The Great Recession struck Americans hard and many financial institutions nationwide struggled to keep their heads above water. Many couldn’t manage to stay afloat.
Since October 2000, the Federal Insurance Deposit Corp. lists hundreds of failed banks across the United States, including 15 in Missouri.
To monitor the signs of failure, consumers and bankers turn to a complex ratio designed as an early warning system to identify potential problem banks. It’s called the Texas ratio.
According to Investopedia, the ratio was developed by Gerald Cassidy and other analysts at RDC Capital Markets in the late 1980s when many financial institutions in Texas got in trouble by lowering lending standards and overextending credit to the energy and real estate sectors. In 1989, Texas had a record 133 failures.
The Texas ratio takes the amount of a bank’s nonperforming assets and loans, as well as loans delinquent for more than 90 days, and divides by the firm’s tangible capital equity plus its loan-loss reserve. A ratio of more than 100 is considered a warning sign.
“All it does is tell the potential problems versus your strength,” said Bob Hammerschmidt, Commerce Bank Springfield region president. “No one measure can tell you how your bank is doing. They all need to be looked at in context, but the Texas ratio is a good indicator of who’s not having any fun.”
Hammerschmidt routinely tracks the Texas ratio, among other ratios, for 34 area banks.
“Over time, you can see a correlation to failure,” he said. “Right now, things are looking up. They aren’t nearly as bad as in 2007, ’08 and ’09. I think capital levels are improving.”
Making the grade
Using data from the Federal Deposit Insurance Corp. and bank comparison site DepositAccounts.com, Springfield Business Journal calculated the Texas ratio for the 37 banks listed by the FDIC in the Springfield metropolitan statistical area.
Rising to the top was Plato-based Legacy Bank & Trust Co., with local branches in Sparta, Rogersville and Mountain Grove. The 108-year old institution was the only bank to score below 2 percent, coming in with a Texas ratio of 1.83 percent.
The top five area banks, based on the Texas ratio calculated bankwide, all scored below 3 percent, with No. 5 Wood & Huston Bank coming in at 2.79 percent.
On the opposite end of the spectrum, Bank of Bolivar bottomed out the list with a Texas ratio of 23.52. While the bottom five scored between 16 and 24 percent, banks aren’t considered vulnerable until reaching a ratio of 50 percent. In comparison, the nation’s worst banks have a ratio exceeding 300 percent.
Citizens Bank of Rogersville has a Texas ratio of 19.96 percent. While the Rogersville-based bank ranks in the bottom five, President Brian VanFosson said it’s an improvement. “We’ve had a little bit of a lag on earnings,” he said, citing lingering effects from the recession. “We are working to clear up some real estate and trying hard to get rid of foreclosure properties.”
With large parcels of foreclosed land in Ozark, Nixa and Stone County on the books, VanFosson said he expects the ratio to dramatically improve within 30 days as the bank unloads some real estate.
“We have one parcel that costs $30,000 a month just in maintenance, upkeep and insurance,” he said. “That all goes right to the bottom line.
“It’s easy to look at the Texas ratio and say the sky is falling, but a lot of work goes into those numbers. We aren’t happy right now, but we aren’t uncomfortable either.”
Midrange on the local list with a Texas ratio of 10.16, Arvest Bank also is working to improve its standing. “We have had challenging times these last couple of years; nobody will deny that,” said Brad Crain, Springfield region president. “In the last few years, we have taken on troubled banks through acquisition. With those come troubled loans you have to deal with.”
Troubled assets
Similar to the Texas ratio, the troubled asset ratio compares the sum of troubled assets with the sum of tier one capital plus loan loss reserves. Simply put, the higher the value, the more stress caused by loans that are not paying as scheduled.
Banks with a high Texas ratio have a similarly high troubled-asset ratio. At Citizens Bank of Rogersville, the ratio is 25.1 percent, the highest on the local list. In September 2011, after multiple quarters in the 45 to 50 percent range, the ratio spiked as high as 50.6 percent.
“A lot of banks are still struggling with troubled assets,” VanFosson said. “As we convert those assets and grow capital, the numbers have gone down.”
VanFosson points to the 2013 purchase of the bank by a group of local investors as a turning point. The following quarter in December 2013, the bank hit a troubled-asset ratio low of 20.4 percent.
In 2010, when Liberty Bank acquired Village Bank, Village had a troubled-asset ratio of 106.2, according to SBJ archives. As Simmons First National Bank took over Springfield’s Southwest Community Bank the same year, it had a ratio of 328.4 before the FDIC shut it down. Empire Bank acquired Citizens National Bank when it had a ratio of 133.6.
With a troubled-asset ratio of 12 at Arvest, double the national median of 6.6 percent, Arvest’s Crain said ratios are a good metric of bank health, but it’s always an ongoing process.
“Ratios like this are always in the back of our minds, but right now, loans are growing and deposits are growing. We believe we are headed down the right path,” he said.
