As to your point about bank failures, who really cares anyway? There is next to nothing anyone outside the bank can do. If your deposits are insured, you’re safe. If not, get them below the insured limits and be safe. Having done that, you’re done. If the bank fails, 99% chance says it reopens Monday under a new name anyway and no one misses a beat.

Finally, lets go over our numbers one more time. In 2008, the Bank’s total interest income $24.4 million
total interest expense -$4.0 million
net interest income $20.4 million

Salaries Occup and Other -$12.0 million (not including Provision)
Net income $8.4 million (actual operational net inc.)

Provision -$18.2 million
Reported final loss -$9.8 million

As an aside, that level of net income (the $8.4 million) is nearly three times larger than the average bank our size.

Now theoretically, having hopefully discovered and recognized and properly provisioned for those bad loans we should have no provision this year and as such we should make $8.4 million in net income in 2009. The reality is we will probably provision another $2 or $3 million in 2009, which is certainly less than the $18 million in 2008, which also means we should make money this year. In fact, we made a little over a $1 million in Q4 2008 (with no provision) and a little under $1 million (with a $600K provision) in Q1 2009.

First, let me thank him for linking to his entire letter on the Pueblo Bank & Trust Web site, which I should have done. In writing an article about problem loans, I chose the portion of his letter that spoke directly to problem loans. I don’t think I quoted the letter “out of context,” unless you mean I failed to quote seven consecutive paragraphs of his letter, as he apparently feels I should have done. I think that would have been overkill. Instead, I should have provided the link so readers could see the full context.

His second comment is fair, although I disagree that my statement is incorrect. It could have been more clear.

Let me be more explicit: The bank’s net loss was $9.8 million in 2008. We agree on that. The bank made a provision for loan losses of $18.2 million, which I think we agree on.

That provision of $18.2 million was nearly has large as the bank’s “net interest margin,” which is the difference between interest charged on loans and interest paid on deposits. It’s essentially a bank’s gross margin, which doesn’t consider the costs of employee salaries, rent on its offices, or any other costs of operations.

My point was that the provision was so large, it wiped out the gross margin that usually can be expected to pay for the rest of the operating costs – and then provide profits.

The bank, as we noted, posted a net loss as a result. Of course, it would have made $9 million if we ignore the bad-loan provision. And the bank could have 100% profitability if we ignore all of its costs!

Finally, the measure I’m using is similar to, but actually tougher than, the Texas Ratio, which was indeed developed more than 20 years ago.

Bill Tandy’s list of questions that help determine whether a bank will ultimately fail is an excellent one – I can’t dispute any of them. The entire picture is indeed more complex than a single ratio. That ratio, however, is a beginning yardstick to ask further questions.

I conclude my comments with just one question: If we can’t look at this measure of problem loans and become aware that some banks have greater challenges than others, what’s the point of having the data available at all? We might as well be completely caught off guard when a bank fails.

For anyone to use this ratio, in any serious way, to predict whether a bank is going to fail or not is, at best, painfully naive. Yes, I know the article said this list isn’t a list of banks that will fail (wink, wink), but if not, then what’s the point of the article?

Setting aside all of the qualitative issues, the ratio itself has a number of quantitative problems, not the least of which is the absolute level of capital itself. Just as an illustration as to how unreliable this ratio is I remember when I worked for the FDIC closing a bank in Dallas with a ratio of less than 20%. And as a CEO of a California Bank, we survived a problem ratio of 608%.

No one, not even the most savvy bank analyst, can from any and all published data tell whether or not a bank will fail. To know whether or not a bank is going to fail there is a whole host of information one would need to have or know and it is not publically available. What is the Bank’s relationship with the regulators? Is the management of the bank the same management as last year or not? Does management have the background or experience to deal with an elevated level of problem loans? Has the board and management been through more than one economic cycle? What’s the Bank’s ability to raise new capital if it is needed? If a bank’s problem loans are up, is it because management is being aggressive in identifying and reserving for those problems? Or conversely, if a bank’s problem ratio is low, is it because management is reluctant to identify, or is otherwise hiding, problems? If in fact problem loans are high or are headed up, are they well or poorly secured? Or said another way, what is the real exposure to loss, and consequently risk to capital, these problem loans represent? These questions and many more go to the qualitative part of the analysis, which obviously cannot be found or answered by any combination of published financial information or ratios, let alone by a single ratio.

Bill Tandy, CEO Pueblo Bank and Trust

That is incorrect.

We lost $9.8 million in 2008 which includes ALL costs of operations.

What Mr. Milstead should have said was if the Bank hadn’t made the $18 million provision for these loans, it would have MADE nearly $9 million.

Bill Tandy, CEO Pueblo Bank and Trust

So, how is Pueblo Bank and Trust? Well, the short answer is, we’re good.

As the Bank’s President and CEO, having been the CEO who successfully took on a problem bank in Texas during the real estate crash noted above, and with 21 years experience as a bank CEO, I can honestly tell you the answer is “good”.

PB&T currently ranks in the top 6% of banks in the nation in terms of being strongly capitalized, which is the single best indicator of survivability during times like these. We currently rank in the top 1% nationally in terms of being liquid, which is another very important indicator. Over the last ten years or so, we have ranked in the top 1% in the nation for profitability.

We don’t have any subprime loans. We don’t have any brokered deposits. We don’t have most of the problems or issues the media wants you to wring your hands over.

Do we have problem loans? We sure do. And by the way, that can be said for nearly every bank in Colorado and most of the banks in the country. Are our problems more than we normally deal with? They sure are. Have we taken losses as a result? We sure have. Not only that, there is a reasonable chance we’ll lose money in 2008 as a result.

During the first half of 2008, we put over $10 million in our loan loss reserve, because the Board and Management continue to be realistic about the loans we have, the real estate market we’re in, and the slowness of the economy. We are aggressively provisioning for loan losses both real and potential. Why? That is just the prudent thing to do, period.

The good news, even after having expensed $10.4 million in the loan loss reserve during the first half of 2008, is that we lost only $4.9 million. Said another way, if times were normal, we actually made $5.5 million for the first half of 2008, which would otherwise, once again, put us on track to be one of the top 1% most profitable banks in the United States.

If you would like to read the entire letter it is located at:
http://www.pbandt.com/letter.aspx

As a post script the Bank, after provisioning $18 million for loan losses in 2008, is making money again. In the fourth quarter of 2008 and first quarter of 2009 we made $2 million.

And to quote the Banking Commissioner for the State of Colorado in a conversation we had about four months ago, “In my 20 plus years in this job, I haven’t lost 5 minutes worth of sleep worrying about Pueblo Bank and Trust.”

Sincerely,

Bill Tandy, President CEO Pueblo Bank and Trust

Being that I work for a Credit Union I find this really an interesting read, as the Credit Unions in general are a much more stable field of finance. I just had no idea the banking sector in the local regions were suffering such a drastic decline as well.

Kudos!

I.

2. Could you publish the bottom 20-25 banks on the list?

Thank you