(For PDF package of graphs/charts, click here)

Source data: FDIC Q308 figures

This post is a recreation of a package that I distributed to clients this morning.

Since the failure of IndyMac on July 11 of last year, there have been 31 other mid-size, community or regional banks that have been shut down. The reason that the failure of these banks is interesting to me, and the failure of a very large bank like WaMu is not as interesting to me is simple. Construction loans. So for this look at bank failures I have chosen to remove the WaMu closure and focus on the other 31 banks. WaMu on its own had $300 billion in assets and would have skewed some of the numbers that I present. And like I said, WaMu was a national bank, whereas the rest of the banks on the list are smaller regional or community banks.

The regional and community banks were largely priced out of SFR mortgage lending and therefore became heavily involved in construction lending in most cases with borrowers that they had strong relationships with. But as the housing boom went the way of the dodo, these regional banks have had the unenviable task of both trying to work out loans with their borrowers, which consumed valuable time, while also watching in horror as home prices dropped and public homebuilders dumped lots, sending the market even lower. This report explores recent bank failures by the numbers.

Geography

No surprise in the bar graph or the map. The high volume construction states lead the way. In fact, California, Georgia and Florida account for half of the total number of failed banks. Noticeably absent from this list is Arizona, which was also a very high volume construction state during the boom. However, Arizona does not have the same number of large regional banks that CA and the other states do. Arizona’s largest bank in terms of total assets wouldn’t make the list of the top 15 in CA.

If you are counting bank failures by assets, rather than number of institutions, the figures are even more sobering. California banks made up almost 75% of the assets of the failed institutions. The map on the preceding page shows the location of the failed institutions and a marker that corresponds with the size of the bank by assets. The chart below shows similar data, and it is staggering.

Running Total of Assets of Failed Banks Over Time

Summary Numbers - Banks that have failed since July 11, 2008

The table above shows a theme that becomes familiar when looking at ratios of non-performing loans and REO. Note that non-performing loans will often outnumber REO by a ratio of 7:1 or 8:1. A component of this trend is that the data comes from September of last year. However, the ratio still underlines the fact that banks are knee deep in these problems and very few banks have resolved anything to date. If they had, then the ratio would be getting closer to 1:1.

People who know me know that I often refer to the Texas Ratio when discussing banks that are teetering on failure. The Texas Ratio, so named because it was a fairly reliable way to predict bank failures in Texas in the 1980’s, is calculated in the following way:

(Non-performing Loans + REO)

(Equity + Loan Loss Reserves)

As banks get closer to a Texas Ratio of 1.0 (or $1 in non-performing assets for each $1 in equity and loan loss reserve), the bank’s odds of failure increase significantly.

Combined Texas Ratio of Failed Banks = 1.58

We have compiled our own internal list of banks with severe capitalization problems and the list has thus far proven to be fairly accurate. Since January 1, three of the top five banks with the most severe capitalization problems on our list have failed, while another is teetering on the edge.

Summary

Bank failures since July of last year have been accelerating. It’s likely that this trend will continue and that California will continue to play a major role. California has both a significant number of banks that are heavily involved in construction lending, as well as a severe contraction in pricing which is driving values lower. Eventually the market will begin to recover, but the question at this point is how many banks will become casualties of the contraction.

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