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The truth of this institution.....!

|Includes: Flagstar Bancorp, Inc. (FBC)
Feb. 5, 2010, 4:54 p.m. EST
Bank failures to keep rising in 2010, despite GDP rebound
Flagstar, Sterling, Amcore may be vulnerable, Texas Ratio suggests
SAN FRANCISCO (MarketWatch) -- The continuing fallout from bad loans made in good years mean even more U.S. banks will fail in 2010 than 2009, despite a recovering economy.
That's the prediction of bank analysts who see as many as 200 institutions closing this year, at a potential cost of more than $50 billion to taxpayers, as risky loans approved in 2006 and 2007 take their toll.
And that represents a projected 43% increase in closures from 2009, which saw 140 failures, the most since 1992 when the U.S. was recovering from the savings and loan crisis.
Market impact
Still, a year ago, the outlook for the industry was much grimmer as bank stocks plunged on concern some of the largest institutions like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) might be nationalized. See story on nationalization fears.
"Some people thought every bank in the globe was going to fail," Cannon said. "By the standards of last February, the outlook is better, given we were looking at possible systemic failure."
There are other reasons for optimism. While more banks probably will fail in 2010 and beyond, the market impact of those closures will be much less than the pain inflicted on investors in recent years. That's because banks that fail will be smaller, Cassidy said.
The 10 largest failure candidates have less than $100 billion in assets among them, Cassidy estimated. In contrast, when Washington Mutual (OTHER:WAMUQ) failed in September 2008, the Seattle-based thrift had more than $300 billion in assets.
The process for resolving failed institutions is also running a lot smoother than when IndyMac became the first major victim of the current cycle in July 2008, KBW's Cannon said.
"The process has become orderly and pretty well-absorbed by the market," he added. "When a publicly traded bank fails the stock has already dropped below $1 usually."
The Texas Ratio
That may be little comfort to banks still struggling to survive and investors in those institutions.
The Federal Deposit Insurance Corp., which takes over failed banks, counted 552 "problem" institutions with assets of $346 billion at the end of September. That was the highest number in more than 15 years and up from 416 on June 30.
The FDIC doesn't identify banks on the list, partly because that might cause depositors to withdraw their savings, hastening the demise of these institutions.
However, some analysts and investors look at the so-called Texas Ratio as a general guide to which banks may be under the most pressure.
The ratio is calculated by dividing a bank's non-performing assets, including loans at least 90 days delinquent, by its tangible equity capital plus money set
aside for future loan losses. The number basically measures credit problems as a percentage of the capital a lender has available to deal with them.
Cassidy came up with the idea after covering Texas banks in the 1980s. The analyst noticed that when problem assets grew to more than 100% of capital, most of the Texas banks in that precarious position ended up going under.
KBW counted 388 banks in the U.S. with Texas Ratios over 100% at the end of the third quarter.
The main banking subsidiaries of Flagstar Bancorp (NYSE:FBC) , Sterling Financial Corp. (NASDAQ:STSA) and Amcore Financial Inc. (NASDAQ:AMFI) may be vulnerable, according to KBW's yardstick.
Flagstar Bank had a Texas Ratio of 125% at the end of September, according to KBW research. Sterling's ratio was 116%, while Amcore's was 157% on Sept. 30, KBW research also shows.
Sterling spokeswoman Cara Coon said the Texas ratio is only one measure of a bank's financial health. She declined to comment further.
Investor relations representatives at Flagstar and Amcore declined to comment.
Shares of all three banking companies trade below $1. Still, they have been trying to raise capital in recent months, with varying results.
Troy, Mich.-based Flagstar, the second-largest bank based in the Midwest with $14 billion in assets, reported a $72 million quarterly net loss this month. However, the company raised $300 million in new capital through a January rights offering.
"While we continue to manage through the asset quality issues on our legacy balance sheet, this significant investment of capital is an affirmative statement about the Flagstar franchise," Chief Executive Joseph Campanelli said in a statement.