The Geography of Stress Testing

State-by-State Analysis of Trepp Capital Adequacy Stress Test Q3 2012

Earlier this month, Trepp released its updated Trepp Capital Adequacy Stress Test (T-CAST) results. The test was designed in response to the requirements of the Dodd-Frank financial reform legislation to project future bank capital levels. When a banks projections fail to meet minimum capital ratios, the bank is considered to have failed the stress test. The national results in the most recent T-CAST showed a slight decrease in the overall fail rate, falling from 12.7% to 12.0%. While 12% is a respectable fail rate, we wanted to break out the numbers to illustrate a few areas of interest, namely states with the most improvement or deterioration. For both analyses, states with fewer than 50 banks tested were removed as one or two banks moving in or out of the fail bucket could move the needle significantly. The following chart shows the top ten and bottom ten states in terms of percentage point change in fail rates from Q2 2012 to Q3 2012. A negative is a positive in this instance, as it implies a drop in the failure rate (see North and South Dakota). One encouraging takeaway is that in most cases, the increases in fail risk are smaller than the decreases. In other words, states that are improving are doing so faster than other states are getting worse.

Quarter over Quarter Fail Rate % Movement

North Dakota West Virginia Oklahoma Arkansas South Dakota Colorado South Carolina Missouri Virginia Michigan New York Florida California Kansas Ohio Tennessee Mississippi Montana
-14.00% -12.00% -10.00% -8.00% -6.00% -4.00% -2.00% 0.00% 2.00%

-12.79%

-9.09% -4.51% -3.70% -3.08% -2.83% -2.71% -2.25% -2.22% 0.88% 0.90% 0.94% 0.94% 1.46% 1.80% 1.85% 2.45% 3.46%
4.00% 6.00%


The Geography of Stress Testing February 26, 2013

Next we look at the ten best and worst states in terms of bank failure rate. Interestingly, since our Q2 2012 T-CAST, North Dakota (the most improved state this period) was replaced by Montana (the most deteriorated state this quarter) on the list of states with the worst fail rates. Further, West Virginia jumped to the top of the top ten list, with no failures in the most recent test. It should be noted that states with fewer than 50 banks tested were excluded from these lists.

States with Lowest Fail Rate

State West Virginia Indiana Mississippi Ohio Massachusetts South Dakota Texas Iowa Louisiana Q3 2012 Fail Rate 0.00% 1.98% 3.70% 4.85% 5.80% 6.15% 6.23% 6.89% 7 .09%

States with Highest Fail Rate

State Florida Georgia South Carolina North Carolina Washington Tennessee Illinois Minnesota Montana Q3 2012 Fail Rate 31.75% 29.19% 24.56% 21.62% 20.63% 17 .90% 15.71% 15.20% 14.75%

The large states with the highest T-CAST failure rates are Florida (31.7%), Georgia (29.2%), Tennessee (17 .9%), Illinois (15.7%) and Minnesota (15.2%). These are also the states that have experienced the highest rate of bank closures since 2007 Although conditions in these states have improved, the high . T-CAST failure rates indicate that more progress in capital raising and balance sheet healing is needed before these areas fully emerge from the recent failure cycle. Learn more about the Trepp Capital Adequacy Stress Test and Bank Navigator, the financial risk management platform from which T-CAST results are compiled.
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Trepp Bank Navigator is a comprehensive web-based financial institution surveillance and risk management system. With detailed financial reports, risk scores and rankings on nearly 12,000 commercial banks, thrifts and bank holding companies, Bank Navigator is a useful tool for those concerned with bank financial performance and risk. The Bank Navigator is also a practical solution for developing successful enterprise risk management (ERM) programs.

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Trepp, LLC is the leading provider of information, analytics and technology to the CMBS, commercial real estate and banking markets. Trepp provides primary and secondary market participants with the tools and insight they need to increase their operational efficiencies, information transparency and investment performance. For more information visit www.trepp.com or call U.S. (212) 754-1010 or Europe +44 (0)20 7621 2075. Press Inquiries contact Great Ink at (212) 741-2977 . 2