The number of banks exceeding the threshold more than doubled in the year through June, according to data compiled by Bloomberg, as real estate and credit-card defaults surged. Almost 300 reported 3 percent or more of their loans were nonperforming, a term for commercial and consumer debt that has stopped collecting interest or will no longer be paid in full.
The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.
“At a 3 percent level, I’d be concerned that there’s some underlying issue, and if they’re at 5 percent, chances are regulators have them classified as being in unsafe and unsound condition,” said Walter Mix, former commissioner of the California Department of Financial Institutions, and now a managing director of consulting firm LECG in Los Angeles. He wasn’t commenting on any specific banks.
Missed payments by consumers, builders and small businesses pushed 72 lenders into failure this year, the most since 1992. More collapses may lie ahead as the recession causes increased defaults and swells the confidential U.S. list of “problem banks,” which stood at 305 in the first quarter.
Cash Drain
Nonperforming loans can eat into a company’s earnings and deplete cash, leaving banks below the minimum capital levels required by regulators. Three lenders with nonaccruing ratios of at least 6.2 percent as of March were closed last week. In addition, Chicago-based Corus Bankshares Inc., Austin-based Guaranty Financial Group Inc. and Colonial BancGroup Inc. in Montgomery, Alabama, each with ratios of at least 6.5 percent, said in the past month that they expect to be shut.
“This is a fairly widespread issue for the larger community banks and some regional banks across the country,” said Mix of LECG, where William Isaac, former head of the Federal Deposit Insurance Corp., is chairman of the global financial services unit.
Ratios above 5 percent don’t always lead to failures because banks keep capital cushions and set aside reserves to absorb bad loans. Banks with higher ratios of equity to total assets can better withstand such losses, said Jim Barth, a former chief economist at the Office of Thrift Supervision. Marshall & Ilsley and Synovus said they’ve been getting bad loans off their books by selling them.
Exclusions
Bloomberg’s list was compiled by screening U.S. banks for nonperforming loans of 5 percent or more, and then ranked by assets. The list excluded U.S. territories and lenders that have already failed. Also left out were the 19 lenders that underwent the Treasury’s stress tests in May; they were deemed “too big to fail” and told by regulators that government capital was available to keep them in business.
Excluding the stress-test list, banks with nonperformers above 5 percent had combined deposits of $193 billion, according to Bloomberg data. That’s almost 15 times the size of the FDIC’s deposit insurance fund at the end of the first quarter.
About 2.6 percent of the $7.74 trillion in bank loans outstanding in the U.S. at the end of March were nonaccruing, the highest in 17 years, according to the most recent data from the FDIC. Nonaccrual loans peaked at 3.27 percent in the second quarter of 1991, during the savings and loan crisis, and averaged 1.54 percent over the past 25 years.
‘Off the Charts’
“These numbers are off the charts,” said Blake Howells, an analyst at Becker Capital Management in Portland, Oregon, referring to the nonperforming loan levels at companies he follows. Banks are losing the “ability to try and earn their way through the cycle,” said Howells, who previously spent 13 years at Minneapolis-based U.S. Bancorp.
Corus, with more than two-thirds of its loans nonperforming, has the highest rate among publicly traded banks. The company said last month that it’s “critically undercapitalized” after five consecutive quarterly losses tied to defaults on condominium construction loans. Randy Curtis, Corus’s interim chief executive officer, didn’t respond to calls for comment.
Marshall & Ilsley, Wisconsin’s biggest bank, reduced its nonperforming loans last month to 5.01 percent from 5.18 percent after selling $297 million in soured loans, mostly residential mortgages in Arizona, the Milwaukee-based company said Aug. 10.
Deadline for Nonperformers
The bank has “been very aggressive in identifying and tackling credit challenges,” Chief Financial Officer Greg Smith said in an Aug. 12 interview. Smith said 26 percent of loans classified as nonperforming are overdue by less than the industry’s typical standard of 90 days. With those excluded, the ratio would be around 3.7 percent, he said.
Synovus, plagued by defaulting construction loans in the Atlanta area, said nonperforming loans rose to 5.4 percent in the second quarter from 5.2 percent the previous period. Disposals of nonperforming assets reached $404 million in the quarter ended in June, the Columbus, Georgia-based company said.
Synovus is selling troubled loans and will continue its “aggressive stance on disposing of nonperforming assets” as long as the level is elevated, spokesman Greg Hudgison said in an e-mailed statement.
Michigan Home
Flagstar is based in Troy, Michigan, the state with the nation’s highest unemployment rate. Flagstar has $16.4 billion in assets and reported last month that 11.2 percent of its loans were nonperforming; about two-thirds were home mortgages. Flagstar CFO Paul Borja didn’t return repeated calls for comment.
The bank’s allowance for loan losses was 5.4 percent of total loans at the end of the second quarter, compared with 3.3 percent at Synovus and 2.8 percent at Marshall & Ilsley, according to company filings. All three reported at least three straight quarterly deficits.
The FDIC doesn’t comment on lenders that are open and operating and doesn’t disclose which banks are on its problem list. The agency will probably impose an emergency fee on the more than 8,200 banks it insures in the fourth quarter to replenish the insurance fund, the second special assessment this year, Chairman Sheila Bair said last week. The FDIC attempts to sell deposits and assets of seized banks to healthier firms to avoid eroding the fund, said agency spokesman David Barr.
