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Investigative reporter Bill Dedman of msnbc.com
By Bill Dedman Investigative reporter
NBC News
updated 12/15/2009 7:50:32 AM ET 2009-12-15T12:50:32

The number of banks with risky levels of bad loans continues to climb rapidly, particularly in the West and Southeast, according to federal data analyzed by msnbc.com and the Investigative Reporting Workshop at American University in Washington.

A total of 369 banks had high “troubled asset ratios” at the end of September, up from 297 in June, an increase of one-fourth, according to the analysis. A high ratio means a bank had more troubled loans than money set aside to cover potential losses.

The states with the heaviest concentrations of banks with high levels of bad loans are Nevada, Washington, Florida, Arizona, Georgia, Oregon and Utah.

Here are four ways you can check the health of any bank or credit union in the United States:

The new analysis relies on information reported by banks to the Federal Deposit Insurance Corp. on Sept. 30. Journalists at American University calculated each bank's troubled asset ratio, which compares troubled loans against the bank's capital and loan loss reserves.

Troubled assets include loans that are 90 days or more past due, loans on which the bank is no longer collecting interest, and real estate that the bank already owns, usually through foreclosure. A similar measure, known as a Texas Ratio, is commonly used by bank analysts as an indicator of stress on a bank, though such ratios can't capture all the nuances of a bank's condition.

Nationwide, the number of banks on the edge continues to rise. At the end of 2007, before the recession, just 24 banks had troubled asset ratios greater than 100, meaning they had more troubled loans than money to cover them. At the end of 2008, the number reached 163. This year it has more than doubled again.

Depositors are protected
The American Bankers Association opposes the sharing of ratios like these with the public, and cautions that a heavy debt load does not ensure that a bank will fail.

The FDIC has said its “problem list” of troubled banks grew to 552 at the end of September, its highest level in 16 years, but that list is secret. That's why external analysts turn to shorthand formulas such as the troubled asset ratio.

While the troubled asset ratio is not a predictor of bank failure, and many banks with high ratios have survived, 117 of the 133 banks that have failed so far this year had ratios greater than 100 in their last quarter, American University reported.

For example, the three banks that failed this past Friday had ratios of 181 (SolutionsBank of Overland Park, Kan.), 499 (Republic Federal Bank of Miami), and a whopping 2,168 (Valley Capital Bank of Mesa, Ariz.) That's not the highest ratio this quarter; First DuPage Bank of Westmont, Ill., had a ratio of 22,501 at the end of the quarter; it was taken over by the FDIC in October.

Even when a bank does fail, no depositor has lost a dime in insured deposits since the FDIC was created in 1934. That protection has its limits. The basic limit had been $100,000 per depositor per bank, but has been increased to $250,000 through Dec. 31, 2013. The FDIC has more detailed information and a calculator to help you determine your level of protection.

In short, the FDIC's advice boils down to this: If your deposits are under the FDIC limits, you're protected even if your bank should fail. If your deposits exceed those limits, the best protection is to move deposits now into smaller accounts at more than one FDIC-insured bank.

Concentrated in a few states
The rising troubled asset ratios show the increasing pressure that the recession and bad loans, particularly on commercial real estate, have placed on the nation's banks.

While 12 states have not a single bank with a ratio over 100, they're rampant in a few states. Here are the top 10 states in terms of percentage of banks with high levels of risky debt. Click the state's name to look up any bank in that state.

  1. Nevada, 21.1 percent of the banks headquartered in the state have ratios over 100. That's 8 out of 38 banks in the state. Another 7 have ratios over 50.
  2. Washington, 20.0 percent, or 19 out 95. Another 18 are over 50.
  3. Florida, 19.8 percent, or 58 out of 293. Another 69 are over 50.
  4. Arizona, 19.2 percent, or 10 out of 52. Another 11 are over 50.
  5. Georgia, 18.8 percent, or 59 out of 313. Another 62 are over 50.
  6. Oregon, 16.2 percent, or 6 out of 37. Another 4 are over 50.
  7. Utah, 15.6 percent, or 10 out of 64. Another 8 are over 50.
  8. Michigan, 9.5 percent, or 14 out of 148. Another 21 are over 50.
  9. California, 7.0 percent, or 21 out of 302. Another 35 are over 50.
  10. Minnesota, 5.9 percent, or 25 out of 422. Another 59 are over 50.

(The District of Columbia has a higher rate of banks at risk, but few bank headquarters. Two out of six D.C. banks have ratios over 100.)

At the end of the third quarter, 4.6 percent of all 8,109 banks insured by the FDIC had ratios greater than 100, up from 3.6 percent at the previous quarter. That rise occurred even while the system has been shedding the sickest banks through FDIC takeovers.

Largest banks with heavy debt loads
Four of the 100 largest banks in the U.S. by assets had ratios greater than 100 at the end of the third quarter. They were:

  • The 32nd largest bank, Wachovia Mortgage, Federal Savings Bank, North Las Vegas, saw its troubled asset ratio rise from 25 in December 2007 to 105 in the latest data. The bank's parent company has received TARP funding, which may not be reflected in the ratios.
  • The 77th largest, Flagstar Bank, Troy, Mich., has had its ups and downs. Its ratio has risen from 32 in December 2007 to a high of 106 in September. The bank's parent company has also received TARP funding.
  • The 82nd largest, Westernbank, Mayaguez, Puerto Rico, has seen its ratio rise dramatically from 39 in December 2007 to 145 in both June and September.
  • And No. 100, AmTrust Bank, Cleveland, Ohio, failed on Dec. 4. Its ratio rose from 61 in December 2007 to 265 in September.

Along the same lines, the national median for the troubled asset ratio continued to rise: At the end of 2007, the median was only 5.0 — half the banks in the U.S. were above that level, and half below. The midpoint rose to 9.9 at the end of 2008 and hit 14.1 in September.

The total of badly past due loans and foreclosed properties at all banks reached more than $348 billion in September, up from $307 billion for those same banks in June and only $87 billion at the end of 2007. More details of the overall pattern are in the American University report.

“For now, the credit adversity we have been observing for some time remains with us, and we expect that it will be at least a couple of more quarters before we see a meaningful improvement in that trend,” FDIC Chairman Sheila Bair said in a quarterly summary published Nov. 24.

Limitations of the ratio
The troubled asset ratio was devised in the early 1980s by journalist Wendell Cochran, now senior editor of the Investigative Reporting Workshop at American University Others do similar calculations.

The reports in most cases do not include the billions in federal money injected onto the balance sheets of bank holding companies in the form of so-called TARP funds.

The ratio does not include the value of non-loan assets that have caused so much trouble in the past year, particularly for some larger banks that moved away from traditional commercial banking. Nor does it reflect mortgage-backed securities, collateralized debt obligations, etc. In this way, the ratio may underestimate the real depth of problems.

And no ratio can get at all the detailed information — such as the individual loan files, quality of management, potential for raising other capital — that a regulator would use to evaluate a bank's safety and soundness.

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