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Several weeks back, I wrote that the U.S. banking crisis was not over. As evidence, I pointed to the fact that more than 50% of the 742 banks that borrowed money from the Troubled Asset Relief Program (TARP) had not even started to pay off their debts. That is costly money for banks - the dividend rate (read interest) goes from 5% to 9% in four years. That means banks borrowing from TARP in 2008 will start paying 9% this year.

Below, I provide more detail on the problems facing banks that have not repaid their TARP monies. I also look at other indicators of banking problems.

Why Banks Have Not Repaid TARP - The Role of Regulators

There are two related reasons why banks have not paid off their TARP loans. The first is that they are really strapped. The second is that the FDIC and other bank regulators will not permit it. What do bank regulators worry about? Mostly, the wrong things. After decades of meetings in Basel at the Bank for International Settlements, bankers/regulators have come up with three "accords" to manage banks - Basel I, II, and III (the U.S. never signed Basel III). But the accords and whatever regulators were using did not prevent the banking collapse in 2008. Risk-based capital: who is assigning the weights? In Europe, sovereign debt was treated as safe as cash, at least until "the Greek problem" surfaced.

What U.S. Regulators Want

However, to understand what is happening in the U.S. banking industry, you have to understand what the regulators want and how their requirements are slowing TARP repayments. Since I know little about bank regulations, I asked a banker friend of mine who does. He said "The regulators expect each bank to establish their own minimum capital ratios based on each bank's risk profile. During the exam process, the regulators determine the adequacy of their risk profile assessment and the determination of their own internal minimum capital ratios."

He went on to say that the regulators look at a lot of data but focus on three quantitative indicators: the Leverage Capital Ratio, The Tier 1 Risk-Based Capital Ratio, and the Total Risk-Based Capital Ratio. He added that there are "official" numbers for these ratios, but the regulators in many cases now want higher numbers based on the risk profile of the bank. And even higher numbers are coming: the Fed has announced it will require banks to carry more capital in coming years.

Table 1 includes the "official" and "wanted" numbers for these ratios. In addition, the Federal Deposit Insurance Corporation collects data on 7,357 banking institutions. I used the numbers to generate average data for all banks as well as the number and percent of banks that score less than the "wanted" numbers.

Table 1. - U.S. Bank Performance on Regulators' Standards (end 2011)

Ratios

Standard

Leverage Capital

Tier 1

Total Risk-Based

"Official"

5.0%

6.0%

10.0%

"Wanted"

8.0%

10.0%

12.0%

Average

10.8%

21.1%

22.3%

% Below "Wanted"

14.2%

6.5%

10.7%

# Below "Wanted"

1044

480

786

Source: FDIC

Quite clearly, there is a substantial number of banks still in the "gray" zone with the regulators on all three of the indicators they use. My banking friend wanted me to qualify that statement. He said: "Some of those banks in the 'grey zone' as you put it may be very strong banks that have a low risk profile and thus negating the need for elevated capital levels". Ok. Before investing, you should do your own due diligence.

Do "TARP" Banks Really Need TARP Money?

In my previous bank article, I included a table listing the banks that had not started paying their TARP loans back by the end of 2011. In Table 2, I calculated what would happen to the Tier 1 Ratios of banks if they did pay back their TARP loans. For this exercise, TARP data came from the April 2, TARP Report and the FDIC data from the latest reporting period - end 2011. In this Table, I also included data from the FDIC on each bank's return on assets (ROA). A negative ROA is not good - it means the bank is losing money.

Table 2. - What Happens to Tier 1 Ratios If Banks Pay Off TARP Loans

TARP

Amount

Tier 1

Tier 1

Return on Assets

Bank

Borrowing Date

(in $ 1,000)

Before

After

(ROA)

Hampton Roads Bankshares, Inc. (HMPR)

12/31/2008

80,347

7.9

2.4

-4.19

Zions First National Bank (ZION)

11/14/2008

1,400,000

13.4

3.8

0.91

Alarion Bank (AFSI)

1/23/2009

6,514

8.9

5.8

-0.89

AB&T National Bank (OTCQB:ABTO)

1/23/2009

3,500

10.1

6.8

-0.44

Banco Popular de Puerto Rico (BPOP)

12/5/2008

935,000

12.0

6.8

0.63

Old Second National Bank (OSBC)

1/16/2009

73,000

11.7

7.0

0.02

Standard Bank and Trust Company

4/24/2009

60,000

10.6

7.0

0.04

Park National Corporation (PRK)

12/23/2008

100,000

9.5

7.2

1.66

Metropolitan Bank Group, Inc. (OTC:MTPOF)

4/10/2009

2,040

7.6

7.5

-2.62

Taylor Capital Group (TAYC)

