Illinois is the new Texas.
At least, lingering problems among the state’s lenders have kept it as one of the nation’s most stressed regions for banks, as measured by local institutions with high Texas ratios. (
As with housing, different bank markets across the country have crashed and recovered at different speeds.
Assets held by commercial banks with Texas ratios of more than 100% - meaning that bad debt outweighed capital and loss reserves – spiked and tapered quickly in states like Washington and California.
In Georgia and Florida, the cleanup has been slower. The same is true in Illinois, which has come close to surpassing Georgia and Florida in recent periods to claim the top spot in terms of total assets at distressed banks (see the first chart).
The Texas ratio, calculated as nonperforming assets (excluding amounts covered by loss-sharing agreements with the Federal Deposit Insurance Corp.) as a percentage of tangible equity and loan loss allowances, was
Like in that era, it has been highly predictive of failures during the current cycle. Among the 342 commercial banks that posted Texas ratios of greater than 100% in any period from the first quarter of 2008 through the second quarter of 2009, 65% failed; 7% were no longer reporting financials as of the first quarter this year, mostly because they had been acquired or consolidated into affiliates; 15% still have Texas ratios higher than 100%; and 13% had managed to bring their Texas ratios below the 100% threshold.
Big institutions explain much of the swings in California and Washington. United Commercial Bank in San Francisco first posted a Texas ratio higher than 100% in the third quarter of 2009, for instance, when it had $10.9 billion in assets. California National Bank in Los Angeles first crossed the mark in the second quarter of 2009, when it had $7.1 billion in assets. Both failed by the end of that year. (U.S. Bancorp (USB)
In Washington, Sterling Financial Corp.’s (STSA) principal subsidiary reached a Texas ratio of 150% in the second quarter of 2010, when it had $9.2 billion of assets. The company was recapitalized with the assistance of the Treasury Department in August that year in
For the mostly smaller banks still struggling with high Texas ratios in Georgia, Illinois and Florida, there is some good news: outcomes for such institutions have been improving (see the second chart), perhaps reflecting a better economy.
It’s true that many banks that have recently exceeded a Texas ratio of 100% have not had much time to fail. (On average since late 2007, it took about a year from when a bank first breached the threshold for it to collapse, among those that were in fact seized.) Still, recent groups have already restored themselves to Texas ratios of less than 100% at higher rates than earlier in the cycle – about 32% of those that reached the mark in 2011 compared with 19% in 2009.
