I’m OK, but is the bank I want to borrow money from OK?

TEXAS RATIO, what in Sam Houston does Texas have to do with MY loan?

Is it SAFE to borrow money from MY bank? I have always paid my loan as agreed, but now my lown is coming up for renewal… What next? Can they really do that to me? It seems hard to believe, but, who would have thought we would ever ask those questions…ever? The FDIC has taken over almost 40 banks in Georgia (1 in 5 nationally) in the last 2 plus years. UNPRECEDENTED! Two more have fallen this month. Rumor has it that another 10 or so will fail or will be “merged” if they can clean up their problems enough to do so.

A new phrase has emerged that is as important to the banking world as Google is to the Internet world. It is the TEXAS RATIO list. At first, I thought it was a quotient of “rednecks to pick-ups” until I wanted to borrow money. It is a quarterly governmental report prepared by the banking department that gives a myriad of pertinent information on the bank’s financial health. Texas Ratios for the 3rd quarter of 2010 for Georgia tell part of the story.  These things include bank size (Total Assets), past due figures (very important because it will often tell if more problems are about to emerge), the percentage of loans that are on non accrual and not earning interest income, how much property they have taken back and are holding as Other Real Estate Owned (OREO), construction/acquisition and development loans to capital percentages. (If a bank is over the percentage allowed by the regulators, they are not allowed to lend in these areas and it is a waste of your time to ask), enter the infamous Texas Ratio.

The Texas Ratio represents the ratio of problem loans to the bank shareholders equity/capital. (This has been the biggest topic in the news lately as a bank must have adequate capital to cover their bad loan portfolio. If a bank has more “bad loans” than capital, then technically it is broke. Banks with ratios higher than 100% are not worried about making new loans but are trying to save their ship before it sinks. Banks with ratios higher than 200% run a real risk of failure.)

Another number that is a true bell weather of a bank’s strength is the TIER 1 CAPITAL RATIO. The Tier 1 capital ratio is very important to look at because if a bank’s capital drops below a certain percentage (somewhere around 2-3%), it probably will not survive.  No one number represents a bank’s health or its appetite for loans. ALL OF THESE THINGS MUST BE LOOKED AT IN TOTAL. If the bank you are looking to borrow money from has problems in any/all of these areas, you are probably wasting your time - so do your homework. If your favorite bank has problems in any of these areas, consider looking for a new bank. If the bank you are doing business with fails, the new bank might take you out with the other bank’s garbage so be prepared. Again, do your homework. Don’t be afraid to ask your loan officer (or your potential loan officer) how they are fairing. They are going to ask you the exact same questions. You need to know. They can’t kill and eat you, that’s illegal; so be persistent. It might save your skin some day.

So, where do we go from here? We all know what the problem is, but what’s next? How do we change the light from a speeding train to an exit out of the tunnel? Good question. Tune in next week for a spine tingling answer. Thanks for reading.


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