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.

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