Each quarter the Federal Deposit Insurance Corp. requires every bank in the nation to submit detailed reports about its financial condition. This data is public and contains hundreds of data points for each bank. The Investigative Reporting Workshop downloads the data files from the FDIC Web site. Using experienced computer-assisted journalists, we extract several key variables of bank performance. These include:
- Total Assets
- Total Deposits
- Loans (net of allowance for loan losses)
- Net Income
- Provision for loan losses (the charge to earnings for realized loan losses)
- Tier 1 Capital
- Loan Loss Reserves (the allowance for loan losses)
- Loans that are 90 days or more past due (minus the amount of these loans guaranteed by the federal government)
- Loans that are in nonaccrual status (minus the amount of these loans guaranteed by the federal government). Nonaccrual means the bank can no longer claim interest income from the loan.
- Other real estate owned ((minus the amount guaranteed by the federal government). These primarily are properties the bank has acquired through foreclosure.
Using these variables, we calculated a “troubled asset ratio,” which compares the sum of troubled assets with the sum of Tier 1 Capital plus Loan Loss Reserves. Generally speaking, higher values in this ratio indicate that a bank is under more stress caused by loans that are not paying as scheduled.
The methodology for compiling the "troubled asset ratio" for credit unions is basically the same as that the Investigative Reporting Workshop uses to calculate the ratio for the nation's banks, with some differences because credit unions report somewhat different data.
We downloaded the quarterly data file from the National Credit Union Administration, the chief regulator for credit unions and imported the data into a database manager. Based on consultations with NCUA analysts, we selected the following fields to include in our analysis:
- Loan Loss Reserves
- Provision for Loan Losses (the charge to income for bad loans)
- Capital (or Net Worth in credit union reports)
- Loans More Than Two Months Past Due (banks report delinquencies differently)
- Other Real Estate Owned (property received mostly through foreclosures)
We combined Capital and Loan Loss Reserves to calculate the amount of cushion the credit union has to protect against loan losses. We combined the delinquent loans and other real estate owned to calculate the "Total Troubled Assets."
We then divide the amount of Total Troubled Assets by the amount of Capital and Loan Loss Reserves to derive the "Troubled Asset Ratio." Generally speaking, higher values in this ratio indicate that a bank is under more stress caused by loans that are not paying as scheduled.
Wendell Cochran, senior editor of the Investigative Reporting Workshop, and a former business reporter for the Kansas City Star, the Des Moines Register and Gannett News Service, was likely the first journalist to create this measure of bank health. He did that while covering banking for the Des Moines Register in the early 1980s. Later, at Gannett News Service, he was involved in projects published at USA TODAY and elsewhere that calculated this ratio for every bank and savings and loan in the nation.
Others do similar calculations. The most widely used is the so-called Texas Ratio, created during the 1980s by a banking consultant. You can find various formulas for calculating this ratio, but they generally are in line with the method used by the Investigative Reporting Workshop. There is no attempt here to value the non-loan assets that may also be causing bank problems, such as mortgage-backed securities, collateralized debt obligations, etc.
A note about the bank reports: They are the snapshot of a moment in time. Conditions may have improved or deteriorated between the end of the period and the time the reports come available (usually a lag time of about 50 days). This may be true now, especially, of banks that are receiving TARP money.
However, we are relying on federal data that has a long track record of accuracy. We would offer any bank that has submitted a verified, amended report to the FDIC the opportunity to correct the data relating to that bank.