11/21/2008

104,823

10.9

7.9

2.03

Citizens Republic Bancorp, Inc. (CRBC)

12/12/2008

300,000

13.5

8.2

0.18

PrivateBancorp, Inc.(PVTB)

1/30/2009

243,815

10.8

8.6

0.58

Regions Bank (RF)

11/14/2008

3,500,000

12.9

9.0

0.25

Synovus Bank (SNV)

12/19/2008

967,870

13.9

9.3

0.17

Alpine Bank

3/27/2009

70,000

13.8

9.6

0.59

United Community Bank (UCFC)

12/5/2008

180,000

13.6

9.6

-3.00

Source: FDIC, TARP Reports

So what does this Table tell us? Take the Old Second National Bank as an example. According to my calculations, if "Old Second" paid off its TARP loan, its Tier 1 ratio would fall to 7.0%. And remember that the regulators now want this ratio to be 10%. My banker friend indicates that the regulators informally now want Tier 1 risk-based ratios to be at least 10%. That would mean all the banks on this list would be under pressure from the regulators not to pay off their TARP loans.

Zions Bank is a particularly interesting case. Since it took out its loan in November 2008, it will start paying 9% this year. On March 28, 2012, it paid back $700 million. The Tier 1 data appearing in Table 2 were end-December 2011, so it will not reflect the Tier 1 reduction resulting from this payment. I estimate that payment reduced its Tier 1 ratio to 8.6. I can hear the Zions executives arguing with the regulators over this: Zions - we don't want to pay 9.5% for money. Regulators - we'll let you cut your TARP loan in half, but we will not allow your Tier 1 ratio to fall further, and certainly not to 3.8%, which is what it would fall to if you repaid TARP the entire $1.4 billion that you owe.

The Most Dangerous Banks

Table 3 is my list of the U.S. banks in the most trouble. I arrived at this list by using three different indicators: Leverage Capital Ratio (LEV), Total Risk-Based Capital Ratio ((NYSE:TOT)), and the Return on Assets. I came up with the 20 worst banks on each indicator. I then found those banks included on two or more of the lists. A bold number in the Table indicates the indicators where the bank scored in the bottom 20.

Table 3. - Dangerous Banks

Bank

City

State

LEV

TOT

ROA

American Eagle Savings Bank

Boothwyn

PA

1.3

3.1

-2.5

BankEast

Knoxville

TN

0.4

0.9

-2.1

Central Bank of Georgia

Ellaville

GA

0.4

1.3

-4.9

Central Florida State Bank (OTCPK:CEFB)

Belleview

FL

0.4

1.0

-7.0

Charter National Bank and Trust

Hoffman Estates

IL

0.1

0.3

-4.5

Covenant Bank & Trust

Rock Spring

GA

1.5

3.0

-2.4

DuPage National Bank

West Chicago

IL

0.1

0.4

-3.5

First Guaranty Bank and Trust Company

Jacksonville

FL

0.6

1.7

-2.5

Global Commerce Bank

Doraville

GA

0.6

2.2

-5.2

Home Savings of America

Little Falls

MN

-2.3

-4.6

-5.9

Inter Savings Bank

Maple Grove

MN

1.5

3.3

-1.1

New City Bank

Chicago

IL

-2.4

-3.9

-11.1

Patriot Bank Minnesota

Forest Lake

MN

1.3

2.8

-5.0

Plantation Federal Bank

Pawleys Island

SC

1.0

2.8

-3.6

SCB Bank

Shelbyville

IN

0.3

0.8

-4.3

Tennessee Commerce Bank

Franklin

TN

-3.2

-4.0

-12.6

The First State Bank

Stockbridge

GA

0.6

1.5

-2.1

The Leaders Bank

Oak Brook

IL

1.3

3.6

-4.5

Source: FDIC

Banks with negative ROAs are the most dangerous on this list. Since the data for this Table came from end-2011, it is quite likely some of the banks listed have already failed and/or been taken over. I would urge investors to avoid/perform your own due diligence on any banks on this list, particularly those with a negative ROA. Depositors? Well of course, your deposits are guaranteed up to $250,000….

Concluding Observations

Above, I have outlined the thinking and findings of the U.S. bank regulators. But do they know anything more than they did in 2008? I doubt it.

As most of you know, I believe trying to regulate banks as currently constituted will never work. They are simply too complex to be regulated effectively. What to do?

  • Get risky investments out of banks.
  • Force the investment banking arms of these banks to sell off the depository banking operations.
  • And then limit FDIC insurance to banks that manage their own loans and do not trade on their own accounts.
Source: The U.S. Banking Crisis Is Not Over