Monday, January 25, 2010

Small and Nonperforming: Small Banks Under Pressure

In an era of “too big to fail” and truly epic levels of financial engineering, it’s easy to forget that even small banking institutions with what is considered “traditional” underwriting practices buckle under the pressure of the grim circumstances of economic decline.

Although the plight of some small regional banks has been widely publicized with reports of record numbers (… yet still moderate) of bank failures, the stressful conditions across all small banks is still largely ignored.

The Federal Reserve tracks the conditions in banking on a quarterly basis, segregating banks by total assets and recording a vast array of metrics that yield important clues to the overall health of the nation’s banking system.

Two important metrics, the nonperforming asset ratio and the ratio of “healthy” bank assets (… total assets of banks with allowance for loan and lease losses (ALLL) greater than their nonperforming assets) to total assets of all banks of similar size are indicating that conditions for banks with total assets up to $300 million are the worst seen in at least 20 years.

The nonperforming asset ratio is merely the ratio of total nonperforming assets (… delinquent or seriously overdue commercial and consumer loans, nonpayment leases, etc.) to total assets and currently stands at 2.96%, the highest level seen in at least 20 years for small banks.

The ratio of “healthy” bank assets to total assets for all similar sized banks currently stands at 42.78%, the lowest level ever recorded by the Fed.

So, of all banks with total assets of up to $300 million, 57.22% of assets are associated to banks that have MORE nonperforming assets than they have reserved for… a pretty solid indication that ALLL will be on the rise in coming quarters along with additional bank failures.