Datagy

Is The Nature of Banking Changing?

lauren — Thu, 20 Oct 2011 19:39:25 +0000

The banking business has historically been about taking in deposits at one rate and lending that same money out at a higher rate, the differential being profit for the bank after non-deposit expenses. The Loan/Deposit ratio has always been a measure how well this is being done. What is interesting about this ratio over the last 10 years is how much it has decreased during the last 4 years (2008 to 2011).

2002	2003	2004	2005	2006	2007	2008	2009	2010	2011
88.61	87.99	87.8	88.63	88.91	90.49	84.69	78.09	77.74	74.35

A closer look reveals the following:

	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011
Deposits	4,846	5,200	5,778	6,271	6,947	7,313	8,099	8,474	8,738	9,090
Loans	4,294	4,576	5,073	5,558	6,176	6,618	6,860	6,617	6,793	6,758

An initial analysis shows that for the years 2002 to 2007 both loans and deposits increased at similar rates which resulted in the Loan/Deposit ratio remaining relatively constant (around 88%). Starting in 2008 deposits continued to increase while loans remained somewhat flat. This failure of loan volumes to keep pace with deposits resulted in a steady decrease of the Loan/Deposit ratio (now around 74%). This change in the progression of loan volume is in line with the recession of 2008. The analysis raises a number of questions, for example, is the drop in loan demand entirely the result of the housing downturn or have other loan types also had an impact? The Real Estate loan losses continue, have banks backed away from all lending or just Real Estate lending? Perhaps the biggest question is the one in our opening line “Is this a fundamental change in the Banking industry?” The answer can only be answered over time; meanwhile, we will look at some other interesting changes in banking with our next release.

Has ORE seen its peak?

admin — Tue, 16 Aug 2011 19:44:59 +0000

In this article, we are going to look at the trend in Bank ORE (Other Real Estate Owned). ORE is generally created when a Bank forecloses on a loan. These foreclosures can consist of single family homes, land, construction, multiple family homes and shopping centers among others. The national trend (shown below) shows growth over the last five years, however, we may have begun a leveling off period as indicated by the last three quarters.

ORE in Billions

Years	March	June	September	December
2007	5.19	5.62	6.77	8.34
2008	10.33	12.08	16.42	19.60
2009	21.97	25.49	29.10	34.12
2010	39.37	44.13	47.78	47.67
2011	47.96

While the peak may be leveling off, the mix of foreclosed property and the sheer size is daunting.

The total ORE has grown substantially over the years. It is interesting that the mix of assets has changed over the years. Note that in 2007 the “1-4 family residential” was almost half of the total (44% of total) but in 2011 “Construction and Land” is the largest (35.50% of total). The amount and mix of ORE will have an impact for years to come.

ORE Mix (In Billions and as a Percentage of the Total)

	2007		2011
Loan Types	In Billions	% Mix	In Billions	% Mix
Const & Land	0.45	8.59	17.02	35.50
Farmland	0.07	1.28	0.42	0.87
1-4 Family Residential	2.29	44.08	11.47	23.91
Multi-Family	0.33	6.38	2.32	4.83
Non-Farm Non-Res	1.02	19.76	10.17	21.21
Foreclosed GNMA Loans	0.96	18.43	6.35	13.24
ORE in Foreign Offices	0.08	1.48	0.21	0.44
Total Other Real Estate Owned	5.19	100.00	47.96	100.00

Capital Ratios in the Banking World

lauren — Fri, 15 Jul 2011 17:53:55 +0000

In banking, there has been much talk in recent years about the amount of equity capital a bank has to help it through rough times. In this article we look at the equity to assets relationship for various sizes of banks.

