There’s trouble a foot ..

Interesting … the nation’s banks have just been given a stress test by the Investigative Reporting Workshop, a project of the School of Communication at American University. Using June 2009 figures, they calculated a troubled asset ratio for every bank and credit union in the country.

According to MSNBC:

“While it is not an official FDIC statistic, nor is it intended as a definitive predictor of the likelihood of bank failure, the troubled asset ratio apparently is a strong indicator of severe stress inside a bank because it shows the bank’s ability to withstand loan losses. Of the 92 banks that have failed so far this year, 84 had troubled asset ratios of 100 percent or greater in the final quarter they reported data before they closed.”

Here’s a look at here’s some of the local figures:

Troubled asset ratio, June 2009

56.7 Stirling Savings Bank (of Spokane)
54.5 Treasure State Bank of Missoula
38.5 Farmers State Bank (of Victor)
29.9 First Security Bank of Missoula

25.9 First Interstate Bank (of Billings)
24.1 US Bank (National)
19.7 Wells Fargo (National)
17.4 Community Bank – Missoula

16.8 Montana First Credit Union
15.6 Mountain West Bank (of Kalispell)
14.3 First Citizens (of Rhode Island)
10.1 Missoula Federal Credit Union

For banks, they calculated a “troubled asset ratio,” which compares the sum of troubled assets with the sum of Tier 1 Capital plus Loan Loss Reserves. Generally speaking, higher values in this ratio indicate that a bank is under more stress caused by loans that are not paying as scheduled.

For credit unions, they combined Capital and Loan Loss Reserves to calculate the amount of cushion the credit union has to protect against loan losses. We combined the delinquent loans and other real estate owned to calculate the “Total Troubled Assets.”

They then divided the amount of Total Troubled Assets by the amount of Capital and Loan Loss Reserves to derive the “Troubled Asset Ratio.” Generally speaking, higher values in this ratio indicate that a credit union is under more stress caused by loans that are not paying as scheduled.

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How safe is your bank, Missoula?

There’s a number of ways to check on the safety and financial soundness of your bank. If you’ve got a little bit of finance knowledge, then the FDIC is the place to go (they’re the folks that guarantee your bank deposits up to $100,000 per account). For credit unions, its the NCUA who do the same thing:

Federal Deposit Insurance Corporation

National Credit Union Administration

But, perhaps a simple rating system (with abundant research behind the ratings) is more useful, and for that Bankrate.com’s Safe & Sound® service is a good option. The fewer the stars, the greater the risk that the bank will fail.

(Remember that many banks are owned by larger corporations, which may be headquartered in another state. You’ll need to look under that state.)

Here’s some examples, mainly from Missoula, Montana. (There are simplified explanations of the terms down below.)

Bankrate.com

Leverage

Equity/

Net Income

Net Worth to

Safe & Sound

Assets

Equity

Ratio

Assets

ROE

Total Assets

(‘000s)

(‘000s)

