The FDIC has slowed down with its post-2008 onslaught of bank failures, but it hasn’t stopped entirely. Because the number of banks in financial trouble is still significant. While the Federal Reserve has stress tests it can administer to systemically important banks like Citi and Bank of America, most banks’ health is gauged by more old school means: the Texas Ratio.
(Update: All five banks on this list have failed in 2012. Check out our story on the five banks likely to fail in 2013.)
The Texas Ratio is a way of measuring a bank’s health by comparing their non-performing assets to their equity. The ratio is found by finding the sum of the value of delinquent loans and real estate owned and dividing it by the sum of tangible common equity and loan loss reserves.
In essence, the Texas Ratio seeks to find out whether a bank has enough liquidity to cover the bad loans on their books. It’s a good predictor of bank failures, especially post-2008, when community banks are being sunk by their over-concentration in real estate lending.
The rule of thumb with the Texas Ratio is that banks over 1:1, or 100%, are very likely to fail.
The last three bank failures had astronomical Texas Ratios. New City Bank had a Texas Ratio of 390%, Global Commerce Bank’s was 575%, Central Bank of Georgia’s was 320%, SCB Bank’s was 515%, and Charter National Bank and Trust’s was 660%. All of these numbers come from Amateur Investor’s list of banks by Texas Ratio. Having an astronomical Texas Ratio is a good predictor of failure. Of the top five, four have closed this year.
Which banks are up next?
With the caveats that a poor Texas Ratio does not necessarily guarantee a bank will be shuttered, and more importantly that customer deposits will be insured by the FDIC up to $250,000 in the event of a failure — so don’t panic! — here’s a list of the five least healthy banks that are still doing business. A fair warning to their employees and customers — that might not be the case soon. As we learned, the FDIC knows a bank will fail long before they actually shut it down and begins secretly looking for asset buyers in the meantime. The grave might already be dug for these banks:
Security Exchange Bank (Marietta, Ga.): Georgia has lost so many banks in the last few years, it should hardly come as a surprise that a Peach State bank tops the list. Security Exchange Bank currently boasts a staggering Texas Ratio of 1,227%. This two-branch bank in Cobb County looks likely to go the way of so many other Georgia banks. Update: Security Exchange Bank was shuttered by state regulators on June 15, 2012. Fidelity Bank, of Atlanta, has agreed to assume all the deposits. Montgomery Bank & Trust (Ailey, Ga.): Surprise! Georgia tops the list, once again. This rural one-branch bank has a Texas Ratio of 868%. Brutal. Update: Montgomery Bank & Trust was closed by state regulators on July 7, 2012. Ameris Bank agreed to assume all its deposits. Palm Desert National Trust (Palm Desert, Ca.): This small Inland Empire bank has a Texas Ratio of 629%. Inland California has suffered badly during the mortgage crisis, especially cities like Stockton and Fresno. Palm Desert is much further south, though it’s not a surprise to see an obscenely high Texas Ratio here. Update: Palm Desert National Trust was shuttered by the OCC on Friday April 27, 2012. Pacific Premier Bank agreed to assume its deposits and purchase its assets. Jasper Banking Company (Jasper, Ga.): Still in Georgia! Jasper Banking Company of the small town of Jasper, Ga., has a Texas Ratio of 660. Update: Jasper Banking Company was closed by regulators on Friday July 27, 2012. Stearns Bank National Association agreed to assume the bank’s deposits and purchase its assets. Georgia Trust Bank (Buford, Ga.): And number five brings us back to Georgia, of course, with Georgia Trust Bank, which boasts a Texas Ratio of 544%. Update: Georgia Trust Bank was closed by state regulators on Friday July 20, 2012. Community & Southern Bank agreed to assume the bank’s deposits and purchase some assets.
Now, nothing is certain, and you have nothing to fear so long as you keep less than $250,000 with these banks. If for some insane reason your deposits are over $250,000 with one of these institutions — or any institution for that matter! — you should diversify. Otherwise, check back for our bank failure articles, and see if the Texas Ratio is as good a predictor of insolvency as we — and basically everyone else — thinks it is. Considering we’ve had to update this list five times so far this year, it seems the Texas Ratio is a good indicator of potential failure. That said, 32 banks have failed so far in 2012, so it’s certainly not the only predictor.
Don’t see your bank here?
Doesn’t mean it’s necessarily in good health, financially or otherwise. Go check out your bank’s MyBankTracker Report Card here, where you can learn about its fiscal health, customer reviews, fees and locations all in one spot.
Click here for the full list of bank failures in 2012.