Is Your Bank in Immediate Danger of Failure?

As the Dow dips below 10,000, it's not just yourSavings Bank in Illinois and First National of Rosedale,
investments that might be at risk.Mississippi. On June 11, it was reported that another
Your bank could be, too.bank, Washington First International Bank, was seized.
Let's face it: The global economy is still rough. TheAnd June 18, it was Nevada Security Bank.
European debt debacle continues to spread from oneFrankly, none of these failures should have come as a
country to the next, with no one sure where it will end.surprise. After all, Rosedale had the highest Texas
Here at home, the recovery is soft at best.ratio of any bank in the country, at 15.78. TierOne's
The best way to evaluate the economy is to ignoreratio was 4.05, and Arcola's was 0.91.
the mishmash of indicators that are released each dayInvestors simply cannot afford not to know if their
and focus on the one metric that really matters. It's notbank is one of the ten banks I've identified as being in
reported like chain-store sales or the unemploymentgrave danger of failing. It's crucial that all investors view
rate, but it's nevertheless the best gauge of how thethe list of banks to ensure that their money is safe.
economy is doing.And if your bank has a high or even a
This indicator is called the "net charge-off rate." It is thehigher-than-average Texas ratio, then for heaven's
amount of bank loans that borrowers can't repay, and Isake go in tomorrow and close your accounts. It's
think it's the most telling way to measure the nation'salways best to get out of Dodge ahead of the posse.
actual financial health. Say unemployment drops fromUsing this highly accurate barometer of bank health,
10% to 5%. If people still can't afford to pay back theirI've not only reassured myself that my own bank --
loans, then the country really hasn't grown stronger,the highly excellent Amarillo National -- is safe and
has it?sound, I've also made a list of the top ten banks most
The charge-off rate is 1.94%, and it has, astonishingly,likely to fail. If you bank at one of these institutions or
grown fivefold since the beginning of 2007. In a typicalhave friends or loved ones who do, please pass this
year, a bank should expect to lose about 32 cents forinformation along to them:
every $100 it lends. Right now, however, banks areThe Top Ten Banks in Danger of Failure as of June 9,
losing $1.94 on $100 in loans.2010 are:
This problem is made worse by bank's deteriorating1. USA Bank, Port Chester, NY
financial condition. At the beginning at 2007, banks had2. First Commerce Community Bank, Douglasville, GA
$1.80 in cash reserves for every dollar of loans that3. SouthWestUSA Bank, Las Vegas, NV
were past due. So even if all those loans went belly up4. High Desert State Bank, Albuquerque, NM
-- and not all past-due loans will -- the banks were5. Bank of Ellijay, Ellijay, CA
more than covered. Today, banks have only about 806. Eastern Savings Bank, Hunt Valley, MD
cents for every dollar of problem loans.7. ISN Bank, Cherry Hill, NJ
Don't kid yourself into thinking that the worst of the8. Habersham Bank, Clarksville, GA
financial crisis has passed. For some banks, it's just9. Ravenswood Bank, Chicago, IL
beginning. Eating all those bad loans is hurting all banks,10. First National, Savannah, GA
and many more are going to fail. The Federal DepositI don't want to see any bank go under. But the fact is
Insurance Corp. (FDIC) says 77% of banks aremany have and many more will as the financial
profitable. But that leaves 23% that are bleeding cash.system works through its mountain of bad loans. The
The FDIC currently has 775 banks on its "Problembest way to predict which banks are in hot water is to
Bank" list. So far this year, 83 banks have failed, aboutuse the Texas ratio.
half of which did so in the second quarter. That's aOne bit of good news is that the 20 publicly traded
truly frightening number by historical standards: About abanks in the S&P 500 have low Texas ratios.
third of the banks that have failed since 2000 haveInstitution - Ticker - Texas Ratio
done so in the first 5 months of 2010.Northern Trust - NTRS - 0.04
The FDIC does not release its problem loans list, it onlyPeoples United - PBCT - 0.11
says how many banks are on it. But using a specialHudson City Bancorp - HCBK - 0.15
ratio that measures a bank's problem loans (theComerica - CMA - 0.20
precursor to the loans that are eventually charged off),Fifth Third - FITB - 0.23
investors can determine with a high degree ofCitigroup - C - 0.25
accuracy whether their bank is safe.Keybank - KEY - 0.27
It's called the "Texas ratio." It was developed by aM&T - MT - 0.29
financial wizard at RBC Capital Markets namedFirst Horizon - FHN - 0.32
Gerard Cassidy, who used it to correctly predict bankMarshall & Isley - MI - 0.37
failures in Texas during the 1980s recession, and againRegions Financial - RF - 0.37
in New England in the recession of the early 1990s.Zion Bancorp - ZION - 0.42
The Texas ratio is determined by dividing the bank'sJ.P. Morgan Chase - JPM - 0.45
non-performing assets by its tangible common equityPNC Financial - PNC - 0.45
and loan-loss reserves. Tangible common is equityBB&T - BBT - 0.45
capital less goodwill and intangibles. As the ratioHuntington - HBAN - 0.48
approaches 1.0, the bank's risk of failure rises.Suntrust - STI - 0.54
Every bank that has failed in the second quarter hasBank of America - BAC - 0.55
had a Texas ratio of greater than 0.90. In fact theUS Bank - USB - 0.60
average was about 5.0.Wells Fargo - WFC - 0.64
Bank failures are announced on Friday afternoons,And again, if you have friends or loved ones who bank
after the close of the week's business. On June 5,at one of the listed institutions, please pass this
Bloomberg news reported that three banks had failed:information along to them promptly.
TierOne Bank in Nebraska, Arcola Homestead