Although many investors and commentators believe that we have passed the heart of the financial crisis and are slowly moving toward a recovery in the economy, our banking system is still chock full of bad loans that need to be passed through the system. This will cause much discomfort for the economy and the industry.

IN PICTURES: Digging Out Of Debt In 8 Steps

East West Bancorp (Nasdaq:EWBC) has 4% of its loans classified as "problem loans" as of the end of the second quarter of 2009. Problem loans are defined as all loan past due, non-accrual loans and other real estate owned (OREO). Despite the troubling problem loan ratio, East West Bancorp raised capital recently by issuing common stock in a private and public offering of stock, and the conversion of preferred stock to common. The net effect was to increase common equity by $249 million, and leaves the bank with a pro forma Tier 1 leverage capital ratio of 11.22%.

Flagstar Bancorp (NYSE:FBC) has 11.2% of its loans in this category, one of the highest among the large banks. The bank has raised significant capital this year, and just finished the final tranche of $50 million, and has raised $621 million in gross capital in 2009.

Other banks with high amounts problem loans include Marshall & Ilsley (NYSE:MI) and Synovus (NYSE:SNV), with non-performing loans as a percent of total loans of 5.01% and 5.40%, respectively at the end of the second quarter of 2009.

UCBH Holdings Inc (Nasdaq:UCBH) has a problem loan ratio of 13.4%. The bank just suspended interest payments on its trust preferred securities, and halted dividends on its common and preferred stock.

Things to Consider
One problem with these loans is that they will continue to suppress a strong recovery in residential or commercial real estate. As the loans pass through the bank's internal processes, the underlying collateral will eventually hit the market. This will be a slow bleed over the next couple of years, as the loans move from past due to workout to OREO and then to the market.

Another thought to consider is that just because a bank has a high problem loan ratio does not mean that it will fail. An investor should look at the capital cushion that the bank maintains to absorb losses, as well as the trend of the ratio.

The Federal Deposit Insurance Corporation (FDIC) reports that 2.6% of the $7.74 trillion in outstanding loans were in non-accrual status. The agency now has 416 problem institutions on its watch list. These institutions hold $300 billion in assets.

The Bottom Line
The panic phase of the financial crisis has certainly seemed to have passed, but they same can't be said for the pain caused by the indulgences of the last decade. We will continue to feel it for a few more years. (To learn more, see The Industry Handbook: The Banking Industry.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    How Toyota Succeeds at Home and Abroad (TM)

    Japan's biggest car manufacturer is also one of North America's biggest, delighting shareholders with its high profit margins.
  2. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  3. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  4. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  5. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  6. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  7. Investing News

    Is the White House too Optimistic on the Economy?

    Are the White House's economic growth projections for 2016 and 2017 realistic or too optimistic?
  8. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  9. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  10. Economics

    Can the Market Predict a Recession?

    Is a bear market an indication that a recession is on the horizon?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center