Philip van Doorn
Lehman Brothers Bank marks loans to market each quarter. The company stated that the markdowns on problem loans are aggressive enough that it does not need to set aside additional loan loss reserves.
Privately held AmTrust Bank reported nonperforming assets comprising 5.34% of total assets as of Dec. 31, shooting up from 3.49% the previous quarter and 1.70% at the end of 2006. Loan-loss reserves covered just 24.41% of nonperforming loans as of Dec. 31. While this is low reserve coverage, the institution's risk based capital ratio climbed during the year, as it reduced the size of its balance sheet and avoided paying dividends. Like all 10 institutions listed above, AmTrust's provisions for loan-loss reserves in 2007 greatly outweighed its net loan charge-offs. The ratio of net charge-offs to average loans was 0.58% for 2007, and loan-loss reserves covered 1.33% of total loans at the end of the year. This means that even if it were to add nothing to reserves during 2008, AmTrust could easily double its loan charge-offs from last year without exhausting its loan loss reserves. Of course, continuing declines in housing prices could lead to a much more serious scenario over the next few quarters. BankUnited FSB, held by BankUnited Financial (BKUNA Quote - Cramer on BKUNA - Stock Picks), made it clear in its earnings conference call that it resented being tossed with the bathwater. The holding company's stock closed at $4.29 on April 10, just 0.20 times book value and down over 79% year-over-year. During the real estate boom, BankUnited's loan growth centered on option-payment mortgages with negative amortization features. These loans, in which borrowers choose a payment which could result in adding principal to the loan, represented 61% of its loan portfolio at year-end. One of curious lending innovations during the real estate boom was qualifying option-mortgage borrowers at the low, initial "teaser" rate, rather than at the "fully indexed" rate at which interest would otherwise accrue. During the conference call, CEO Alfred Camner strenuously objected to "some of the nonsense that has been printed about us" and hammered home the point that BankUnited always qualifies borrowers at the fully indexed rate, and has conservative underwriting. BankUnited reported nonperforming assets comprising 2.99% of total assets as of Dec. 31, with reserves covering 30.39% of nonperforming loans. Loans past due 30 to 89 days, but still considered performing, comprised another 2.23% of total assets. Both of these categories climbed steadily during 2007 and will probably continue to do so all through 2008. BankUnited's capital ratios were pretty high at year-end, all things considered.Risk-Based Capital
High levels of capital are a great thing in the current environment, especially for institutions with loan quality concerns. However, for banks or S&Ls with strong asset quality, shareholders might prefer lower capital ratios resulting in higher returns on equity. A bank or S&L needs to maintain a leverage ratio of at least 5% and a risk-based capital of at least 10% to be considered well-capitalized under regulatory guidelines. Because the risk-based capital ratio takes asset-quality and loan-loss reserves into account, this is the ratio that most often slips below the threshold. Looking at the list of 10 institutions with the lowest risk-based capital ratios, it is clear that most of the group has good asset quality: |
| Click here for larger image. |
RSS
