Chicago Lending Strangled By Regulators

NEW YORK (TheStreet) -- TheStreet's analysis of first-quarter data shows that most of the largest banks in the state are now profitable, although credit costs are still placing a major drag on earnings.

What concerns Illinois bankers the most right now, according to bank analyst John Rodis, is that "credit is still an issue, as real estate values in Chicago are still at or near their lows."

Regulatory uncertainty is also a major issue, as the banks "are still waiting to see what the final rules are going to be, regarding capital and the Durbin Amendment, he said."

Linda Koch, the president and CEO of the Illinois Bankers Association, told TheStreet that in addition to the "arbitrary capital requirements" of regulators, bankers are having difficulty with the regulatory approach to troubled debt restructurings.

"Reguators are forcing lenders to harshly write down TDRs, so bankers have a disincentive to restructure loans and keep businesses afloat," Koch said. For commercial borrowers whose loans are maturing, renewing or extending the credit is becoming a problem, even if the loan payments are current, because of the decline in the value of real estate collateral.

"What our bankers need, since the loans are good, since the loans are fully performing, there's no reason not to extend credit, even though the properties have beeen devalued. "

The shakeout of the weakest banks and thrifts in the state has slowed considerably, with four institutions in the Land of Lincoln being shuttered by regulators this year, after 16 failed during 2010.

Since the current wave of bank and thrift closures began in 2008, Illinois has seen 42 institutions shuttered by regulators, trailing only Georgia, which has had 63 failures and Florida, which has had 50 bank and thrift closures.

According to data provided by SNL Financial, nine of the 596 banks and thrifts headquartered in Illinois -- excluding the two that have failed this quarter -- were undercapitalized per ordinary regulatory guidelines as of March 31 and were included on TheStreet's first-quarter Bank Watch List.

Since the Watch List is based solely on capital ratios, we take a different approach on our quarterly coverage of banks in key states, by looking at overall credit quality to identify troubled institutions.

Illinois Banks with Weakest Asset Quality

The following list includes all banks in the state with nonperforming assets comprising more than 15% of total assets:

Nonperforming assets (NPA) include nonaccrual loans, loans past due 90 days or more and repossessed assets. Government-guaranteed loan balances are excluded. The ratio of net charge-offs to average loans is annualized. The total risk-based capital ratios needs to be at least 8% for most institutions to be considered adequately capitalized by regulators and 10% for most to be considered well-capitalized. Most of the undercapitalized banks on the above list are operating under regulatory orders to achieve and maintain total risk-based capital ratios higher than 10%.

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