Meet the Author

Joseph G. Haubrich |

Vice President and Economist

Joseph G. Haubrich

Joseph Haubrich is a vice president and economist at the Federal Reserve Bank of Cleveland, where he is responsible for leading the Research Department's Banking and Financial Institutions Group. He specializes in research related to financial institutions and regulations.

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Meet the Author

Saeed Zaman |


Saeed Zaman

Saeed Zaman is an economist in the Research Department of the Federal Reserve Bank of Cleveland. His current research focuses on inflation measurement and forecasting, including nowcasting methods, and he contributes to the development of macroeconomic forecasting and policy models at the bank. His research interests also include inflation and prices, macroeconomic forecasting, monetary policy, and banking and financial institutions.

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Economic Trends

Fourth District Community Banks

Joe Haubrich and Saeed Zaman

Overall, financial indicators point to some weakening of Fourth District banks’ balance sheets. Asset quality, as measured by net charge-offs (losses realized on loans and leases currently in default minus recoveries on previously charged-off loans and leases) deteriorated in the third quarter of 2007.  Net charge-offs increased to 0.37 percent of total loans (from 0.34 percent at the end of 2006).  Problem assets (nonperforming loans and repossessed real estate) as a share of total assets rose to 0.95 percent, from 0.72 percent at the end of 2006.  The increase in problem assets may translate into higher charge-offs in the future if borrowers cannot catch up with their late payments.  At the national level, the picture is similar; both asset quality ratios have deteriorated.  Net charge-offs and nonperforming loans rose to 0.43 percent of loans (up from 0.33 percent at the end of 2006) and 0.56 percent of assets (up from 0.45 percent at the end of 2006).

Fourth District banks held $12.45 in equity capital and loan loss reserves for every dollar of problem loans, which is above the recent coverage ratio low of 10.75 at the end of 2002, but well below the record high of 24.97 at the end of 2004.

Equity capital as a percent of Fourth District banks’ assets (the leverage ratio) rose to 9.73 percent (from 9.34 percent at the end of 2006).

The percent of unprofitable institutions in the Fourth District rose to 8.66 percent for the third quarter of 2007 (from 6.36 percent at the end of 2006).  Unprofitable banks’ asset size also rose, as the share of District banks’ assets accounted for by unprofitable banks increased from 0.23 percent to 0.45 percent.  Industrywide, the percent of unprofitable institutions rose from 7.7 percent to 9.67 percent at the end of the third quarter of 2007. The asset size of unprofitable banks also went up from 0.59 percent at the end of 2006 to 1.93 percent at the end of the third quarter of 2007.  So, the industrywide increase in the number of unprofitable banks was restricted not only to smaller financial institutions but broad based.

Net income posted by FDIC-insured commercial banks headquartered in the Fourth Federal Reserve District for the first three quarters of 2007 was $7.6 billion —$10.14 billion on an annual basis.  (JP Morgan Chase, chartered in Columbus, is not included in this discussion because its assets are mostly outside the District and its size—roughly $1 trillion—dwarfs other District institutions.) The U.S. banking industry as a whole posted earnings of $107.09 billion for the same period—$142.78 billion on an annual basis.

Fourth District banks’ net interest margins (core profitability computed as interest income minus interest expenses divided by average earning assets) fell to 2.96 percent of total income at the end of the third quarter of 2007, but it is still higher than the U.S. average of 2.87 percent.  Non-interest income relative to total income slipped for both Fourth District banks and the national average, to 28.51 percent for District banks, and to 28.42 percent for the nation.

Fourth District banks’ efficiency (operating expenses as a percent of total income) continued to worsen in the third quarter of 2007, deteriorating to 56.69 percent from the 52.64 percent record set in 2002. (Lower numbers correspond to greater efficiency.)  Banks outside the Fourth District also deteriorated, as the national average climbed to 55.05 percent, from 54.64 percent at the end of 2006.

At the end of the third quarter of 2007, District banks posted a 1.20 percent return on assets (down from 1.41 percent at the end of 2006) and a 12.37 percent return on equity (down from 15.05 percent at the end of 2006). The District’s decline resonated the with the downward trend nationwide:  Return on assets nationwide was down to 1.01 percent (from 1.14 percent at the end of 2006), and return on equity was down to 10.92 percent (from 12.23 percent at the end of 2006).