Telltales of the Next Likely Bank Failures

These 10 banks have high Texas Ratios, a comparison of troubled loans to capital, which can be an early warning sign of stress

by Mara Der Hovanesian

U.S. banks large and small are buckling under the pressure of the credit crisis. The Federal Deposit Insurance Corp. has seized 13 institutions this year, most recently Washington Mutual. The regulator, which maintains a list of "problem" banks, doesn't disclose which others raise red flags. But one measure, the so-called Texas Ratio, may offer a clue.

Developed by RBC Capital Markets analyst Gerard Cassidy in the 1980s, the formula was first used to forecast which Texas banks could stumble during that decade's downturn, another one tied to real estate. The ratio compares a bank's troubled loans to its capital. It can be an early warning sign of stress. If the amount of bad loans equals or exceeds the amount of capital—a ratio of 100% or higher—it may indicate a bank won't have the money to cover losses. That doesn't mean disaster is inevitable; a bank can improve its fortunes, for example, by raising more capital. Here's a list from research firm Highline Financial of 10 banks with high Texas Ratios as of June 30:

• Corus Bank (CORS), Chicago
Total assets: $8.98 billion
The bank has focused on commercial lending, particularly loans for condo construction in Florida and California. In the last quarter, it lost $16.2 million. Corus didn't return calls for comment.
Texas Ratio: 77.20

• Doral Bank Puerto Rico (DRL), San Juan
$8.82 billion
The bank's health is tied to Puerto Rico, which is facing a real estate slump and recession. The company says it has twice the capital required by regulations.
Texas Ratio: 118.45

• Franklin Bank (FBTX), Houston
Total assets: $5.57 billion
Chairman Lewis Ranieri, creator of mortgage-backed securities, took a more active role at Franklin after accounting problems surfaced. Franklin declined to comment.
Texas Ratio: 114.50

• Ocean Bank, Miami
$4.85 billion
The commercial lender has gotten hit by the overbuilt Miami condominium market. Ocean didn't return calls for comment.
Texas Ratio: 76.10

• Vineyard Bank, Rancho Cucamonga, Calif.
Total assets: $2.34 billion
In July regulators ordered the troubled bank to meet stricter capital requirements. Vineyard, which says it has adequate reserves to cover losses, is raising more capital.
Texas Ratio: 90.45

• County Bank, Merced, Calif.
Total assets: $2.06 billion
Its portfolio is dominated by residential construction loans in California, one of the worst housing markets in the U.S. The company declined to comment.
Texas Ratio: 98.83

• Mutual Bank, Harvey, Ill.
Total assets: $1.70 billion
The bank faces the double whammy of a deteriorating capital position and rising foreclosures. Chief Financial Officer David Laffee says the bank has been working to find new investors and line up more capital.
Texas Ratio: 76.21

• Alliance Bank, Culver City, Calif.
Total assets: $1.12 billion
The commercial lender is heavily exposed to real estate construction. CEO Curtis Reis says the company raised $30 million of new capital in September.
Texas Ratio: 102.76

• Omni National Bank, Atlanta
Total assets: $1.03 billion
Omni specializes in home loans in the Atlanta area, where prices are down 9.8% over the past year. CEO Stephen Klein says: "The Texas Ratio is not indicative of the health of any institution."
Texas Ratio: 95.78

• Florida Community Bank, Immokalee, Fla.
Total assets: $0.99 billion
Its core market, southwest Florida, has been hurt by real estate speculation and overbuilding. The bank didn't return calls for comment.
Texas Ratio: 87.23

Data: Highline Financial, BusinessWeek

Der Hovanesian is Banking editor for BusinessWeek in New York.