By
Investigative Reporting Workshop, American University
updated 6/14/2010 7:55:28 PM ET 2010-06-14T23:55:28

The nation's banks keep looking for signs that they've turned the proverbial corner toward prosperity, and there may have been a few faint indicators in the first quarter that the worst days are behind them.

But after more than two years of stress, it's probably still too early for many to relax, according to quarterly financial reports compiled by the Federal Deposit Insurance Corp. and analyzed by the Investigative Reporting Workshop at American University in Washington.

Even though profits increased sharply, troubled assets continued to grow. According to the Workshop's analysis, 411 banks have a "troubled asset ratio" of more than 100, up from 389 banks at the end of December. In other words, they had more problem loans and foreclosed properties on their books than capital and loan loss reserves.

While not an official FDIC statistic, the troubled asset ratio has proven to be a strong indicator of bank stress. Of the 81 banks that have failed so far this year, nearly all had trouble asset ratios above 100, according to their latest FDIC reports.

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One especially troubling fact: the FDIC reported that mortgage delinquencies hit an astounding 10.8 percent in the first quarter, up from 6.4 a year ago and just 1.2 percent three years ago. Those numbers may portend more defaults and foreclosures over the next several months.

The increasing delinquency rates are evidence of continuing stress in the nation's job market, as extended periods of unemployment make it more difficult for many to stay current with their house payments. In addition, some "underwater" homeowners are walking away from houses that are worth far less than the mortgage.

According to the Workshop analysis, 301 banks had more than 15 percent of their single-family mortgages past due more than 30 days.

And even while it was reporting strong performance among banks as a group, the FDIC was adding banks to its "troubled list." At the end of March 775 banks — nearly one in 10 —were considered troubled by the FDIC, even though the agency does not define what that designation means and will not name the banks it includes on that list. That's a jump of 73 since the end of December and the highest number since the end of 1992, when the banking industry was emerging from the savings and loan crisis and a recession.

As a group, the 7,941 banks insured by the FDIC earned a respectable $18 billion profit in the first three months of 2010, more than double the same period a year ago and more than the $12.5 billion they made all of last year. Of that amount more than $13 billion was recorded by the 36 biggest banks. Nearly 1,500 banks took losses in the quarter.

Loans also increased in the first quarter, but much of the gain came because of accounting changes, the FDIC said. The new accounting rules require banks to include more of their credit cards and other securitized assets in their loan portfolios instead of their securities portfolios.

Outside those paper gains, there still is considerable softness in the heart of bank lending operations, a combination of weak demand and tighter lending standards.

Commercial and industrial loans, home mortgages and real estate development loans all declined again in the quarter, as banks put more of their cash into U.S. Treasury securities and other safe investments.

One reason why profits rose in the first quarter is that banks took smaller provisions for possible loan losses. But they still reduced earnings by more than $50 billion to account for loan losses, down from $61 billion a year ago.

Despite that, banks still are accumulating troubled assets, even though the pace has slowed down somewhat from the depths of the recession. At the end of March, banks had more than $382 billion in badly nonperforming loans and foreclosed properties on their books, up from $367 billion at the end of December. A year ago, troubled assets amounted to $285 billion.

Challenges for credit unions
The first quarter also was difficult for the nation's 7,900 credit unions. In a news release, National Credit Union Administration Chairman Debbie Matz said, "We have been cautioning credit unions that 2010 will be a difficult year. Early indications show this to be the case." The NCUA insures credit union deposits up to $250,000 per account, just as the FDIC insures bank deposits.

Credit unions as a group made about $1.1 billion in the first three months of this year, the NCUA reported.

Eight credit unions have failed so far this year, most of them tiny institutions, relatively speaking. For example, on May 17 the government took over Convent Federal Credit Union in New York. Convent, founded in 1960, had just $173,000 credit union in assets; it served 213 members of the Convent Avenue Baptist Church in New York City.

The largest credit union to fail so far this year was the St. Paul's Croatian Federal Credit Union of Eastlake, Ohio, which failed on April 23. It had about $238 million in assets when it closed.

The government took over 15 credit unions in 2009.

About the troubled asset ratio
The new analysis relies on information reported by banks to the FDIC as of March 31. Journalists at American University calculated each bank's troubled asset ratio, which compares troubled loans against the bank's capital and loan loss reserves.

Troubled assets include loans that are 90 days or more past due, loans on which the bank is no longer collecting interest and real estate the bank already owns, usually through foreclosure. A similar measure, known as a Texas Ratio, is commonly used by bank analysts as an indicator of stress on a bank, though such ratios can't capture all the nuances of a bank's condition.

Depositors are protected
While the troubled asset ratio is not a predictor of bank failure, most of the banks that have failed do have high ratios. Still, banks with high ratios can recover, as borrowers resume making scheduled payments or the bank is able to raise more capital.

Even when a bank does fail, no depositor has lost a dime in insured deposits since the FDIC was created in 1934. That protection has its limits. The basic limit had been $100,000 per depositor per bank but has been increased to $250,000 through Dec. 31, 2013. The FDIC has more detailed information and a calculator to help you determine your level of protection.

In short, the FDIC's advice boils down to this: If your deposits are under the FDIC limits, you're protected even if your bank should fail. If your deposits exceed those limits, the best protection is to move deposits into smaller accounts at more than one FDIC-insured bank.

Limitations of the ratio
The troubled asset ratio was devised in the early 1980s by journalist Wendell Cochran, now senior editor of the Investigative Reporting Workshop at American University Others do similar calculations.

The reports in most cases do not include the billions in federal money injected onto the balance sheets of bank holding companies in the form of so-called TARP funds.

The ratio does not include the value of non-loan assets that have caused so much trouble, particularly for some larger banks that moved away from traditional commercial banking. Nor does it reflect mortgage-backed securities, collateralized debt obligations, etc. In this way, the ratio may underestimate the real depth of problems.

And no ratio can get at all the detailed information — such as the individual loan files, quality of management, potential for raising other capital — that a regulator would use to evaluate a bank's safety and soundness.

Copyright 2013, American University School of Communication

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