Regional Banking Conditions Discussed in "ViewPoint"

March 31, 2022

Asset Quality :: Balance Sheet Growth :: Capital :: Earnings Performance :: Liquidity :: National Banking Trends 

Asset Quality

During the last six quarters, banks have closely monitored credit conditions given the impact of the pandemic on economic conditions for businesses and consumers. Through the fourth quarter of 2021, nonperforming loans and net charge-offs have remained well below their historical averages. Noncurrent loans, defined as past due 30 days or more, represented just 0.27 percent of total loans on a median basis as of the fourth quarter of 2021, a small increase from the prior quarter but 11 basis points lower than the fourth quarter of 2020. A majority of the delinquencies were classified as past due 30 to 89 days (see the chart).

By comparison, delinquencies represented 0.58 percent of total loans in the fourth quarter of 2019. Net charge-offs as a percentage of total loans also dropped by half year over year. Strong asset quality ratios allowed banks to reduce their allowance for loan losses after building them in 2020. Even with the decline in provision expense in 2021, the allowance for loan losses was still two times higher than noncurrent loans. A majority of banks in the District haven’t adopted the new current expected credit losses (CECL) methodology and primarily rely on historical losses and qualitative adjustments based on economic conditions to determine the appropriate allowance level. Banks will need to adopt the CECL methodology in 2023, at which time there could be more volatility in community banks’ allowance levels quarter to quarter (see the chart).

Despite strong asset quality metrics, banks remain concerned about increases in delinquencies in 2022. In particular, banks are concerned about commercial real estate exposures, such as retail and hospitality, that were negatively affected in the fourth quarter as a result of the spike in COVID-19 cases related to the omicron variant. On a widespread basis, neither sector reported suffering the same decline in sales and visits as the prior year. In addition to the impact that omicron had on fourth quarter revenues for businesses, loan modifications received under the CARES Act began to expire for many borrowers who experienced financial difficulties during the pandemic. As modifications such as payment forbearance expired, many borrowers returned to their original payment plans, including principal and interest. Although a majority of borrowers have exited forbearance plans and remained current on loans, banks report that a significant number of borrowers will be unable to exit forbearance plans without further modifications in loan terms, including interest rates and maturity dates.

Balance Sheet Growth

According to call report data, annualized asset growth slowed in the fourth quarter of 2021 compared with the prior quarter and the fourth quarter of 2020 but remained elevated compared with historical trends. Median annualized asset growth for the quarter exceeded 12 percent, compared with just over 18 percent in the prior year (see the chart).

The securities portfolio experienced the strongest growth, up 31 percent on an annualized basis as banks rebalanced assets in anticipation of increased deposit runoff and a change in the interest rate environment. Loan growth in the fourth quarter of 2021 was marginal, up 1.7 percent on an annualized basis as increased demand for credit was offset by forgiveness of loans made through the Paycheck Protection Program (PPP). The construction and development portfolio experienced the strongest loan growth during the quarter, 16 percent on a median annualized basis as demand for housing, both residential and multifamily, drove a sharp increase in new construction across the District. Demand for commercial real estate loans also increased during the quarter. Besides multifamily, banks have become more selective in the projects being financed, especially for commercial property sectors made more vulnerable by the pandemic, such as retail and hospitality. Commercial and industrial (C&I) balances continued to decline during the quarter as loans originated under PPP were reduced under the forgiveness program set up by the Small Business Administration. Exposure to C&I loans as a percentage of capital has returned to a prepandemic level after increasing dramatically in 2020. Yet, banks report that the decline in PPP loans masked stronger demand for new C&I loans as businesses continued to reopen and recover from the COVID-19 slowdown.

Most consumer demand for credit came in the form of credit cards and vehicle loans. Higher prices for vehicles helped drive more financing, and consumers showed an increased willingness to finance through banks given the existing interest rate environment in the fourth quarter. Outside of other consumer products, demand for residential credit slowed during the quarter. Part of the problem was the lack of inventory of homes for sale across the District, with some markets having single-family inventories below one month. Additionally, low inventories continued to put pressure on housing prices. Rising home prices and declining affordability further reduced new residential applications. Mortgage rates also rose in the fourth quarter, affecting demand for mortgage refinancing. Banks expect originations and refinancing to continue to decline as mortgage rates are expected to further increase during the next 12 months (see the chart).

