Formula devised in 1980s financial crisis points to looming problems for some TARP recipients

As the country finds itself in the midst of the biggest banking crisis in years, analysts are paying heightened attention to a statistic called the Texas ratio, which they say can be a predictor of future troubles for a particular institution.

BailoutSleuth has determined that 11 recipients of TARP funds are on the list of the 200 active banks with the highest Texas ratios in the country.

A bank with a high Texas ratio is not necessarily at risk for imminent failure. But some who follow bank trends view the list as a sort of "unofficial" version of the super-secret troubled banks list maintained by the Federal Deposit Insurance Corp.

The ratio measures credit problems at a bank by comparing troubled loans to capital. The exact equation is this: Non-performing assets and loans, plus loans that are more than 90 days delinquent, divided by tangible equity capital plus loan loss reserves. A ratio of more than 1 is considered a warning sign of trouble to come.

The equation got its name because it was originally used to study Texas banks in the 1980s. It was also used to study New England banks in the early 1990s.

Not all banks with high ratios fail, but almost all banks that fail have high ratios. Ravenswood Bank in Chicago, the only bank shut down by regulators last week,  had the sixth-highest Texas ratio in the country, at 4.59.

Of the 19 bank failures over the last month, all but one of them had Texas ratios above 1.

BailoutSleuth examined a list assembled earlier this summer by former financial journalist Andy Obermueller at InvestingAnswers.com. The list was whittled down to the banks with the 200 highest Texas ratios - they ranged from 1.35 to 5.67 - and cross-referenced with banks that received taxpayer aid through the Troubled Asset Relief Program.

Of the active banks with the country's highest Texas ratios, 11 banks (or their holding companies) received government investments through TARP's Capital Purchase Program. They are:

--  Sterling Financial Corporation, holding company for Sterling Savings Bank ($303 million in aid)

·      -  --   Flagstar Bancorp, holding company for Flagstar Bank FSB ($266.7 million)

·          -- Dickinson Financial Corporation II, holding company for Southern Commerce Bank N.A.Bank Midwest N. A.; and SunBank, N.A. ($146.1 million). BailoutSleuth reported on Dickinson earlier this summer, when all of its banks were subjected to federal enforcement action.

·         -- IBERIABANK Corp., holding company for Iberiabank ($90 million) RETURNED

·        --  Rogers Bancshares, holding company for Metropolitan National Bank ($25 million)

·        -- Central Bancorp , holding company for United Central Bank ($22.5 million)

·        -- Premier Financial Bancorp, holding company for Adams National Bank ($22.3 million)

·        -- First Sound Bank ($7.4 million)

·        --  Citizens Commerce Bancshares, holding company for Citizens Commerce National Bank ($6.3 million)

To see BailoutSleuth's searchable database of banks and their Texas ratios, go here.

Why does it matter if a TARP bank is on the list? Because when TARP banks fail, taxpayers lose money. Taxpayers are expected to lose most or all of all their investment in TARP recipients Midwest Bank and Trust Co., Pacific Coast National Bank, and United Commercial Bank, all of which failed, as well as CIT Group Inc., which filed for bankruptcy. They combine for $2.7 billion in taxpayer money that was wiped out.

None of the TARP recipients on BailoutSleuth's list have paid back their TARP aid, except for IBERIABANK Corp., which fully redeemed the Treasury Department's investment in March 2009 -- less than four months after receiving it. That means nearly $800 million of taxpayer money is at risk due to its investment in institutions that may be shaky.

And even when TARP banks don't fail, taxpayer money can be lost. In fact, that's already happened with one of the banks identified above by BailoutSleuth.

Last fall, the FDIC took enforcement action against Sterling Savings Bank, citing its "unsafe or unsound banking practices."

As the bank tries to recapitalize, taxpayers are now taking a hit. An agreement between the company and the Treasury Department made earlier this year causes taxpayers to exchange shares in the company valued at $303 million for shares values at $75.8 million. Essentially, Treasury forgave $227.2 million of Sterling's debt.

The company is trying to raise $720 million in new capital, and in May the company announced a deal in which in which two private equity firms -- Warburg Pincus Private Equity X L.P. and Thomas H. Lee Partners L.P. -- would each invest $139 million in the company and each get a 20 percent ownership stake in it.

The Treasury deal was a condition of the equity firms' investment, and without it, the bank would likely have been unable to raise that new capital. If that bank had then failed, taxpayers might have lost their entire investment.

Exchange agreements like the one Treasury made with Sterling aren't uncommon when a TARP bank is suffering. Treasury has made similar arrangements with Pacific Capital Bancorp and The South Financial Group, as BailoutSleuth recently reported.

But whenever a TARP bank finds itself in such bad financial shape that Treasury has to forgive the obligation - and whenever TARP bank appears on a list like the Texas ratio roundup - it undercuts Treasury's often-stated argument that it gave taxpayer money only to healthy banks. 

And regardless of the reasons for Treasury's exchange agreement, nearly a quarter billion dollars of taxpayer funding is gone, with little show for it other than a lifeline for struggling regional bank.

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