What Non-Accrual Rates Tell Us

The table below details the 90+ Days Past Due and Non-Accrual amounts for the 1-4 Family First Liens for the 2nd Quarter Bank Regulatory data out at www.wlmlab.com. The table lists the banks in descending order based upon the loan amount of their portfolio.



You can get the full list here.

 

How to Read

Bank of America has just over $8 billion in 90+ days past due compared to a little over $14 billion in Non-Accrual. So for every $1.00 they have on Non-Accrual they have $0.57 in potentially near-term charge offs. Naturally, not every 90+ past due account will charge off and not every 90+ past due account is on Non-Accrual.

That said, the ratio can provide a nice measuring stick with how aggressively each institution is managing future losses versus current income recognition.

 

Focused on Income

Wells Fargo (5.91), U.S. Bancorp (8.58) and PNC (5.42) all have a very low amount on Non-Accrual relative to what they are looking at in late stage delinquencies. This would indicate that they are much more focused on generating interest income than they are in mitigating future charge offs.

By putting a loan on Non-Accrual the bank is saying they think this loan will not pay back and therefore want to recognize 100% of the payment amount to go to principal pay down.

Focused on Charge Off Reduction

Hudson City (0.02) and SunTrust (0.33) are clearly being very aggressive in pro-actively working down balances. Bank of America, Citigroup and BB&T are slightly leaning towards being conservative.

Confusion on Non-Accrual

There is a lot of misunderstanding surrounding what is or is not "supposed to be" on Non-Accrual. Comments I've received:

1) Once a loan goes 90+ days past due it "automatically" goes on NA. Not necessarily true. It may be bank policy for a specific bank to do this, but there is no regulation requiring it. By the very fact that WFC has a staggering $23 billion sitting 90+ days past due v. $3.879 billion in Non-Accrual refutes the statement.

2) A loan in good standing and not past due would never be on NA. Not true. If the Risk Manager of the portfolio thinks that the risk on the loan is great enough then they may put it on NA regardless of whether or not it's past due.

If you waited until it's obvious they are going to charge off then what's the point? You wouldn't reduce the principal enough to have an impact. It's about using Predictive Modeling to identify those with high 1 or 2 year charge off likelihood and then proactively putting them on NA.

3) Non-Accrual policy is strict and banks don't have the flexibility to "manage" the number. Oh, so not true. As a former Wells Fargo collection strategy manager for the Small Business Lending group I very much managed the number. When times were good I was very aggressive at identifying those with a higher likelihood of default and aggressively putting them on NA.

When times were troublesome and folks were watching NA rates I was instructed to "not be so aggressive". Which, when you think about it is quite stupid. We were worried that the street would see our high NA rates and think we had issues. Instead of educating the analysts that no, relative to 90+ past due our numbers were excellent - it's that we were being more than cautious in our application on NA.

The Takeaway

Non-Accrual rates are an important measure to look at in detail when examining the health of a loan portfolio. There is a lot of focus right now on NPA ratios (non-performing assets) and many of these ratios include Non-Accrual amounts. So, one way to lower an NPA ratio (since it's... well, hard to actually collect on some of these) is to have low percentage of your loans on NA.