Wednesday, February 11, 2009

Surveillance 101: Tracking bank degradations over time.

Case Study: Alliance Bank of Culver City, California

Alliance Bank was taken over by the FDIC last week and the assets sent to California Bank & Trust, a unit of Zions Bank. The Alliance case was typical case of a small institution that got trapped in the aftermath of a deflating bubble. It ended life the owner of a growing portfolio of foreclosed properties stemming from a lending default rate dragging operational earnings deep into the negative. Their Aggregate Loan Default Rate went from a miniscule 26bp (basis points) to 496bp and their Loss Given Default rate was 96%.

As it has been doing with regularity, the FDIC performed it's designated regulatory function taking the troubled entity into the arms of a better positioned and healthier financial institution. In fact, the degradation of Alliance's position took approximately nine months to gestate. The bank's overall stress ratings over time are shown below.

IRA Bank Stress Ratings: Alliance Bank, Culver City, CA
Sep-08 - F
Jun-08 - F
Mar-08 - B
Dec-07 - A
Sep-07 - A+

Like many other institutions who were caught in the bubble a migration of business from income producing to dead weight ensued. Non-Conforming assets went from $17.7M in Sep-07 to $96.5M in Sep-08. During the same time Real Estate Owned(REO) went from $1.1M to $16.6M.

Note: I was interviewed about Alliance on Monday by KNBC-TV Los Angeles. The segment aired on Tuesday Feb. 10.

Wednesday, February 4, 2009

IRA Bank Reports Timing - Why Mid-Quarter?

IRA reports are based on FDIC CALL/TFR Reports. We need these more detailed reports to accomplish the level of bank safety and soundness analysis that we do. Bear in mind that IRA’s bank analytics covers all FDIC reporting institutions. Of these only some are publicly traded companies. Our analysis engines run detailed analytics on the universe of active U.S. bank holding companies as well as the individual unit institution members of a holding company.

Timing of production is keyed to the FDIC’s internal processing schedules. The FDIC holds release of the master dataset for each quarter’s filings for 45 days to perform internal cleaning prior to releasing it for analytics use. We get the data and process it to build the industry stress statistics typically just before the FDIC does its’ mid-quarter press conference. We try to release our reports to coincide with the FDIC conference date provided the FDIC arrived on time. An email is sent to all clients informing you that the reports have been updated.

FYI, catalogs of SEC filings for public companies are available on the IRA website. SEC filings contain top level information on companies aimed primarily at stock investors. They typically begin to appear just before the 30 day point after the end of the reporting period, hence the end of month follies in the markets. That’s a little ahead of the FDIC’s much more comprehensive data needed for safety and soundness analysis on banks to help assess the risk within a person/company’s cash and cash equivalents assets. Different portion of the wealth portfolio.

- Dennis