This week BankRegData.com [3] reviews 1-4 Family First Liens for the entire banking industry. I am going to cover Nonperforming Loans, Accrual on NPLs, Charge Offs and NPLs to Charge Offs.
For the 2nd consecutive quarter 1-4 Family First Liens have increased:
After bottoming out at $1.695 Trillion in Q1 2011 (23.33% of all loans), 1-4 Family First lending has grown 3 straight quarters [4]. In fact, the growth has been accelerating with the 4th Quarter's increase of $33.88 Billion improving upon the $29.19 Billion in Q3. The $33.88 Billion is the largest quarterly increase in 22 quarters (2006 Q2).
Based upon the chart above the optimist would say banks are increasing 1-4 lending while the pessimist might comment on the striking resemblance to the same growth pattern in 2010.
Early Stage (30-89 Days Past Due) and Nonperforming Loans for the past 12 quarters:
A number of things to note here. I'll start with the fact that the 30-89 Day Past Due rate is sitting at 2.57% [5] which is the lowest in 13 quarters. The orange box above details the past 3 quarters where we see increasing absolute dollars sitting in Early Stage delinquency. The rate is going down due to the increasing growth in 1-4 Family First lending (the denominator).
Nonperforming Loans (NPLs) climbed $5.23 Billion over Q3 with the rate increasing to 9.61% [6]. The $5.23 Billion is the first increase after 6 straight quarters of declines. Why the increase? Possible flow from Early Stage as they advance and a reduction in Charge Offs as we'll see shortly.
Nonperforming Loan rates by Asset Size:
Where to start? The red is a weighted average NPL rate on 1-4 Family First Liens for the 4 largest banks (BAC at 16.89% [7], WFC at 15.05% [8], JPM at 21.26% [9], C at 8.64% [10]). The chart is for the past 12 quarters (3 years) and is after the arranged marriages. Note the rapid rise to a peak of 17.37% and a slight decline to a plateau of 15-16% the past 6 quarters.
The $5-999 Billion range (currently 153 institutions) starts out at 4.74% peaks at 7.02% during 2010 Q1 just like the largest banks. Unlike the 4 behemoths the next largest banks continue to decline with the 5.90% being the lowest since the 7.02% peak.
The "Community Bank" segment of less than $5 Billion in assets (6,571 institutions) entered 2009 with the lowest NPL rate of 2.25%, peaked a little later at 3.08% in 2010 Q4 and is sitting at 2.89% which is a 9 quarter low.
How did I account for failed or acquired banks? I'll use a $500 million bank acquired in 2010 Q1 by a $10 Billion bank as an example. The 2009 Q1-Q4 data would show up in the < 5 Billion category while it was still independent and then be part of the $5-999 Billion range starting in 2010 after it (or it's assets) was acquired.
Nonperforming Loans and Nonaccrual:
As seen above, there is $168.95 Billion in 1-4 Family First Nonperforming Loans. Of the $168.95 Billion, $92.91 Billion (55%) is sitting in the 90+ Days Past Due bucket [11] while $76.03 Billion (45%) is sitting in Nonaccrual [12].
What this means is that 55% of 1-4 Family First Liens that are Nonperforming are generating Interest & Fee income. This is an amazing number and one which has been increasing across time.
Percentage of Nonperforming 1-4 Family First Liens accruing Interest & Fee income:
Four years ago (2008 Q1) 26.63% of NPLs were NOT on Nonacrual - meaning they were accruing income. Today the number is 55% and increasing every quarter.
So, the question begs as to why is this happening?
Government Guarantees [13] and Loss Share [14] arrangements are probably the primary culprit. In 2008 Q1 only 7.88% of all delinquencies (30-89 PD, 90+ PD, Nonaccrual) had a government guarantee. Today the number is 23.12% with another 5.34% with Loss Share arrangements.
Accrual Percentage of Nonperforming 1-4 Family First Liens by Asset Size:
The 4 largest banks have 61.75% of their Nonperforming loans in the 90+ Days Past Due bucket accruing interest & fee income.
I should probably avoid the too pointed commentary, but while this might be the "smart" thing to do if you are the bank, it's questionable in the grand scheme of things. These banks should be managing the government backed loans the same way they manage the loans they are 100% on the hook for.
The $5-999 Billion banks have definitely wised up increasing their ratio from 30.68% to 45.59%. The "Community Bank" segment (the vast majority of our banks) have been extremely stable in the ratio and represents the probable "true" ratio of what banks should have as late stage delinquent, but still accruing income.
This is essentially a hidden source of (transferred) income for the largest banks in the country. The larger banks are generating much higher than normal income off these loans compared to similar loans with no guarantees. The downside is that when they do charge off they are carrying a much higher balance on these loans which gets passed on to the government.
Quarterly Charge Offs and Charge Off Rate (Annualized):
The 2011 Q4 1-4 Family First charge off rate of 0.96% [15] was the lowest in 3 years. In many ways, this is a number to be celebrated. The 2011 total of $18.42 Billion was $5.54 billion lower than 2010 ($23.96 Billion) and $7.31 billion lower than 2009 ($25.73 Billion).
That said, we know that the 4th Quarter 2011 NPLs increased by $5.23 Billion so Q4 Charge Offs were very much a managed number. Even more interesting to me is the fact that the "industry" took a significant amount of charge offs in 2010 Q4 ($6.30 Billion and a 1.44% percentage).
The aggregate Charge Off number is disproportionately influenced by the largest banks which also happen to be public. They most likely had the EPS room 2010 year-end to take more charge offs. Whereas in 2011 it was the exact opposite - they had to hold off on charge offs to hit the numbers.
1-4 Family First Charge Off Percentage by Asset Size:
A lot of commentary is possible here, but I'll leave it to the simple fact that, once again, "Community Banks" compare very favorably across time.
To what extent is the industry "managing" charge offs?
Above we looked at both Nonperforming Loans and Charge Offs. Taking a simple ratio of the 2 numbers we can get a NPL to CO ratio showing how many $ of NPLs remain for every $1 of charge offs taken in the quarter.
In 2011 Q4 the industry had $39.86 of NPLs remaining for every $1 of Charge Offs [16]. Note the $27.53 for 2010 Q4 which is out of pattern for the last 9 quarters and indicative of the 2010 Q4 charge off "flush" discussed earlier.
Obligatory, yet not surprising, NPL to CO chart by Asset Size:
Clearly, no surprise with largest banks ($51.90), however, the $5-999 Billion institutions are now behaving like their larger brethren and less like the "Community Banks" that they have historically tracked similar to.