States that have already taken the brunt of the pain due to the rash of bank failures since the beginning of 2008 look to have more trouble on the horizon.

Based on early regulatory data for 96% of the nation's approximately 8,500 banks, Illinois, Georgia and California have more than half of the 78 institutions considered undercapitalized by regulatory capital guidelines as of March 31. Georgia leads all states with 11 bank and thrift failures since the start of 2008, followed by California with nine and Illinois, tied with Florida and Nevada with four.

In comparison, 60 banks and thrifts reported being undercapitalized per ordinary regulatory guidelines as of Dec. 31. Since 22 of those institutions have failed so far, it's clear that being undercapitalized is a good indicator of an institution's risk of failure.

The preliminary list of undercapitalized banks for the first quarter doesn't include savings and loan institutions, since data was available for only 10% of the approximately 800 U.S. thrifts.

The table below lists the 78 undercapitalized banks, in order of ascending Tier 1 leverage ratio:

Undercapitalized Banks - 3/31/09 -
Preliminary Regulatory Data ($Mil)
SNL Financial

In order to be considered well-capitalized, a bank needs to maintain a Tier 1 leverage ratio of 5%, along with a Tier 1 risk-based capital ratio of 6% and a total risk-based capital ratio of 10%. The respective minimum ratios for a bank to be considered adequately capitalized are 4%, 4% and 10%.

Please keep in mind the following:

  • The list is based on preliminary data: Only banks are included, since data for 96% of U.S. banks was available Monday from our data provider, SNL Financial. Only 10% of the data for savings and loan institutions was available. This preliminary regulatory data is often corrected or revised before being finalized.
  • The data is for the banks themselves, not holding companies.
  • A bank on the list may have raised capital since March 31: Most banks with capital concerns are trying very hard to raise capital any way they can. Some on the list may have raised significant capital privately since filing their March 31 call reports. If your bank is on the list, you should determine if you have any deposits that exceed the FDIC's insurance limits and consider discussing the situation with the institution.

Illinois Takes the Lead

Illinois dominated the list of undercapitalized banks. Seventeen institutions in the state have capital ratios below the minimums required to be considered adequately capitalized under ordinary regulatory capital guidelines. Four Illinois banks already have failed since the start of 2008, which ties the state with Florida and Nevada for third most in that time.

Most of the undercapitalized banks in Illinois were suffering from losses on construction and land development loans, as well as commercial mortgages.

The largest undercapitalized Illinois bank is, by far, Corus Bank NA, a subsidiary of Corus Bankshares ( CORS). TheStreet.com was early in reporting on Corus's troubles from its overconcentration in condominium construction and development loans, back in August 2007. In an early April regulatory filing, the holding company expressed doubt about its viability in light of its dismal loan quality, and last week all of its top executives resigned.

So far, 14 Georgia banks have reported being undercapitalized as of March 31, which is double the total number of undercapitalized banks and thrifts in the state as of Dec. 31.

Georgia's rash of failures have provided prey for large banks in the region, like SunTrust ( STI), Regions Financial ( RF), BB&T ( BBT) and Synovus Financial ( SNV), to pick up market share by acquiring some of the failed institutions' assets.

California had nine banks on the preliminary undercapitalized list for March 31, the largest being California National Bank.

The largest holding company that has acquired failed banks in the state is US Bancorp ( USB), which took over the deposits and branches of Downey Savings and PFF Bank & Trust on Nov. 21.

van Doorn was long Riverside Banking Company, the holding company for Riverside National Bank of Florida, of Fort Pierce, holding shares acquired while employed at the institution.

Philip W. van Doorn joined TheStreet.com Ratings Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.

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