In this week's article, Bauer examines banks that entered 2026 with both high loan-to-deposit ratios and loan quality that is less than stellar, a combination that can heighten credit and liquidity risk.
Using nonperforming assets, the Texas Ratio, and Bauer’s Adjusted Capital Ratio, Bauer assesses the loss exposure of each bank.
We offer a range of examples with different outcomes, from banks with strong capital buffers despite rising delinquencies to institutions with weak adjusted capital, persistent losses, and signs of distress.
JRN by Bauer 43:19
When Ambitious Lending Meets Credit Stress
Although business models vary, the optimal loan-to-deposit ratio (LTD) at a bank is generally considered to be between 80% to 90% (maybe a bit lower for community banks). At this “sweet spot”, the bank is lending sufficiently for its size, but not so much that its ability to meet other obligations would be compromised in the event of a downturn or unexpected withdrawals.
The 50 banks on page 5 each have a loan-to-deposit ratio above 90%, based on year-end 2025 data. On its own, that is not necessarily a concern. However, each of these banks also reported nonperforming assets exceeding 2.75% of total assets. Nonperforming assets include nonaccrual loans, loans that are 90 days or more past due, and OREO (other real estate owned, e.g. repossessed assets). Ideally, this ratio should remain below 1%.
The nonperforming ratio is imperfect as it includes loans that carry government guarantees (if there are any). To make up for this, we added a criterion for the Texas Ratio for our list. Each bank on page 5 has a Texas Ratio exceeding 20%. Both Bauer’s Adjusted Capital Ratio and the Texas Ratio exclude the government guaranteed portion of nonperformers from the equation, providing a more accurate picture of how much the bank is on the hook for if the borrowers default.
We begin with 3½-Star Federal Savings Bank, Chicago, IL (35518), a mortgage lender with 75% of its portfolio in 1-4 family residential real estate. This was the same loan segment that drew our attention in in our article “Residential Real Estate Faltering in the Heartland” in October 2024 (JRN 41:40). At that time, residential loans made up more than 80% of the loan portfolio at this $1.1 billion bank.
Loan diversity is not the only thing that has changed in the six quarters since. Loans and total assets were both down 3.7% while deposits were up 15.9%. As a result, its loan-to-deposit ratio dropped from 147% to 122%. Federal SB’s leverage CR simultaneously increased from 12.8% to a very impressive 14.4%.
On the flip side, its nonperforming assets to total assets increased from 1% to 3%, increasing its Texas Ratio from 11.1% to 21.5% and putting Federal SB onto this list today.
Another we have been monitoring the LTD and delinquencies of for even longer is 3-Star California Pacific Bank, Hayward, CA (23242). In December 2021 we wrote that California Pacific Bank had a LTD ratio of 126% and nonperforming assets almost 10% of total assets, but a leverage capital ratio of 44.9% kept it off of Bauer’s Troubled and Problematic Bank Report.
In the four+ years since, California Pacific Bank’s LTD ratio has climbed even higher, to 141.7% and nonperformers to total assets increased to 16.9%. A 41.2% leverage CR continues to provide a safety net.
California Pacific Bank is one of just 18 U.S. banks that ended 2025 with a leverage CR greater than 41%. These banks all have incredibly large capital cushions to protect them against bad loans ...and other losses.
That is not the case for most banks, however. 3-Star Red River State Bank, Halstad, MN (15820) for example, is an Agriculture bank with a sideline of aircraft financing. Its leverage CR of 13.42% is very respectable and 151 basis points above its peer group (11.91%) but provides a limited safety net. That’s somewhat worrisome considering Red River State Bank’s nonperforming asset ratio of 10.6% dwarfs the 0.60% of those peers. It shows Bauer’s Adj. CR & Texas Ratio at work.
When we examine Bauer’s Adj. CR, we look for it to be very close to the leverage CR. A large divergence in these two ratios indicates that nonperforming loans are plaguing the bank. The Bauer’s Adj. CR at Red River State Bank at the end of 2025 was 3.21% (very distant from its 13.42% leverage CR).
To examine the Texas Ratio, we look for a number close to zero. The closer to 100 this ratio climbs, the more likely the bank is to get into serious trouble. Only 11 banks had a higher Texas Ratio than Red River State Bank (73.23%) at the end of 2025.
Two of those 11 banks have already been closed by regulators. They were Metropolitan Capital Bank & Trust, Chicago, IL (57488), (closed January 30, 2026) and Community Bank & Trust—West Georgia, LaGrange, GA (25796) (which was closed on May 1st).
Two others can be found on page 5, both have negative Bauer’s Adj. CRs. They are:
Zero-Star Kentland Federal Savings and Loan Association, Kentland, IN (28722), which we last reported on in January (JRN 43:03). Kentland is still the smallest U.S. bank in operation and has posted 5 consecutive quarterly losses. Both delinquency measures are off the charts (its Bauer’s adjusted is negative (-0.77%) and its Texas Ratio is over 200%). Kentland FS & LA has been on Bauer’s Troubled and Problematic Bank Report since fourth quarter 2022 data.
The other, Zero-Star Columbia Savings & Loan Assn., Milwaukee, WI (28480) also has a negative Bauer’s adjusted CR (-9.8%) and a Texas Ratio over 160%. Columbia S&LA’s quarterly loss streak is four consecutive quarters (or 8 out of the last 11). Columbia Savings has been on Bauer’s Troubled and Problematic Bank Report since 2011. That’s a long good-bye.
