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%.

The list also includes financial strength ratings provided by Weiss Ratings. Weiss Ratings uses a very conservative ratings model, placing the greatest weight on capital strength, credit quality and earnings stability to assign ratings ranging from A-plus (Excellent) to E-minus (Very Weak).

The Illinois bank with the highest level of nonperforming assets as of March 31 was Builders Bank of Chicago, which had an NPA ratio of 37.49%. The institution is operating under a May 2010 Federal Deposit Insurance Corp. consent order, under which Builders Bank agreed to improved oversight by its board of directors and to achieve and maintain a total risk-based capital ratio of at least 13%. That ratio was 11.91% as of March 31. The bank's holding company Builders Financial filed for chapter 11 bankruptcy protection in November.

Largest Illinois Banks

The banks with the largest deposit market shares in Illinois are out-of-state giants, With JPMorgan Chase Bank NA (the main banking subsidiary of JPMorgan Chase ( JPM)) having a 13.5% market share in the state as of June 30, 2010, according to the most recent FDIC data. Second place in deposit gathering in Illinois goes to Bank of America, NA, which is the main banking subsidiary of Bank of America ( BAC), with a 9% market share.

Aside from Northern Trust Company, which is the largest bank in the state and focuses on wealth management, the larger players in the state are looking for better "prospects for loan growth," which "go hand in hand with the economy," according to Rodis, who also said that "some of the numbers of the past few weeks have been weak, but some bankers are starting to see some light at the end of the tunnel. "

Here are the 10 largest Illinois banks, along with key metrics as of March 31:

The largest bank chartered in Illinois is Northern Trust Company, the main subsidiary of Northern Trust Corp. ( NTRS). The bank subsidiary earned $112.8 million during the first quarter, for a return on average assets (ROA) of 0.64%. The bank's earnings declined from $131.8 million in the fourth quarter and $123.6 million in the first quarter of 2010, as trust income declined and employee compensation expenses increased.

The second-largest Illinois bank is Harris NA, which is a subsidiary of Bank of Montreal ( BMO). BMO's acquisition of Marshall & Ilsley ( MI) of Milwaukee for $5.8 billion in is expected to be completed in July. Harris NA reported a first-quarter net loss of $27 million, which exceeded its fourth-quarter net loss of $20.5 million, and compared to a profit of $8.6 million in the first quarter of 2010.

The bank's net interest margin -- essentially the difference between the average yield on loans and securities investments and the average cost of deposits and borrowings -- continued to narrow, to 1.84% in the first quarter, from 1.98% the previous quarter and 2.23% a year earlier, according to SNL Financial. In comparison, the aggregate net interest margin for all U.S. banks and thrifts during the first quarter was 3.66%, according to the FDIC.

The next largest institution in the state held by a publicly traded bank holding company is PrivateBank & Trust of Chicago, which is the main subsidiary of PrivateBancorp ( PVTB). The bank earned $16.8 during the first quarter, for an ROA of 0.54%. In comparison, the bank earned $18.9 million in the fourth quarter and posted a net loss of $12 million in the first quarter of 2010.

PrivateBank & Trust's first-quarter provision for loan losses was $37.6 million, increasing from $36.8 million the previous quarter but down sharply from $71.3 million a year earlier.

MB Financial Bank, NA is held by MB Financial ( MBFI). The bank has acquired six failed institutions since the current credit cycle began in 2008, growing its balance sheet 28% since the end of 2007. The bank earned $7.3 million, improving from $3.6 million in the fourth quarter and $1.6 million during the first quarter of 2010.

After the holding company announced its first-quarter results, Brian Martin of FIG Partners reiterated his "outperform" or "buy" rating for MB Financial, with a price target of $23, saying the shares were "undervalued relative to normalized" earnings, which he estimated would be $1.46 a share. Martin's target represents a 24% premium to Friday's closing price of $18.48.

Strongest Illinois Banks and Thrifts

Based on Fourth-quarter financial reports, 59 Illinois institutions were assigned "recommended" ratings of B-plus or above by Weiss Ratings:

All of the Illinois banks and thrifts on Weiss's recommended list were strongly capitalized as of March 31, with total risk-based capital ratios exceeding 13.5% and 32 had total risk-based capital ratios exceeding 20% or twice the level most institutions need to be considered well-capitalized by regulators. More than half had first-quarter returns on average assets exceeding 1% and nearly all achieved a first-quarter ROA exceeding 0.75%. In comparison, the aggregate first-quarter ROA for all U.S. banks and thrifts was 0.87%, according to the FDIC.

Thorough Bank Failure Coverage

There have been 23 bank failures so far during 2011, following 157 during 2010.

All bank and thrift failures since the beginning of 2008 are detailed in TheStreet's interactive bank failure map:

The bank failure map is color-coded, with the states having the greatest number of failures highlighted in dark gray, and states with no failures in light green. By moving your mouse over a state you can see its combined 2008-2010 totals. Then click the state to open a detailed map pinpointing the locations and providing additional information for each bank failure.

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--Written by Philip van Doorn in Jupiter, Fla.

>To contact the writer of this article, click here: Philip van Doorn.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., 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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