More banks considered at-risk

SAN FRANCISCO – More than 1,000 banks may fail during the next three to five years as the recession intensifies and loan losses climb, an analyst at RBC Capital Markets estimated this week.

And among large banks, Sterling Financial, of Spokane, has topped analyst Gerard Cassidy’s early-warning system for spotting future trouble.

In 2008, Cassidy forecast 200 to 300 bank failures, but now he says the environment has since deteriorated.

“Residential mortgage delinquencies remain at record levels, home-equity loan defaults are steadily rising and residential construction and land loan non-performing assets are skyrocketing for lenders with excess exposure to the weakest housing markets in the U.S.,” Cassidy wrote in a note to clients.

“In conjunction with the slowdown in the economy, credit deterioration has accelerated in the commercial and industrial and commercial real estate loan areas,” he said.

Since the mortgage-fueled credit crunch erupted in 2007, 34 banks have failed in the United States. While Washington Mutual became the biggest bank failure in history last year, Cassidy expects most of the banks that collapse will be relatively small, with less than $2 billion in assets.

Cassidy and his colleagues developed the warning system for spotting trouble at banks using a calculation known as the Texas Ratio. It measures credit problems as a percentage of the capital a lender has available to deal with them. The formula divides the number of a bank’s non-performing loans, including those 90 days delinquent, by its tangible equity capital plus money set aside for future loan losses.

Cassidy came up with the ratio after covering Texas banks in the 1980s. He noticed that when problem assets grew to more than 100 percent of capital, most of the Texas banks in that precarious position ended up failing.

Among the 50 largest U.S. commercial banks by assets, Sterling Financial had the highest Texas Ratio at the end of the fourth quarter. The ratio of 54 percent was up from 45.4 percent in the third quarter and 15.6 percent at the end of 2007, according to RBC data.

Sterling recently reported a net loss for fourth-quarter 2008 of $356.3 million, or $6.87 a share, compared with net income of $16.9 million, or 33 cents a share, for the 2007 period. For the full year, the net loss was $336.7 million, or $6.51 a share, compared with net income of $93.3 million, or $1.86 a share, in 2007.

The bank suspended its dividend and said executive officers and some senior officers would not receive cash bonuses for 2008.

Non-performing construction loans of almost $485 million did much of the damage in 2008, Sterling said, with $117.4 million of that in Portland.

Sterling Executive Vice President Dan Byrne said the Texas Ratio was developed to assess the condition of savings and loan institutions, not commercial banks.

“It’s unfortunate we got on a list like this using what I think is an antiquated measure,” he said, adding that the Texas Ratio is not one used by regulators to assess a bank’s condition. “By all measures, our capital is very strong in their eyes,” he said.

AmericanWest Bancorporation showed up on another list of undercapitalized banks, released by Highline Financial Corp.

President Patrick Rusnak acknowledged AmericanWest falls short of one of the three benchmarks used by regulators to determine whether a bank is well-capitalized, but he said efforts are under way to get the bank above that standard.

In his research report, Cassidy calls on investors to “avoid the bank stocks” during this precarious climate and gloomy outlook hanging over the industry.

“We are nowhere near the end of this down leg in the current credit cycle,” Cassidy said.