The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.NEW YORK ( TheStreet) -- Several weeks back, I wrote that the U.S. banking crisis was not over. As evidence, I pointed to the fact that more than 50% of the 742 banks that borrowed money from the Troubled Asset Relief Program had not even started to pay off their debts. That is costly money for banks -- the dividend rate (read interest) goes from 5% to 9% in four years. That means banks borrowing from TARP in 2008 will start paying 9% this year.
Quite clearly, there are a substantial number of banks still in the "gray" zone with the regulators on all three of the indicators they use. My banking friend wanted me to qualify that statement. He said: "Some of those banks in the 'grey zone' as you put it may be very strong banks that have a low risk profile and thus negating the need for elevated capital levels." OK. Before investing, you should do your own due diligence.
Source: FDIC, TARP Reports
Let's look at Old Second National Bank ( OSBC) as an example. According to my calculations, if Old Second paid off its TARP loan, its Tier 1 ratio would fall to 7.0%. And remember that the regulators now want this ratio to be 10%. My banker friend indicates that the regulators informally now want Tier 1 risk-based ratios to be at least 10%. That would mean all the banks on this list would be under pressure from the regulators not to pay off their TARP loans. Zions Bank ( ZION)is a particularly interesting case. Since it took out its loan in November 2008, it will start paying 9% this year. On March 28, it paid back $700 million. The Tier 1 data appearing in Table 2 were end-December 2011, so it will not reflect the Tier 1 reduction resulting from this payment. I estimate that payment reduced Zions' Tier 1 ratio to 8.6. I can just imagine the Zions executives arguing with the regulators over this: Zions -- we don't want to pay 9.5% for money. Regulators -- we'll let you cut your TARP loan in half, but we will not allow your Tier 1 ratio to fall further, and certainly not to 3.8% which is what it fall to if you repaid TARP the entire $1.4 billion that you owe.
Source: FDIC Banks with negative ROAs are the most dangerous on this list. I would urge investors to avoid them or at least perform your own due diligence on any banks on this list, particularly those with a negative ROA. Depositors? Well of course, your deposits are guaranteed up to $250,000 . . . . Get risky investments out of banks; Force the investment banking arms of these banks to sell off the depository banking; operations And then limit FDIC insurance to banks that manage their own loans and do not trade on their own accounts.