Two Banks With Much in Common Fail

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Two banks failed last Friday (October 25th). That’s as many as have failed in the previous two years combined. The immediate question that came to our mind was, what do these two banks have in common? Answer: A Lot.

Based on June 30, 2019 financial data, Zero-Star Louisa Community Bank, Louisa, KY was “Critically Under-capitalized” with a leverage CR of just 1.97%. Zero-Star Resolute Bank, Maumee, OH was “significantly undercapitalized” with a leverage CR of  2.41%.

Both banks were established in 2006 and are quite small… they were also both shrinking. Both banks had been posting losses for years; both had problems with loan quality (each had negative numbers for their Bauer’s Adjusted Capital Ratios); and both were much more heavily invested in Commercial & Industrial loans and Commercial Real Estate loans than their peers.

September 30th Call Reports were not available online for either of the failed banks as of this writing. In just a few weeks, though, we will have third quarter reports for all U.S. banks and will be scouring them for others in similar situations to these.

Just a few days after the failures, the Federal Reserve cut the target Fed Funds rate another quarter point to between 1.5% and 1.75%. That marks the third cut in as many meetings. The last time that happened was back in 2008.

This cut was not made lightly. In fact two dissenters preferred to leave rates where they were (down from three at the previous meeting). Given that the majority of economic data heading into the meeting was positive, we probably would have dissented too. Ultimately, the committee cut lending rates because 1) inflation is still a bit below their 2% target, and 2) business investment and exports are weaker than they’d like.

Remember where the two banks that failed had concentrated their lending? Businesses. With trade tensions high and global growth slowing, any company that depends, even remotely, on international imports or exports must be extra cautious. So must the banks that lend to them. And so, by extension, do the people (and companies) who bank with those banks. (What did people do before we came along?)

Rhetorical question, we know. Thanks to our founder, Paul A. Bauer, we are here and we have saved countless depositors from losing both principal and interest in U.S. banks with bank and credit union star-ratings, which we provide totally free on our website.

For those who want more, Bauer provides a number of reports that provide as much, or as little, detail you desire on any specific U.S. bank or credit union, or even on groups of banks and credit unions. In fact, one of our most popular reports has just been improved.

Bauer’s Due Diligence Performance Report  (see page 7) compares the most recent financial data on the desired institution and compares it side-by-side with the same data a year earlier. This includes a balance sheet, income statement and net worth ratios, as you would expect, but it goes much further than that. The Due Diligence Performance Report on a bank provides nine asset quality measures; eight liquidity and performance measures, historical data, and holding company data (when available).

It is often by looking at these ratios that you will glean the most. A complimentary Due Diligence Performance Report on 4-Star Bank of Hawaii can be found on page 7. Bank of Hawaii has sufficient capital levels, stellar asset quality and excellent performance measures. You can also see it is profitable and is growing at a sustainable pace. When you look at the Holding Company, you will note that this bank’s assets account for almost all of the parent’s total assets. No worry here about trickle-down troubles.

Had you looked at the corresponding reports for either of the banks that failed last week, in addition to the big ZEROs in the star-rating, you would have seen extremely low capital ratios, dismal asset quality, downright scary liquidity and performance measures, and a lot of negative numbers in the profitability and historical data. You would have known to avoid them. And that knowledge is a wonderful thing.

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