How Are Americans Coping With Inflation?

How Are Americans Coping With Inflation?

Button to Download the Current issue of Jumbo Rate News nowAbout a month ago, the Wall Street Journal ran a story entitled: “Dollar-Store Dinners and Vats of Shampoo Help Families Cope With Inflation” (by Rachel Wolfe August 1, 2022). The basic gist of the story is that many families can no longer afford trips to buy fresh produce and groceries and are increasing their reliance on less healthy, but cheaper options.

It is a sad state of affairs that cannot be ignored. According to the latest Consumer Price Index (CPI), and in spite of a July dip in energy prices, food and shelter prices continue to climb. With a 12-month food index increase of 10.9% (the largest since May of 1979—43 years ago) it is no wonder that groceries are now making headlines.

The index for food at home was particularly worrisome with a jump of 13.1% from last July. Dairy products increased 14.9%, fruits and vegetables were up 9.3%, while cereals and bakery items rose 15% over the year. In other words, most of your healthy options. (Food away from home was up 7.6%.)

When you combine the increased cost of feeding a family with a 33% increase in energy over the same 12 month period, it becomes clear why so many Americans are tightening their belts and changing their shopping (and eating) habits.

Although so far (at least) most consumers have not had to choose between feeding their families and paying their bills. However, according to the New York Fed’s Quarterly Report on Household Debt and Credit, both debt and debt transitioning into 30 days or more past due are beginning to spark concern, particularly in low-income areas.

Debt transition into serious delinquency (90 days or more) is most prevalent in the credit card and automobile loan categories. Granted,  there is only one way to go as past due accounts in 2021 were at historic lows.

So far, based on June 30, 2022 data, negative impacts on the nation’s banks have been minimal. Only 51 banks are  showing overarching deterioration in overall loan quality. While that number is up from 48 at March 31st, it’s down from 56 a year earlier. These 51 banks can be found on page 7.

Each has the following:

A Bauer’s Adjusted Capital Ratio (CR) <=3%, and/or a Texas Ratio>=50% and/or nonperforming assets to total assets > than 1% and loan loss reserves < 80% of delinquent loans.

Nonperforming assets include loans  that are  delinquent 90 days or more as well as repossessed assets (OREO). Let’s use 2-Star Monterey County Bank, CA, the first bank on the list, as an example. Monterey County Bank has $211 million in assets. Of those assets, 34% ($71.7 million) are loans. Overall, those loans are performing (i.e. it is reporting lower delinquencies) better than in the entire past year.  It has a $3.875 million in delinquencies and a nonperforming assets ratio of 6.8%. Those are down from $4.117 million and 8.8% respectively last quarter and $3.885 million and 7.3% a year ago.

However, during the second quarter, its credit cards entering into the past due 30-89 days category grew from $2,000 to $12,000. Worrisome? Not really. Worthy of watching? Absolutely. Monterey County Bank also has $11.498 million in OREO (131% of total net worth). All of its OREO is secured by real estate (structures and/or land).

While repossessed assets are not “bad loans” (anymore), they are still nonperforming assets. As such, Monterey County Bank met all four of the criteria used for the page 7 list.

Its Bauer’s Adjusted Capital Ratio was just 2.65%. Remember, Bauer’s Adjusted removes delinquent loans from both sides of the Leverage CR, so the closer the Bauer’s Adjusted is to the Leverage, the better off the bank is. Monterey County Banks Leverage Ratio is 9.25%. Not very close at all.

The Texas Ratio is another way to measure the impact that delinquent loans are having on the bank. The closer the Texas Ratio is to zero (zero being no delinquent loans), the better. Conversely, anything approaching 100% is worrisome. Monterey County Bank’s Texas Ratio is over 100% (148.6% to be exact). For comparison, the Texas Ratio for its peer group is 3.8%.

The next measures are combined: Nonperforming assets at Monterey County Bank are over 6% and it only has enough reserves to cover 41% of its delinquent loans. In a perfect world, Bauer likes to see a nonperforming ratio under 1% and there should be enough in reserves to cover all of them in a worst case scenario. The 51 banks on page 7 are somewhat less than “perfect”.

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