Starting in the early 1990s, Eastern Savings launched a business buying defaulted loans from other banks for pennies on the dollar, expecting to more than recover its investment through collections from the distressed borrowers. But its involvement in that business raises its so-called "Texas ratio," which is a comparison of a bank's assets to its nonperforming loans.
A high ratio typically means a bank is at risk of failure. But the senior bank official said Eastern don't fit that mold. The nature of its business means it can record a high number of loan defaults, or delinquencies, yet remain highly profitable, he said.
The bank's financial filings with FDIC seem to support that claim. Those documents show the bank carried more than $400 million in past-due or nonperforming loans on its balance sheet at the end of the first quarter of this year. That represents more than a third of its total assets of $1.1 billion. But the bank reported a first-quarter profit of $4.8 million, despite operating in one of the worst environments for financial firms in decades.
"This is not considered a troubled bank," the senior bank official said.
Analysts say the banks at greatest risk of failure are small- to mid-size institutions with high exposure to housing-related investments and loans. Mortgage delinquencies have reached all-time highs, forcing many banks to take large provisions for bad loans.
"Clearly, the financial industry is facing its biggest challenge since the [savings and loan] crisis days," said Michael D. Larson, a banking analyst with Weiss Research.
Larson and other analysts said the current difficulties pale in comparison to the savings and loan crisis of the 1980s and 1990s, when more than 700 institutions across the country were bailed out by the government.
But he advised consumers concerned about their bank to make sure their deposits are insured. Those who have more than $100,000 can spread their savings among several institutions to reduce their risk.
For a fee, consumers can find out how safe their money is by purchasing a report on their bank from an assortment of ratings firms, such as Bankrate.com, The Street.com and others.
Bert Ely, a banking analyst in Alexandria, Va., said the current crisis is just a "classic credit correction" that will weed out troubled banks, leaving a stronger industry in its wake. The industry has endured far worse cycles in past decades, he said, and the industry remains fundamentally sound.
"Mortgage credit got too loose ... and now the turkeys are coming home to roost," he said.
"As Warren Buffett has said, 'The tide is going out, and we're seeing who's swimming naked.' "
paul.adams@baltsun.com
Sun reporters Hanah Cho and Lorraine Mirabella contributed to this article.
