A report by the The Independent Community Bankers of America (ICBA) and Aite Group, LLC states that community banks are getting strong in this difficult time and are positing themselves for a recovery in the economy. The report titled Impact of the Financial Crisis on U.S. Community Banks: Difficult Times, New Opportunities was based on a survey of 743 community banks.

Key takeaways from the community banks surveyed:

Banks that saw Increase in Deposits = 55%
Customers who withdrew Deposits = 17%
Banks who saw increase in new retail customers = 57%
Banks who saw increase in new business customers = 47%
Banks that saw loan originations volume increase = 40%
Banks that saw increase in loan delinquencies and charge-offs = 73%

This survey clearly shows that community banks are getting hit hard with charge-offs. The loan types include mortgages (residential and commercial), credit card debt, personal loans, car loans, etc. Growth in number of customers and deposits shows the confidence of consumers in these community banks when compared to large banks. This should help the survivors when the economic recovers.

The rise in loan delinquencies and charge-offs is leading to some of the small and medium banks to fail. So far this year 40 banks have been shutdown by the FDIC.Most of them are small banks. Yesterday three more banks failed. They are:

First National Bank of Anthony, Anthony, KS   (Total Assets =$156.9 M, Total Deposits =  $142.5 M)
Cooperative Bank, Wilmington, NC  (Total Assets =$970  M, Total Deposits =  $774 M)
Southern Community Bank, Fayetteville, GA  (Total Assets =$377 M, Total Deposits =  $307 M)

Of the hundreds of listed community banks some will emerge strong from the current crisis.Unfortunately until the economy recovers there will many more bank failures like the three that failed yesterday.The trick to investing in banks is to identify the banks with a respected franchise, strong balance sheet and good management team.

A bank’s Tier 1 Capital Ratio is an indicator of its strength and ability to absorb losses. Regulators  in the USA and other countries are now using this factor in addition to others to identify banks that are likely to collapse.

The Tier 1 capital ratio is the ratio of a bank’s core equity capital to its total risk-weighted assets (Source: Wikipedia). This ratio is considered to be a more reliable measure of financial strength than other numbers that can be calculated to evaluate a bank. In general, the higher the ratio the better the bank. For example, a bank having a Tier 1 ratio of 20% is better than the one with less than 10%. Higher Tier 1 ratio implies that the bank is being run very conservatively.

The following chart shows the Tier 1 Ratios of thirteen large  banks in USA.These numbers were pulled from their first quarter, 2009 earnings report. The Tier1 ratios include TARP funds if a bank accepted it. Hence in some cases the Tier 1 Ratio is higher than it was originally. Some of these banks listed in the chart below repaid billions in TARP funds this week.

Large US Banks Tier 1 Capital Ratios 

Chart

Table

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Source: Bank 1Q,2009 Earning Reports

State Street (STT) is highly conservative since it has a Tier 1 ratio of 19.13%. Wells Fargo(WFC) on the other hand had the lowest ratio at 8.28%. Despite heavy TARP infusions Bank of America (BAC) and Citibank (C) have Tier 1 ratios of just 10.09% and 11.80% respectively. Other than State Street, Bank of New York Mellon (BK) and BB&T (BBT) have high Tier 1 ratios of above 12%. Some might argue that the capital ratios of US banks that accepted government funds may not be a good indicator of financial strength since the numbers are inflated. However it is still worth monitoring on a quarterly basis as wild swings in the Tier 1 ratio can be indicator of other problems.