EDITOR NOTE: Have you ever heard of the Texas Ratio? It’s a measure of a bank’s credit troubles. Last Friday, the Almena State Bank in Kansas collapsed. It had a Texas Ratio of 213%. It was the fourth bank to close in 2020, and the third to close after the pandemic. Credit troubles are often the main source of a banking collapse. There have been several bank failures over the last decade (since 2008). And with the economy walking on fragile ground, with high unemployment, high debt levels, near-zero interest rates, and accelerating inflation, there will be more to come. This article details the events leading to Almena’s collapse. But it tells you very little about mitigating such risks. Two things you can do: 1) here’s how to evaluate your bank’s financial health. 2) Here’s what you can do about it.
Kansas state regulators closed Almena State Bank late Friday, October 23. This is the fourth bank to fail in 2020, and it’s the third bank to fail since the COVID-19 pandemic began in March. Like the first and second bank that failed during the pandemic, Almena State Bank had major problems long before this year. According to the FDIC press release:
The failed bank experienced longstanding capital and asset quality issues, operating with financial difficulties unrelated to the current economic conditions resulting from the pandemic.
Even though the pandemic may not be to blame for this bank’s failure, it should be noted that this failure occurred only one week after the previous bank failure (the October 16th failure of First City Bank of Florida). It does suggest that the pace of failures may be on the rise after the previous nine months in which only three banks failed.
The pandemic will likely result in a large increase in loan defaults and other conditions that will stress banks. Help from the Federal Reserve, the Treasury, the FDIC and other regulators should prevent mass bank failures, but the number of bank failures will likely increase over the next year. An example of what may occur can be seen in the bank failure data during and after the 2008 Financial Crisis. This is shown below.
Number of bank failures around the time of the 2008 Financial Crisis:
- 2006: 0
- 2007: 3
- 2008: 25
- 2009: 140
- 2010: 157
Most banks failed in 2010, two years after the crisis reached its climax in 2008. Thus, it will likely take some time before we see the first bank failure that’s the result of the COVID-19 crisis.
We are still in a relatively calm period for bank failures that began in 2015. From 2015 to 2019, there have been no years in which more than 8 banks have failed. No banks failed in 2018, and only four failed in 2019.
Details of the Almena State Bank failure
The FDIC handled the closure of Almena State Bank in a very similar way it handled last week’s closure of First City Bank of Florida. According to this FDIC press release, “To protect depositors, the FDIC entered into a purchase and assumption agreement with Equity Bank of Andover, Kansas to assume all of the deposits of Almena State Bank. The two branches of Almena State Bank will reopen as branches of Equity Bank on Monday, October 26.”
All deposits, even brokered deposits over $250k, are safe
All deposits were transferred to the new bank. This includes deposits above the FDIC coverage limits. It also includes brokered deposits above the FDIC limits. This is described in the FDIC’s FAQs:
No one lost any money on deposit as a result of the closure of this bank. All deposits, regardless of dollar amount, were transferred to Equity Bank.
The total of all deposit accounts, including brokered deposits, has been assumed by Equity Bank
Both insured and uninsured deposits that were held at Almena State Bank were transferred to Equity Bank. Thus, even depositors who had over the insurance limits had no loss in this failure. Acquiring banks have often decided not to assume brokered deposits, but that’s not the case this time. Even brokered deposits were assumed by Equity Bank.
Past cases when all uninsured deposits were at risk
Occasionally, banks fail and uninsured deposits directly held at a bank are not covered. That happened last year in the first 2019 bank failure. In that case, the acquiring bank only agreed to assume insured deposits. Depositors who had over the insurance limits were at risk of losing some or all of their uninsured deposits. In previous years, banks have also failed without an acquiring bank. In those cases, the FDIC liquidates the bank and sends checks to depositors of only their insured deposits.
Customer access to deposits
Another benefit when the FDIC arranges for an acquisition of a failed bank is that the new bank will typically allow customers of the failed bank to continue to use their accounts without any immediate changes. According to Equity Bank’s customer FAQs on the acquisition:
What will happen to my accounts?
We will work to consolidate internal systems and software over the next few weeks and we will keep you updated right here. Once completed, Almena State Bank accounts will become Equity Bank accounts. We expect no service interruptions with your accounts. Until this time, please continue to use and access your accounts as you always have.
You may still use checks, may still bank in the same location, and debit card service will be uninterrupted.
We will be corresponding with every customer, including a detailed brochure that explains any customer steps during the change, and we'll update you right here, on this page, with important dates and milestones.
CD rates may be reduced
For this bank failure, the only concern for depositors are those with CDs that had high rates. Almena State Bank had been offering 5-year CDs with yields as high as 1.85% in 2019. Those rates may not last as the FDIC describes in its FAQs:
Interest on deposits accrued through close of business on October 23, 2020, will be paid at your same rate. Almena State Bank’s rates will be reviewed by Equity Bank and may be lowered; however, you will be notified in writing of any changes. You may withdraw funds from any transferred account, regardless of whether your interest rate changes, without early withdrawal penalty until you enter into a new deposit agreement with Equity Bank.
Cause of the failure
DepositAccounts.com had given Almena State Bank an “F” grade on its financial health based on data from its June 30, 2020 call report. The bank had a very high Texas Ratio of 213%. It also had a very high Texas Ratio a year ago (105%). Any bank with a Texas Ratio greater than 100% is considered at risk.
The failure of Almena State Bank differed from the first bank that failed in 2019 and the last bank to fail in 2017. In both of those cases, fraud was the primary cause of the failures. Due to the fraud, the financial health grades didn’t help predict the failures. Also, the fraud caused the acquiring banks to decide to only assume the insured deposits. Customers at those banks with uninsured deposits were at risk of losing those deposits.
Those previous two bank failures were an important reminder why everyone should make sure that their deposits (total of both principal and interest) are kept below the FDIC and NCUA insurance limits at each of their banks and credit unions.
Credit union liquidations and conservatorships
So far this year, one small credit union has been liquidated and a small credit union has been placed into NCUA conservatorship. I reviewed those actions in my previous bank failure review.
Originally posted on DepositAccounts.com