Although stimulus payments and other economic support have ceased, banks in the District were still flush with deposits in the fourth quarter of 2021. Median deposit growth remained higher than the historical average, up 5.5 percent quarter over quarter, continuing a six-quarter trend. However, banks reported more runoff of balances held by lower-income customers, leading some banks to report a small increase in borrowings. Despite the stronger loan growth, the loans-to-deposits ratio remains unchanged on an aggregate basis from the prior quarter at 62.9 percent, still significantly lower than the prepandemic ratio. Higher loan-to-deposit ratios reflect a greater use of funding for loan production.


Capital levels at Sixth District community banks generally held steady in the fourth quarter of 2021. The majority of banks in the District continue to meet well-capitalized standards. Just over a third of community banks in the District used the community bank leverage ratio (CBLR) as their primary capital ratio at year-end. On an aggregate basis, the CBLR in the fourth quarter of 2021 was just under 10 percent, down less than 15 basis points from the prior two quarters. The aggregate level of the CBLR suggests that most banks using it will be able to meet the 9 percent minimum required in 2022, up from the 8.5 percent level that was temporarily put in place in 2021 in response to the pandemic. The remaining community banks use Tier 1 common capital as the primary capital ratio. In the fourth quarter of 2021, the median ratio was 12.35 percent, 5 basis points higher than the prior quarter. Although earnings dipped and dividends increased during the quarter, retained earnings continued to drive overall capital improvement (see the chart).

Slower asset growth also led to a decline in risk-weighted assets, which helped improve the capital ratio. As loan growth returns, more pressure will be put on both the leverage and Tier 1 common capital ratios in 2022, possibly forcing banks to adjust their dividend and stock buyback plans.

Earnings Performance

On a median basis, return on average assets (ROAA) dipped in the fourth quarter of 2021 among community banks in the Sixth District. More banks in the District reported an ROAA below 1 percent compared with the prior quarter. Among community banks, 6 percent reported losses for the quarter, the highest percentage since the fourth quarter of 2019 (see the chart).

The shift in earnings was due to a combination of lower revenues (interest and noninterest income), higher provision expense, and higher noninterest expenses. A majority of banks reported a lower net interest margin for the quarter as they continued preparing their balance sheets for an expected increase in interest rates early in 2022 (see the chart).

Most community banks in the District are asset sensitive and will benefit from rising interest rates to varying degrees, depending on the composition of their loan and securities portfolios. At the same time, interest expense levels remained consistent with the prior quarter and prior year-end (see the chart).

Banks in the District also recorded a higher provision expense for the quarter. Over the last four quarters, provision expense has been marginal as banks added to their allowance for loan losses early in 2020 but did not experience a significant decline in asset quality. As economic conditions improved and net charge-offs remained low, banks did not need further provisions to increase their allowance level. In the fourth quarter of 2021, with the return of loan growth and the emergence of a new COVID-19 variant, banks once again adjusted their allowance higher through the provision process.

Noninterest income also declined at community banks in the District as fees from the Paycheck Protection Program have mostly been recognized and pressure is being placed on banks to reduce or remove overdraft fees. Noninterest expenses further squeezed earnings in the fourth quarter of 2021 as banks faced increased pressure from other industries to attract staffing for customer service and back-office positions. Technology costs have also been increasing, both from an automation perspective and the need to enhance cyber security as smaller institutions became a more frequent target of cyberattacks in 2021.


Given the current level of deposits and securities on the balance sheet, liquidity for community banks in the Sixth District remains healthy and a source of strength heading into a rising rate environment. The median on-hand liquidity ratio exceeded 34 percent in the fourth quarter of 2021, higher than peer community banks in other districts. Deposit growth over the last six quarters has primarily occurred in transaction accounts rather than savings accounts and certificates of deposits (CDs), which will allow deposits to be withdrawn more easily from the bank (see the chart).

