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Loan delinquencies declined in the second quarter, but the temporary aid provided by government stimulus checks means that the credit crunch could be far from over, analysts say.

Several analysts this week have crunched the numbers on the second-quarter loan landscape and found some encouraging trends. A sample of second-quarter delinquency trends at 47 large and mid-size banking institutions shows the median delinquency ratio to total loans was 1.07%, down slightly from 1.10% in the first quarter, according to a report last week by boutique investment firm Stifel Nicolaus.

Compared another way, delinquencies on average rose only 2 basis points to 1.20% from the quarter before, so says the report.

"Any sign that credit quality deterioration might be decelerating is welcomed news for a battered industry," writes Stifel Nicolaus analyst Christopher Mutascio. "And many believe that the early stage delinquency levels could be one of the better leading indicators in trying to determine when the overall turn in credit quality might occur."

However "we are skeptical in putting too much emphasis on the second quarter 2008 data because there is a good chance that the results have been positively skewed by tax rebates as part of the economic stimulus plans," he writes.

Huntington Bancshares






Colonial BancGroup

( CNB) and

Zions Bancorp


experienced the largest improvement in early-stage delinquencies, the report says. On the flip side,




First Horizon



East West Bancorp


were among those banks with the had the worst deterioration, according to Stifel Nicolaus. Wachovia noted "anomalies" in the spike of its commercial and industrial delinquency rates, which negatively impacted overall past due levels, according to the Stifel note.

Delinquencies fell in at least two of the seven loan categories that Stifel analyzed -- commercial real estate and construction loans, while home equity lines of credit remained stable in the second quarter, the report said. Beginning delinquencies in the other four loan categories -- 1-4 family residential, home equity loans, commercial and industrial and credit cards - rose in the second quarter compared to the first, it said.

On first observation, signs that loans in early delinquency -- those at least 30 days but no more than 89 days past due -- are stabilizing may signal a break in all the doom and gloom surrounding the financial sector. But while the signs are encouraging, it is still probably too soon to call a bottom of the credit crisis, analysts say.

Fox-Pitt, Kelton Cochran Caronia Waller analysts, in a note on Monday, attribute the improved delinquency statistics to consumers using their stimulus checks, but also "more emphasis from companies on managing results and identifying problems sooner," among other things, in a note titled, "Early-Stage Delinquencies: A Head Fake?"

Overall, 30-day to 89-day delinquencies rose slightly to 1.52% for the three months ending in June from 1.44% in the first quarter, according to the Fox-Pitt, Kelton analysis, but like Stifel Nicolaus, Fox-Pitt analysts found that delinquency trends in some categories, such as construction, consumer loans and commercial real estate somewhat, have improved.

For instance, the 30- to 89-day delinquency ratio on construction loans fell 58 basis points to 1.96% from the first quarter, according to Fox-Pitt, Kelton.

"Banks generally put loans on loan accrual at 90 days, but looking at early stage delinquencies, we get a sense of what will happen in the next quarter," says Al Savastano, one of the Fox-Pitt, Kelton analysts that co-wrote the report. It will "probably continue to get worse. We expect to see more weakness in residential, home equity and construction looking at ... commercial real estate and commercial and industrial to see if there is any spillover."

The Fox-Pitt analysts used a sample of 133 banking companies with at least $50 million in market cap and covering $5.6 trillion in loans. The analysts culled data from the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision, among other regulatory agencies.


Regional banks continue to experience rising delinquencies, although we note that several of our regional banks have reported a decline as they have aggressively moved problem assets to non-accrual status," the analysts write. "We believe it is too early to conclude the improvement in some delinquency ratios as a sign that the worst has yet passed."

Once thought to be contained only to the subprime and lower-quality mortgage tranches, the mortgage crisis expanded into a full-fledged consumer-credit driven crunch as home prices continued their steep declines and the economy faltered. Banks holding all types of consumer-centric loans, from credit cards to even some prime mortgage loans, have had to retrench their operations and balance sheets to prepare for the losses already coming in drips and drabs.

It seems the financial world -- after watching the investment banks take massive writedowns on the securities backed by some of the more risky mortgages -- is now looking to the commercial banks and waiting for the other proverbial shoe to drop. And banks have been scrambling to boost their loan-loss reserve piles as their nonperforming loans and other assets deteriorate in performance.

On Tuesday,

Fannie Mae

( FNM) reported more bad news, noting that so-called serious delinquencies on single-family loans that it owns and that back mortgage-backed securities it issues jumped 6 basis points to 1.36% in June from a month earlier. Fannie classifies "seriously delinquent" loans as those loans where a borrower has missed at least three payment cycles or the loan has been referred to foreclosure but not yet foreclosed on.

Freddie Mac

( FRE) also said that serious delinquencies rose 8 basis points over one month to 1.01% in July, its latest monthly data.

"Nonperformers are still going up -- period," says Jeff Davis, an analyst at First Horizon's FTN Midwest Securities. "The rate of increase may decelerate somewhat, so that's a good trend,

but loan losses will be higher."

Over the past year, banks have been busy "recognizing nonperforming assets and building reserves," he adds. "The back half

of this year is where we will see the loss recognition really kick up. We'll see a number of banks call a spade a spade and just take a big haircut. The assumption is that banks have not fully begun to recognize losses."

Wells Fargo


was one of the first banks to do so last November, when

it moved

roughly $12 billion of troubled home equity loans that were either purchased or originated through indirect channels off its books into a special portfolio that is now being winding down.

Davis concurs that construction loans, such as those to homebuilders, are likely to hit a peak over the next few quarters "if for no other reason that the banks stopped making the loans roughly in the fall of last year," he says. They are "short duration portfolios. Either they are going to pay off or go bad."

But there will be a "baton pass" to consumer loan portfolios and, to some extent, in commercial real estate, he adds. Recovery in the consumer portfolios is still a long way off, because of higher unemployment and high gas prices, Davis says.

"It takes a while for consumer past due

loans and losses to cycle through the system," he says.