Is Your Bank One of the 433 in Immediate Danger of Failure
INVESTING ANSWERS
Tuesday, June 8, 3010
By Andy Obermueller
As the Dow dips below 10,000, it's not just your investments
that might be at risk.
Your bank could be, too.
Let's face it: The global economy is still rough. The European
debt debacle continues to spread from one country to the next, with
no one sure where it will end. Here at home, the recovery is soft
at best.
The best way to evaluate the economy is to ignore the mishmash
of indicators that are released each day and focus on the one
metric that really matters. It's not reported like chain-store
sales or the unemployment rate, but it's nevertheless the best
gauge of how the economy is doing.
This indicator is called the "net charge-off rate." It is the
amount of bank loans that borrowers can't repay, and I think it's
the most telling way to measure the nation's actual financial
health. Say unemployment drops from 10% to 5%. If people still
can't afford to pay back their loans, then the country really
hasn't grown stronger, has it?
The charge-off rate is 1.94%, and it has, astonishingly, grown
fivefold since the beginning of 2007. In a typical year, a bank
should expect to lose about 32 cents for every $100 it lends. Right
now, however, banks are losing $1.94 on $100 in loans.
This problem is made worse by bank's deteriorating financial
condition. At the beginning of 2007, banks had $1.80 in cash
reserves for every dollar of loans that were past due. So even if
all those loans went belly up -- and not all past-due loans will --
the banks were more than covered. Today, banks have only about 80
cents for every dollar of problem loans.
Don't kid yourself into thinking that the worst of the financial
crisis has passed. For some banks, it's just beginning. Eating all
those bad loans is hurting all banks, and many more are going to
fail. The Federal Deposit Insurance Corp. (FDIC) says 77% of banks
are profitable. But that leaves 23% that are bleeding cash.
The FDIC currently has 775 banks on its "Problem Bank" list. So
far this year, 96 banks have failed, about half of which did so in
the second quarter. That's a truly frightening number by historical
standards: About a third of the banks that have failed since 2000
did so in the first 5 months of 2010.
The FDIC does not release its problem loans list, it only says
how many banks are on it. But using a special ratio that measures a
bank's problem loans (the precursor to the loans that are
eventually charged off), investors can determine with a high degree
of accuracy whether their bank is safe.
It's called the "Texas ratio." It was developed by a financial
wizard at RBC Capital Markets named Gerard Cassidy, who used it to
correctly predict bank failures in Texas during the 1980s
recession, and again in New England in the recession of the early
1990s.
The Texas ratio is determined by dividing the bank's
non-performing assets by its tangible common equity and loan-loss
reserves. Tangible common is equity capital less goodwill and
intangibles. As the ratio approaches 1.0, the bank's risk of
failure rises.
Every bank that has failed in the second quarter has had a Texas
ratio of greater than 0.90. In fact the average was about 5.0.
Bank failures are announced on Friday afternoons, after the
close of the week's business. On June 5, Bloomberg news reported
that three banks had failed: TierOne Bank in Nebraska, Arcola
Homestead Savings Bank in Illinois and First National of Rosedale,
Mississippi.
Frankly, none of these failures should have come as a surprise.
After all, Rosedale had the highest Texas ratio of any bank in the
country, at 15.78. TierOne's ratio was 4.05, and Arcola's was
0.91.
Investors simply cannot afford not to know if their bank is one
of the 433 banks I've identified as being in grave danger of
failing. It's crucial that all investors view the list of banks to
ensure that their money is safe. And if your bank has a high or
even a higher-than-average Texas ratio, then for heaven's sake go
in tomorrow and close your accounts. It's always best to get out of
Dodge ahead of the posse.
Using this highly accurate barometer of bank health, I've not
only reassured myself that my own bank -- the highly excellent
Amarillo National -- is safe and sound, I've also made a list of
the top ten banks most likely to fail. If you bank at one of these
institutions or have friends or loved ones who do, please pass this
information along to them:
The Top Ten Banks in Danger of Failure as of June 9,
2010 are:
- USA Bank, Port Chester, NY -- FAILED 7/9/10
- First Commerce Community Bank, Douglasville, GA
- SouthWestUSA Bank, Las Vegas, NV
- High Desert State Bank, Albuquerque, NM -- FAILED 6/25/10
- Bank of Ellijay, Ellijay, CA
- Eastern Savings Bank, Hunt Valley, MD
- ISN Bank, Cherry Hill, NJ
- Habersham Bank, Clarksville, GA
- Ravenswood Bank, Chicago, IL
- First National, Savannah, GA -- FAILED 6/25/10
I don't want to see any bank go under. But the fact is many have
and many more will as the financial system works through its
mountain of bad loans. The best way to predict which banks are in
hot water is to use the Texas ratio. One bit of good news is that
the 20 publicly traded banks in the S&P 500 have low Texas
ratios. These large banks are strong. Too many others, however, are
not. See the list of 433 U.S. banks in danger of
failing immediately, and ensure that your money is safe.
About the author: Andy Obermueller is the
Editor of Government-Driven Investing, the only
publication in the U.S devoted to helping individual investors
profit from the trillions of dollars in government spending each
year. Andy is a research fanatic who spends dozens of hours each
week poring over government data and corporate finances. He then
takes his most profitable ideas and presents them to subscribers
each month via Government-Driven Investing.