Saturday, September 26, 2009

Banks: Troubled Asset Ratio

by Bill McBride on 9/26/2009 09:25:00 PM

The American University School and MSNBC have created a tool for tracking the "troubled asset ratio" for banks. This tool allows you to search for individual banks.

Here is the description:

[The] “troubled asset ratio” ... compares the sum of troubled assets with the sum of Tier 1 Capital plus Loan Loss Reserves. Generally speaking, higher values in this ratio indicate that a bank is under more stress caused by loans that are not paying as scheduled.

Wendell Cochran, senior editor of the Investigative Reporting Workshop, and a former business reporter for the Kansas City Star, the Des Moines Register and Gannett News Service, was likely the first journalist to create this measure of bank health. He did that while covering banking for the Des Moines Register in the early 1980s. Later, at Gannett News Service, he was involved in projects published at USA TODAY and elsewhere that calculated this ratio for every bank and savings and loan in the nation.

Others do similar calculations. The most widely used is the so-called Texas Ratio, created during the 1980s by a banking consultant. You can find various formulas for calculating this ratio, but they generally are in line with the method used by the Investigative Reporting Workshop. There is no attempt here to value the non-loan assets that may also be causing bank problems, such as mortgage-backed securities, collateralized debt obligations, etc.
According to BankTracker, the national median troubled-asset ratio is 13 (a percentage of Tier 1 Capital plus Loan Loss Reserves). The most recent bank failure, Georgian Bank in Altanta Georgia had a ratio of 198.3.

I looked up a few banks from the Unofficial Problem Bank List with Prompt Corrective Actions:

NameCityStatePCATroubled Asset Ratio
Peoples First Community BankPanama CityFL6/11/2009362.8
Warren BankWarrenMI8/3/2009351.1
Home Federal Savings Bank DetroitMI3/5/2009193.2
Bank of ElmwoodRacineWI7/23/2009182.5
American United BankLawrencevilleGA8/13/2009155.3
Heritage BankTopekaKS3/31/2009149.1
Bank 1stAlbuquerqueNM8/31/2009146.1