This week we are going to take a look at just how strained things remain in the banking system by examining the Texas Ratio. While this ratio can be calculated in many ways, for our purposes, we will be using the following formula: Texas Ratio = (all loans past due 30 days or more + nonaccrual loans + OREO) / (Tier 1 Capital + loan loss reserves). As we have previously written about, this ratio came from research done on Texas banks during the early 1980s (hence the name) and was tested again on New England bank failures during the 1990s. It has a reasonably high degree of accuracy when asset quality is the biggest issue in the industry and the research found that institutions tended to be severely stressed when this ratio climbed above 100%. While we inherently dislike using any singular metric to analyze banks (given complexities involved overall and certain issues that can occur related to combinations tied to FDIC assisted transactions), we felt the data was compelling enough to provide an update on industry conditions using 3Q data (unadjusted for failures since 9/30).
Based on this data, analysis reveals that Puerto Rico is the most strained of all the states or territories (FDIC insures banks in territories as well). In fact, it comes in with a weighted average ratio for all of its 10 banks of an amazing 122%. Showing just how strained this territory is, we also find that 70% of all banks have a ratio above 100%. Finally, the highest ratio for any bank in the territory is 259%, while the lowest comes in at 33%.
Taking the #2 slot in terms of stress is the state of FL. This state has just over an 85% weighted average Texas Ratio, pointing to a very difficult environment. Overall, its 295 banks have already seen 6 failures since 3Q, so it isn't surprising that FL also holds the #1 spot in terms of bank closures (tied with CA) since quarter-end. Unfortunately for those banks doing business in the Sunshine State, conditions will remain difficult for some time to come. In fact, the data shows 73 banks (about 25% of all banks in the state that haven't failed) are currently carrying a ratio at or above 100%.
Dropping into the 3rd toughest spot and just behind FL at 84% is WA. While this state hasn't seen any failures since the 3Q, the data shows that trend isn't likely to last much longer. In all, 8 banks have a Texas Ratio above 200%, while 23 (about 24% of all banks in the state) are above the 100% threshold.
Coming in at 4th and carrying a weighted average Texas Ratio of 73% is the state of MI. Battered by job losses and carrying the country's highest unemployment rate of 15.1%, the Wolverine State remains under pressure. Here, 15% of banks (excluding the 2 banks that failed since 3Q) have a ratio greater than 100%, with the highest one coming in at 349%.
In the 5th spot is the Sooner State of OK, which has an overall ratio of 69%. OK has only 5 banks of its 252 (about 2%) with a ratio greater than 100%, but as the data shows, many more banks in the state are at levels high enough to push OK into one of the top rankings in the country.
As for the rest of the top 15 states, here they are in order by weighted average ratio: GA (65% overall with 26% of banks >100%); AZ (63% overall with 21% of banks>100%); AK (63%, but skewed by Wells Fargo, Anchorage at 74%); SC (60%); MD (57%); OR (56%); DC (54%); AL (52%); OH (50%); and WI (50%).
Again, no single metric can capture everything going on in these states and territories, but given the heightened focus on asset quality; it is important to stay on top of industry trends and the Texas Ratio is certainly a decent tool to use.