Community Banks
Increased inventories from the sub-prime mortgage crunch are affecting loans to prime borrowers that have borrowed against excess equity in their properties. These borrowers have over extended themselves, primarily funding undersold, speculative construction projects.Signs of a distressed community bank include:
- rapid growth - increases to loans receivable outpace receivables collection, which reduces cash.
- homogeneous portfolio - high risk if primary asset class becomes distressed.
- credit quality - sudden and sharp increases to bad debt allowance and non-amortizing loans are an indicator of distressed assets.
- cost of funds - the legal lending limit is directly tied to deposits and some community banks pay a premium to increase deposits. This is demonstrated through high-yield savings, money market, and three-month C/Ds. The higher the yield, the narrower the interest rate margin which leaves little flexibility for rate reductions.
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Tags: Money
Posted on August 8th, 2007 | By: bootstrap economist | Filed under Banking
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