposits as stable funding, as trends could quickly reverse when market conditions change.

Clearly, some positive trends are beginning to emerge for the industry as a whole, although our region has not yet experienced those trends to the extent we would all like. While we await the return of better times, we hope that the information in this article is helpful to you as your bank navigates this challenging period.

Ben Carter is an Assistant Vice President with the Federal Reserve Bank of Richmond and can be reached at

Donna Thompson is a supervisory examiner with the Federal Reserve Bank of Richmond and can be reached at

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