Definitions:	Peer Groups
Equity/Average Assets Equity includes Preferred and Common stock, Stock Surplus, Retained Earnings and other miscellaneous equity items. Tangible Capital/Average Assets Equity Capital -Intangible assets (goodwill etc.)- Nonperforming assets + Loan Loss Reserve.	Banks with Assets > 3 Billion Banks with Assets 1-3 Billion Banks with Assets 300 Million – 1 Billion Banks with Assets 100-300 Million Banks with Assets 50-100 Million Banks with Assets < 50 Milliion

Definitions:

Peer Groups

Equity/Average Assets
Equity includes Preferred and Common stock, Stock Surplus, Retained Earnings and other miscellaneous equity items.

Tangible Capital/Average Assets

Equity Capital -Intangible assets (goodwill etc.)- Nonperforming assets + Loan Loss Reserve.

Banks with Assets > 3 Billion
Banks with Assets 1-3 Billion
Banks with Assets 300 Million – 1 Billion
Banks with Assets 100-300 Million
Banks with Assets 50-100 Million
Banks with Assets < 50 Milliion

As the numbers show, the safety net of Tangible Capital, is generally greater as the size of the bank gets smaller. Despite the number of small banks failing, most appear on average to have a higher capital position to withstand future losses.

Peer Data (by Asset Size):	Tangible Capital Ratio	Equity Capital Ratio
Banks with Assets > 3 Billion	6.23	11.15
Banks with Assets 1-3 Billion	7.40	10.95
Banks with Assets 300 Million – 1 Billion	6.99	9.98
Banks with Assets 100-300 Million	7.85	10.24
Banks with Assets 50-100 Million	9.17	10.99
Banks with Assets < 50 Million	10.73	11.97

The Texas Ratio, Continued

lauren — Fri, 15 Jul 2011 17:08:20 +0000

The Texas Ratio is basically defined as questionable assets compared to capital plus loan loss reserves.

Twenty of twenty-three banks closed by the FDIC in 2011 had a Texas Ratio greater than 100%. In this installment of interesting facts about the “Texas Ratio” we chose to look only at those banks reporting a ratio over 100% as of December 31 2010. It is interesting that with 6,927 active banks in December 2010, 484 (453 In September) have a Texas ratio greater than 100%. The average ratio is actually in excess of 150% at 158.34%.

It is also interesting to note that of the 484 banks that reported ratios over 100%, none in this group reported over 100% in 2006. The growth is primarily in the last two years, from 0 in 2006, 1 in 2007, 49 in 2008, 275 in 2009 and finally 484 in 2010. The average Texas ratio for this group follows the same pattern: 9.47 in 2006, 20.93 in 2007, 50.72 in 2008, 107.42 in 2009 and finally 158.34 in 2010.

Not only do 484 banks have a Texas ratio over 100% but, 167 have a ratio over 200% and 67 have a ratio over 300%. Said another way, currently 6.99% of our banks have a Texas Ratio over 100%, 2.41% with Texas Ratio over 200% and .97 % with a Texas Ratio over 300%. A Texas Ratio over 100 percent, can and often does, indicate potential bank survival problems.

The Texas Ratio- What it is, and how it spells trouble for many banks

lauren — Fri, 15 Jul 2011 16:02:46 +0000

The FDIC has closed an amazing number of banks over the last three years (324 banks between January 2008 and December 2010). While each closure is no doubt the result of a culmination of institution specific failings, we wanted to take a look at one particular piece of financial information in the hope of garnering some insight into the overall issue of Bank closures.

We chose to look at the Texas ratio. This ratio came out of the Savings and Loan crisis of the late 1980s and early 1990s. The ratio is basically the amount of questionable assets a Bank has compared to its adjusted capital (see below).

Assets past due 90 days or more + Nonaccrual Assets + Other Real Estate Owned + Restructured Loans
-------------------------------------------------------------------------------------
Equity + Loan Loss Reserves – Disallowed Goodwill and Intangible Assets

The generally accepted threshold value for this ratio is 100%. Any financial institution having a ratio in excess of 100% could be considered to be in distress. The average Texas Ratio for Banks that closed during the last 3 years is 398%*. This is essentially four times greater than the recognized limit. These Banks have four times their adjusted capital in questionable assets.