By DAVID MOON, Moon Capital Management,
July 20, 2008
IndyMac Bank failed with $32 billion in assets and was taken over by the FDIC a
week ago, it was the second-largest bank failure in U.S.
history. As the banking crisis has worsened over the last several months,
many depositors have probably questioned the soundness of the entire banking
system, particularly their personal bank.
As we learned watching James Stewart in 'It's a
Wonderful Life,' banks don't actually keep all of your cash in the vault. They
lend it to folks who pay interest and eventually repay the loan balance to the
Well, that's how it's supposed to work,
On March 31, 8.65 percent of IndyMac's loans were
noncurrent. That means the borrowers were either behind on their payments or
simply weren't making payments. If you add the real estate that the bank had
foreclosed as a result of defaulted loans, the percentage grows to 11.55
The average yield on the bank's loans was 6.69
Seems like it would be hard to stay in business long if
you were loaning money at 6.69 percent and more than ten percent of your
borrowers didn't pay you back.
Yet the bank wasn't even on the government's official
list of troubled banks this spring. Do you have to shoot someone to get on that
Using IndyMac as an example of how not to run a bank,
how do some local lenders compare?
First Tennessee's parent, First Horizon, which
replaced its president and CEO last week, has 20 percent of local deposits.
Based on its March 31 reporting, 3.25 percent of its loans were noncurrent. It
had reserves equal to 90 percent of its nonperforming loans.
For comparison, IndyMac's reserves were only 17 percent
of its nonperforming loans.
Like First Tennessee, SunTrust has reserved less than
its nonperforming loans, at 76 percent.
On the other end of the scale, Knoxville's Home Federal
Bank has reserves exceeding 1,000 percent of its nonperforming loans. At 0.05
percent, Home Federal's nonperforming assets are almost
BB&T and Regions also have each reserved more than
their reported nonperforming loans. One reason: First Tennessee and SunTrust
have higher percentages of noncurrent loans on their books than either BB&T
If a bank hasn't yet reserved an amount equal to its
nonperforming loans, perhaps the bank is expecting a significant percentage of
its bad loans to start performing again. If not, it will likely either have to
increase its reserves in the future or do something even less pleasant, like
write off loans or sell them at a discount.
It is possible, of course, that different banks might
use different definitions of 'nonperforming,' so this measure can be
Even the regional bank stocks with significant
stock-price declines appear to be much healthier than one of the few banks to be
taken over by the FDIC during this recent debacle. Based on the reported
figures, the balance sheets aren't even
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).