Taking aim at Troubled banks: the Texas ratio, a measure of risky business, draws a bead on some in this state. But it's not always a straight-shooter.

• Author: Maley, Frank
• Position: FEATURE

When a company nicknames itself the YES! Bank, people could infer it's a soft touch for loans. But Asheboro-based CommunityONE Bank never has been a pushover, says Larry Campbell, interim CEO of its parent FNB United Corp. "I had a lot of people telling me, 'But you said you were the YES! Bank,' when we turned them down."

Though the YES! Bank can say no, it clearly hasn't done it enough. Many of the loans it made the past few years have soured. Largely because of that, FNB United, the state's seventh-largest financial institution, is one of the sickest. It lost more money last year--$87.6 million--than any of the other 100 largest financial institutions with headquarters in the state, and its ratio of nonperforming loans to total loans was the second-highest. Its Texas ratio, seen by some as predictor of bank failure, is more than twice the level considered cause for concern. Even $51.5 million from the federal Troubled Asset Relief Program hasn't been enough to correct the problems.

While the state's behemoth, Charlotte-based Bank of America Corp., grabs most of the headlines and is doing better than a year ago--largely because of its much-vilified purchase of Merrill Lynch--too many smaller banks, with their old-fashioned dependence on spread lending, are faring worse. At the end of 2008, only two banks on BUSINESS NORTH CAROLINA's Financial 100 list (page 76) had Texas ratios above 100%, at which banks are at severe risk of failing. One of those, Wilmington-based Cooperative Bankshares Inc., was shut down by regulators last June.

By the end of 2009, the list of banks above 100% had grown to four, with three more above 90%. The ratio, developed by analysts scrutinizing Texas banks in the recession of the early 1980s, weighs nonperforming assets and loans 90 days past due against tangible equity and loan-loss reserves. "If you have to pick a number that shows how the stress of a recession affects the credit quality of a bank and the survivability--the continuing operating capability--of a bank, the Texas ratio does a pretty good job," says Tony Plath, associate professor of finance at UNC Charlotte.

It's not foolproof. Some banks with respectable Texas ratios still end up failing. Regulators shut down Wilmington-based Cape Fear Bank in April 2009 despite a Texas ratio of 44.9% at the end of the previous year. For some banks, even a high Texas ratio doesn't mean certain death. Investors who have the means and will to bail out a bank can...