As deposit growth slows and interest rates rise, there is an expectation that banks will further accelerate their strategic move from in-person to online banking to protect and strengthen their funding base. The ability to provide online banking may reduce the future need for brokered deposits to provide additional funding as banks are better able to attract depositors through digital platforms. For now, having a strong deposit base should help fuel improved loan growth in 2022. The loan-to-deposit ratio, in aggregate, remained lower in the fourth quarter of 2021 than before the pandemic. Forecast loan demand for 2022 is expected to prevent the ratio from dropping further and might require additional focus on deposit gathering later in the year as deposit growth is also forecast to slow in coming quarters. Still, the ratio is unlikely to edge higher in the first two quarters of 2022 as borrowers continue to assess credit needs amid higher interest rates.

National Banking Trends

On an aggregate basis, return on average assets (ROAA) declined sharply in the fourth quarter of 2021 compared to the prior quarter, but ROAA was down just 3 basis points year-over-year. Typically, banks generally report increased noninterest expense at the end of the fourth quarter (see the chart).

Personnel expenses, associated with attracting and retaining employees, were up sharply at year-end as banks reported difficulty maintaining staffing levels. Additionally, noninterest expenses were also driven by investments in technology and other costs aimed at offsetting shifts in staffing levels and increasing digital services. Still, improved loan growth, benign credit trends, and higher noninterest income driven by fees aided in offsetting higher noninterest expenses for the quarter. During the past two years, larger banks have acquired companies, such as insurance and fiduciary agencies, that generate more noninterest income. These acquisitions helped stabilized earnings early in the pandemic and are now driving some earnings growth. Margin compression slowed in 2021. As of the fourth quarter of 2021, the net interest margin was flat quarter over quarter across all banks but down slightly for community banks (institutions with less than $10 billion in assets) (see the chart).

Currently, banks are forecasting greater margin expansion in 2022 as interest rates increase and loan growth accelerates. On an aggregate basis, provision expense was down again in the fourth quarter as larger banks continued to report negative provisions. Provisions for banks using the current expected credit loss (CECL) will likely be more volatile in 2022 as economic conditions change, loan growth improves, and forecasts for losses are adjusted (see the chart).

On an aggregate and annualized basis, asset growth declined in the fourth quarter compared with the prior quarter and prior year. According to call report data, deposit growth, which fueled banks’ balance sheet expansion during the last six quarters, continued to moderate during the quarter as stimulus payments and other financial support ended. Lower deposit balances directly affected both the securities portfolios and cash accounts as banks previously held higher balances in both portfolios while loan demand stagnated. Yet banks experienced stronger loan growth compared with the prior quarter, especially in both the commercial and consumer portfolios. Community banks reported positive loan growth for the first time since the second quarter of 2020, the first full quarter of the pandemic. Banks also reported an increased line utilization among their commercial customers. Demand for consumer credit products, with the exception of residential mortgages, returned with banks reporting more growth in their credit card and vehicle loan portfolios. Demand for residential loans declined in the fourth quarter but remained elevated compared with prepandemic levels. Changes in asset quality remained muted in the fourth quarter on an aggregate basis, as a variety of stimulus and other pandemic programs have prevented a sharp rise in delinquencies. Overall, the ratio of nonperforming loans, as a percentage of average total loans, was consistent with the level experienced before the pandemic (see the chart).

Community banks in particular reported another decline in delinquencies, continuing a trend that started in the third quarter of 2020, pushing delinquency rates lower than in the fourth quarter of 2019. Larger individual banks have reported some increases in delinquency rates, usually within a few targeted portfolios such as commercial loans or home equity lines of credit, but there hasn’t been a widespread increase in delinquencies even as forbearance programs established under the CARES Act expire. Net charge-offs as a percentage of average loans have fallen to 20 basis points, which is less than half the level experienced in the fourth quarter of 2019. However, as loan growth accelerates and the effects of stimulus programs wane, banks will likely need to boost provision levels in 2022.

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