Airway Boulevard Bank

*****

204.3

16

12.77

7.83%

$2,061,000

26.13

7.83

Banco Popular

*****

87.9

44.2

1.99

50.28%

$2,305,000

10.71

Bank of Montana

NA

9.5

3.7

2.57

38.95%

-$154,000

-8.24

38.93

Community Bank

***

85.9

8.2

10.48

9.55%

$466,000

11.12

9.63

Farmers State Bank

***

296.5

30.5

9.72

10.29%

$927,000

6.12

10.31

First Citizens Bank

**

32.7

3.5

9.34

10.70%

-$34,000

-1.94

10.77

First Interstate Bank

****

5284

416

12.70

7.87%

$35,706,000

16.98

7.88

First National Bank of Montana

****

283.9

24.7

11.49

8.70%

$1,226,000

9.93

8.73

First Security Bank

****

847

111.8

7.58

13.20%

$7,090,000

12.79

13.2

Gateway Community Federal CU

****

39.4

4.4

8.95

11.17%

$149,810

11.06

Missoula Federal Credit Union

****

275.7

29.6

9.31

10.74%

$1,355,300

10.82

Mountain West Bank

***

694.2

62

11.20

8.93%

$3,180,000

10.52

8.94

Sterling Savings Bank

**

12215.7

1374.3

8.89

11.25%

$18,111,000

2.61

11.25

Treasure State Bank

****

77.5

9.5

8.16

12.26%

$60,000

1.28

12.21

US Bank

****

242,307.90

21,541.80

11.25

8.89%

$2,157,468,000

20.3

8.89

Wells Fargo Bank

****

503,327.00

43,942.00

11.45

8.73%

$2,951,000,000

13.58

8.73

Little Horn State Bank

*

68.4

6.3

10.86

9.21%

-$158,000

-4.65

9.27

Now, the following explanations are simplified but these are some of the common ways of judging the financial soundness of a bank or credit union.

Capitalization stands as protection against loss for bank customers and credit union members. There are various capitalization ratios, but one of the simplest is Equity to Assets (where Equity is loss reserves, accumulated earnings from the past, and recent net income; and Assets are loans, cash, investments, as well as land and buildings.) It shows whether or not there is sufficient capitalization to cover outstanding loan balances.

The reverse is Leverage Ratio, Total Liabilities / Net Worth (or simply Assets/Equity). Generally, the higher this ratio, the more risky the institution’s situation.

Net Income is simply how much money is being made. The institution either records a profit or a loss. Losses eat into equity, which lowers capitalization and raises leverage, creating more risk.

ROE, or Return on Equity, measures how much money is being made with the assets. It is a measure of financial efficiency, and shows how well a bank or credit union uses investment dollars to generate earnings growth. Overall, the US banking industry had a 3.58% ROE in Q2 2008

Net worth to total assets – this also represents how well capitalized a bank or credit union is. The higher, the better. The Treasury recommends at least 6 percent net worth to total assets in order to be in good standing.

Nothing is as cheap as someone else’s money

Did your wallet suddenly feel lighter? It should have, because yesterday the Bush administration spent $2,000 of your money. That’s your share of the $700 billion that they’re going to use to buy up mortgage-related assets. $2,000 for every man, woman and child in the United States.

This whole financial crisis seems to boil down to a rush to borrow money. Certainly, many homeowners borrowed way more money than they could afford. Many didn’t put down enough of a deposit to create sufficient investment in the property such that they would fight to stop foreclosure.

All that borrowing was too easy, pushing house prices even higher. Now that prices have fallen to more realistic levels (given household income), the value of all those mortgages correctly look overpriced. Unfortunately, since liquidity seems to have frozen and banks have raised their lending standards, it is almost impossible for many to refinance.

But, let’s look further … and what we will find is more borrowing. This week short-selling has been banned for a large number of stock. Basically, this will stop much speculation (and the market signals they initiate), but it will also stop the practice of borrowing someone else’s money to make a gamble on whether the market will continue to decline. Borrowing on a bet that someone else will fail? Or failing on a bet to borrow?

The investment banks are fast going under, collapsing under the weight of their borrowings. Tonight, two of the remaining (Goldman Sachs and Morgan Stanley) have become bank holding companies. Essentially acknowledging that they must limit the amount of debt they can take on. When it collapsed, Lehman had about a 30:1 debt-to-equity ratio, meaning it had borrowed $30 for every dollar in capital it held.

We’ve been living in an era where too many people thought it was too easy to make money. The line seemed to be if you could just convince someone to lend you the money, then you could make a killing on even the flimsiest of schemes. First it was the dot-coms, burning through money until you either ran out of cash or someone bought you out. Second was the stock market, fun times in an era of irrational exuberance. And, then it was real estate. No need to worry about the tiresome business of actually making something that people wanted to buy! Just borrow the money and watch your paper balance expand.

Now, sadly, as we face the unwillingness of banks to lend, it will be very hard for otherwise healthy businesses to finance their growth and operations. Which means levels of real income and employment will fall. That, I suspect, means that the economic hangover from all that drunken borrowing is going to be long and hard.

Just pray that we don’t all expect the Fed to bail us out. We don’t need another loan. Nor another complex financing derivative dreamed up on Wall Street. We need to stop all this borrowing and get back to making money the hard way – through hard work and innovation.

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