Capital Levels
To determine which banks are most troubled, regulators compare the ratio of nonperforming loans to the percentage of equity a firm has relative to its assets, said Barth, the former OTS economist. A company with 5 percent nonperforming loans and equity of 8 percent is better positioned than one with the same amount of troubled loans and equity of 4 percent, he said.
Flagstar’s equity-to-assets ratio in the second quarter was 5.4 percent, Synovus’s was 8.9 percent and Marshall & Ilsley, which raised $552 million through a stock sale in June, was at 11 percent, according to the banks.
The three lenders that failed last week -- Florida’s First State Bank and Community National Bank and Oregon’s Community First Bank -- all had nonperforming loans above 6 percent and equity ratios below 4.5 percent.
“The nonperforming ratio, in and of itself, should be a great concern,” said Barth, a professor of finance at Auburn University in Alabama and senior finance fellow at the Milken Institute in Santa Monica, California. “It becomes even more troublesome when it goes above 3 percent and the equity-to-asset ratio is quite low.”
Toast Time
While 5 percent can be “fatal” for home lenders, commercial real estate lenders may be able to withstand higher rates, said William K. Black, former lawyer at the Federal Home Loan Bank of San Francisco and the OTS. Commercial loans carry higher interest rates because they’re riskier, he said.
“At the 5 percent range, you’re probably hurting,” said Black, an associate professor of economics and law at the University of Missouri-Kansas City. “Once it gets around 10 percent, you’re likely toast.”
Thanks to bloomberg.com
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Aug 16, 2009
Toxic Loans Topping 5% May Push 150 Banks to Point of No Return
U.S. to Resume Training Georgian Troops
WASHINGTON — The United States is resuming a combat training mission in the former Soviet republic of Georgia to prepare its army for counterinsurgency operations in Afghanistan, despite the risks of angering Russia, senior Defense Department officials said Thursday.
The training effort is intended to prepare Georgian troops to fight at NATO standards alongside American and allied forces in Afghanistan, the Pentagon officials said.
Russian officials have been informed, American officials said. The training should not worry the Kremlin, they said, because it would not involve skills that would be useful against a large conventional force like Russia’s.
“This training mission is not about internal defenses or any capabilities that the Georgians would use at home,” said Geoff Morrell, the Pentagon press secretary. “This is about the United States supporting Georgia’s contribution to the war in Afghanistan, which everybody can recognize is needed and valued and appreciated.”
At the same time, officials in Washington said, the Georgians should not see the new training mission as a military counterweight to Russian influence along Georgia’s borders and within the separatist regions they fought over.
A year ago, the republic’s brief, disastrous war with Russia froze a similar American training operation that prepared Georgian troops for deployments to Iraq.
The new training mission is scheduled to begin Sept. 1. The first members of a Marine Corps training and advising team are to arrive in Georgia on Sunday or Monday, and the number of trainers will fluctuate between 10 and 69 over the next six months.
Georgia has pledged an army battalion — about 750 troops — to Afghanistan, and it should be ready to deploy next spring, perhaps by March.
It is unlikely that Kremlin officials could offer a convincing argument that training a single Georgian Army battalion amounted to a threat to Russian security. But the new training could be seen as a launching pad for increased military relations among Washington, NATO members and a former Soviet republic that aspires to NATO membership.
The Kremlin vehemently opposes any extension of NATO’s defensive umbrella over former Soviet republics, in particular Georgia and Ukraine. At the same time, some NATO officials view Georgia’s behavior before the war last year as needlessly provocative, and have said it harmed the country’s chances for alliance membership.
Shortly after taking office, President Obama ordered the doubling of American forces in Afghanistan, to about 68,000, and the administration has sought, with little success, to persuade NATO allies to add to their combat forces.
In contrast to some NATO allies that impose restrictions on where their forces can go and what they can do in Afghanistan, the Georgian military will send its troops with none of these so-called caveats, a decision viewed by American officials as intended to indicate Georgia’s worthiness for potential alliance membership.
Officials said Georgia’s troops would probably be assigned to operations in areas of Afghanistan under Marine command, so the training mission begins that partnership.
The United States has so far rebuffed requests from Georgia to rearm its military after its humiliating defeat by Russia. When the war began, Georgia recalled an army brigade serving in Iraq and never sent it back, and the Americans training the Georgians returned home.
Georgian troops that join the Afghan mission will bring their own small-caliber weapons, but the United States and other allies will supply vehicles, including armored transports, as well as logistical support and daily supplies, according to senior Defense Department officials.
Any weapons provided to the Georgians would stay in Afghanistan, the officials said.
Some military ties between the United States and Georgia resumed after the war with Russia, but they focused on officer development, improvement of command-and-control systems, and other such areas, officials said. There have been visits by senior American military officers and government leaders — most recently Vice President Joseph R. Biden Jr. — and NATO has conducted some military exchanges.
Administration officials familiar with discussions with Russia said American officials emphasized that Russia had endorsed the international security assistance mission in Afghanistan. For example, Russia allows overflight rights and land access for the coalition supply mission for Afghanistan.
A senior Pentagon official, speaking on the condition of anonymity in order to describe the diplomatic communications with Russia, acknowledged that “this is delicate for us — because while we want to be supportive of the Georgians, and look forward to their contribution in Afghanistan, we don’t want to be perceived incorrectly as supplying lethal capabilities that would elicit a Russian response.”
From nytimes.com
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