Remember when the federal government bailed out the big banks? Wasn’t that long ago.
Thanks to the Great Recession, we learned new terms like credit default swaps, mortgage-backed securities and troubled assets. Most of that dust has settled.
But I recently stumbled upon a little-known bank statistic that had big implications in forecasting a bank’s failure – or at least a sell-off. Remember the troubled asset ratio?
In the Springfield market, we saw high troubled asset ratios precede the failure of Southwest Community Bank (a whopping 328.4 against a national median of 14.5 – more on that later but think of it like golf scores) and the sales of Village Bank and Citizens National Bank.
Of the 133 banks that failed in 2009, 117 had troubled asset ratios in the triple digits.
For those keeping score at home, the ratio compares a financial institution’s troubled assets with the sum of Tier 1 capital plus loan loss reserves. A higher ratio is an indicator of greater stress on the bank due to loans not paying as scheduled. The stat is proven.
In writing for Springfield Business Journal’s upcoming 40 Under 40 awards publication, I was researching Brian Straughan’s career and his role in starting Springfield First Community Bank. He and two other bank executives, backed by some hefty local investors, opened the de novo bank in the throes of the Great Recession. And they watched other banks drop like flies as Federal Deposit Insurance Corp. enforcers came knocking.
One rabbit hole led me to Springfield First Community Bank’s troubled asset ratio chart produced by Banktracker/the Investigative Reporting Workshop of American University. For the record, SFC’s ratio of 2.7 has some distance below the national median of 5.9. But twice in its young history the Springfield bank rose above the national barometer: in late 2012 to early 2013 and briefly in third-quarter 2014. SFC’s highest ratio was 12.5 in first quarter 2013. Still relatively healthy. Remember, the greatest casualties come with ratios above 100.
In reviewing banks operating in our market, the lowest scores belong to First Home Bank, Legacy Bank & Trust Co., Wood & Huston Bank and OakStar Bank, all at 2 or below.
The market is healthy as the troubled asset ratio goes.
The highest ratios don’t exceed 25. Bank of Bolivar is at 23.2, but it’s been as high as 48.2 in late 2011. Citizens Bank of Rogersville, 22.5, and Guaranty Bank, 19.5, have always been above the national median.
In any case, it’s good to see the Banktracker organizers with American University School of Communication are still collecting the data. The number of failed banks has slowed every year since 2010 to only eight last year, according to the FDIC. The slate has been clean so far this year.
While costly and criticized, it’s safe to say the bailout worked.
Springfield Business Journal Editor Eric Olson can be reached at eolson@sbj.net.
