More banks are reaching an inflection point for credit where bad assets are again a mere blip on the radar.
Puget Sound Bank, Umpqua Holdings (UMPQ) and Wintrust Financial (WTFC) were among the banks that reported that nonperforming assets at or near 1% of total assets in the first quarter. Before the financial crisis, industry observers viewed 1% as a line in the sand that distinguished the strong from the struggling.
As more banking companies reduce problematic assets, crossing that threshold could become a rite of passage.
"If I was a banker that had managed to get my problems down to 1%, I'd be trumpeting that fact to my market in a big way," says Ben Crabtree, a former analyst and a senior adviser to Oak Ridge Financial, an investment firm. "When you get to that level, the things on your mind change. You are now more focused on making new loans and getting new customers."
Crabtree says accepting 1% nonperforming assets as a positive sign is part of the new and evolving "normal" for banks. "Ratios that would have been ho-hum or mediocre seven or eight years ago are the new good," he says, adding that it also applies to a 1% return on assets or a 12% return on equity.
At Dec. 31, the average nonperforming asset ratio for banks was 2.55%, according to the Federal Deposit Insurance Corp. So it could take several more quarters before 1% becomes the norm. But the banks with higher ratios are certainly aiming for it.
"Psychologically, for the banks with 3% or 4% or higher, I think breaking below that 1% level is an important goal," says Terry McEvoy, a analyst at Oppenheimer & Co. "It speaks to the hard work they've put into resolving the issues. Is it meaningful? Yes, directionally it is an improvement."
Wintrust, in Lake Forest, Ill., and Umpqua, in Portland, Ore., are quickly approaching that mark. On Wednesday, Wintrust reported a ratio was 1.17% at March 31, while Umpqua reported a ratio of 1.05%. To be fair, both companies never suffered from some of the high-level problems that many other banks have. (Umpqua and Wintrust have also purchased several failed banks, and the ratios exclude assets covered by loss-sharing arrangements with the FDIC.)
Despite leading the pack, executives at Umpqua and Wintrust were particularly ambivalent.
"It gives people confidence, but the new normal hasn't been identified," says Ray Davis, the president and chief executive of the $11.5 billion-asset Umpqua. "We want to get it as low as we can. Getting to 1% is better than to 2% but not as good as 0.5%"
Ed Wehmer, the president and chief executive of the $16.2 billion-asset Wintrust, says it is a good figure to reach, though observers are still iffy about the reported numbers.
"I think it helps, but don't view it as any sort of golden ring," Wehmer says. "Analysts remain very pessimistic and leery about the industry. I don't think they trust Washington and they certainly don't have confidence about the veracity of anyone's numbers."
There could be some validity in Wehmer's statement.
Wintrust's actual ratio could be closer to 3% when factoring in troubled-debt restructurings, says Brad Milsaps, an analyst at Sandler O'Neill. "I think every bank ought to be shooting for" 1%, he adds. "But most are not quite there yet."
As Wintrust and Umpqua inch to 1%, the $250 million-asset Puget Sound Bank managed to slide in just below that mark. The Bellevue, Wash., bank reported Wednesday that its nonperforming asset ratio was 0.99% at March 31.
Puget Sound Bank was founded in 2005 with a specific focus on commercial and industrial lending. That focus saved the bank a lot of heartache. As nonperforming assets began piling up at other banks in its area, Puget Sound Bank remained squeaky clean for much of the downturn.
"We knew it wouldn't last, but we wondered how long can we hold on to zero?" says Jim Mitchell, Puget Sound Bank's president and chief executive. "Of course, it didn't last."
Though some analysts have described credit trends across the country as lumpy, Mitchell says he is not expecting any jumps back up, notwithstanding any macroeconomic changes that might arise.
"We just presented to our board and we shared with them that our credit quality is improving," Mitchell says. "We expected to be below 0.99 [percent] by a significant level by year end."