Banking quick review: asset quality

by PlanMaestro

The last part of bankregdata‘s review of the banks’ third quarter results. His emphasis is on asset quality and I do not think there are going to be many surprises for the readers that have been following the Charting Banking series despite the slightly different angle that Bill uses:

  1. Asset quality is improving fast
  2. Construction and development loans are a pain in the neck

In particular, I like his analysis of the real estate owned (REO) composition and the speed on how banks have been restructuring the most troubled loans (construction and development, and housing mortgages).


This week reviews the Banking Industry 3rd Quarter 2011 performance for Asset Quality, Loans, Restructures and REO.

Using the Texas Ratio as a measure of risk we see that (collectively) banks continue to improve:

A review by Asset Size shows some risk in the largest banks (where GAAP issues mitigate some of the concerns) and mid-size Community Banks between $250 and $999 Million.

Unadjusted Nonperforming Loans continue to drop and are at 4.21% of Total Loans. In terms of dollars, NPLs at $309.67 Billion are now 24.47% below the 2010 Q1 peak:

The Adjusted NPL numbers are dropping slightly quicker – more on that shortly.

Quarter over Quarter Nonperforming Loan Amount by Loan Portfolio:

Of the 13 largest Loan Portfolio types, every one experienced a drop with the exception of Individuals: Auto Loans which rose 1.98%.

A couple of thoughts regarding Construction & Development NPLs:

  • Even with a 10.10% drop in NPLs, Construction & Development loans still have a 14.57% NPL rate.
  • At $254 Billion C&D lending is back to 2003 Q1 levels and $377 Billion (59.69%) off the 2008 Q1 high.
  • In 2003 Q1 C&D made up 4.88% of all loans outstanding – today it is 3.46%.
  • Is this due to a lack of demand or the fact that banks won’t go near Constuction loans?
  • It’s hard to picture an expanding economy without an increase in Construction & Develoment loans.

One concern is that while there is good news with Charge Offs at $31.66 Billion (lowest quarter since 2008 Q3), Adjusted NPLs to Charge Offs has climbed to $7.09. Basically, there are $7.09 of Adjusted NPLs for every $1 of Charge Offs – banks are delaying Charge Offs relative to the NPLs earlier in the cycle.

If you go here you’ll note that it is the small banks struggling with the ratio. Home Equity and 1-4 Family Junior Liens are particularly a problem.

Restructured Debt inexorably climbs higher (and higher):

Restructured Loans to Total Loans is at 2.63%. All reported loan types experienced increases in the rate:

  • 1-4 Family Residential at 4.52%
  • Commercial Real Estate at 2.08%
  • Commercial & Industrial at 0.76%
  • Construction & Development at 5.93%

Once again, Construction & Development loans continue to be a problem area – especially with a 52.96% NPL rate on the restructured portion.

Other Real Estate Owned continues to slowly drop:

OREO is being liquidated and slowly coming down. Collectively, banks took a -$1,135,148,000 hit to Non Interest Income, however, they continue to offset it with Gains from Loan Sales.

OREO levels compared to Peak/Previous High by OREO Type:

And on that cheery note, I’ll end this much-too-long missive and wish you a Merry Christmas. If you have any questions or suggestions feel free to contact me.Ahh, yes, there is that pesky Construction & Development issue once again. Comparatively, the smaller community banks have worked through a higher portion of their Construction NPLs and charged them off to REO. The problem is that they are just sitting on the balance sheet – slightly more difficult to get rid of that partially built apartment building.

Looking at 1-4 Family Residential is a mixed bag. All 1-4 Family Residential has come down 19.38%, however, Foreclosed GNMA is still very high. The bigger problem for Housing is that banks are just not charging it off at the same clip – the inventory is being held out of REO. Once again, we look to the NPL to CO ratio which shows 37.34 for 1-4 Family Residential. That’s $37.34 of NPLs for $1 of Charge Offs – which is an 11 quarter high and the highest since the 46.00 put up in 2008 Q4 when the largest banks delayed charge offs to hit year end numbers.

Bill Moreland