Banking Health in the Ninth District

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The recession and difficulties in financial markets have put a spotlight on banks. How healthy are Ninth District banks, and how do we know? Bank health is measured by a variety of metrics, a handful of which are presented here going back to the 1980s, when the District and nation were also in the grips of a banking crisis. Charts will be updated quarterly (or annually for some) as new data is available.

Chart 1 – Asset quality down, but stabilizing

Asset quality ratios

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Trend

After a notable uptick over several years in the percentage of nonperforming assets (red line) and a related increase in net charge-offs (blue line), both measures stabilized during the first half of 2010, particularly for net charge-offs. However, both measures remain comparably high.

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Chart 1A – Greatest asset quality deterioration in loans secured by commercial real estate

Asset quality - sector detail

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Trend

There has a notable increase in the percentage of nonperforming assets in several major loan sectors, particularly commercial real estate and construction and land development. The first half of 2010 saw some relief in the overall upward trend. Noncurrent loans in agriculture remain low, but are ticking a bit higher.

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Chart 2 – High concentration in commercial real estate

Loan concentration

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Trend

Commercial real estate has steadily grabbed a larger share of overall bank lending; commercial and residential real estate loans are now responsible for almost half of bank lending. The average bank also has significantly reduced its nonmortgage consumer commercial and industrial loans have declined recently.

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Chart 3 – Return on assets falling; more negative earnings

Return on average assets; negative earnings

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Trend

Return on average assets (blue line) has been declining for several years and has plummeted of late, driven in part by an increasing number of banks reporting negative earnings (red bars).

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Chart 4 – Coverage ratios down, but flattening; provisions elevated, but improving

Provisions and coverage ratio

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Trend

Coverage ratios have slid steeply since 2006, but have stabilized at a low level in recent quarters as nonaccruals are no longer rising as fast as reserves. Provisions also saw a notable decline in the first half of 2010, although they remain at elevated levels.

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Chart 5 – Capital levels are flat

Capital ratios

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Trend

Two different capital ratios show that capital adequacy for banks has declined, particularly on a risk-adjusted basis; but they are improving a little of late and suggest that the banking sector in the Ninth District appears financially sound overall.

Definition
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Chart 6 – Liquid assets up slightly

Liquid assets

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Trend

Liquid asset ratios among banks have steadily declined since the mid-1980s, but they have seen a slight improvement in the past two years, not unlike the brief and small uptick seen with the onset of the 2001 recession.

Definition
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Chart 7 – Noncore funding trending up

Funding source trends

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Trend

Noncore funds (red line) and brokered deposits (blue line) can be relatively “footloose” sources of bank funding, and their overall share has increased significantly over the past two decades. After a brief decline, noncore funds have been rising in recent quarters.

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Chart 8 – Ratings declining

Bank ratings from regulatory agencies

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Trend

Despite a continued uptick in the number of low-rated (or problem) banks, a large majority of banks are still considered healthy.

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Chart 9 – Failures increasing

Bank failures

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Trend

The number of failing banks has risen in recent quarters exceeding, in the case of Minnesota, earlier banking crises.

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