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Posted: November 29, 2009 12:01 a.m.

Peoples Bank has poor debt to credit ratio

According to recent reports, The Peoples Bank of Covington may be in danger of failing.

The Federal Deposit Insurance Commission maintains a list of troubled banks, but that list is not available to the public. However, analysts have other tools for determining whether banks may be in danger of failing.

One of the most popular tools is the Texas Ratio, which takes all of a bank’s non-performing loans, those that are not making any money, and divides those by tangible common equity capital plus money set aside for future loan losses.

National Public Radio gave a much simpler explanation of ratio, defining it as "bad stuff divided by good stuff." A CBS story gave a slightly more complete description: the institution's bad and delinquent loans divided by its cash on hand plus money set aside to cover loans that go bad.

The tool was developed by a group of analysts who used it to study the health of Texas banks in the 1980s according to investopedia.com. They discovered that once the ratio reached 1:1, when a bank had as much bad stuff as good stuff, a bank was likely to fail.

Having a high Texas Ratio does not mean a bank will fail, it simply means a bank is more likely to fail.

According to a recent report by the Atlanta Journal Constitution, The Peoples Bank of Covington had a Texas Ratio of 192, or 1.92:1. According to nuscho.com, a site that also calculates Texas Ratios, Peoples Bank came in at 179. Either way, the ratio is much greater than 1:1.

While several large banks failed during 2008 and captured national headlines, more than a thousand smaller banks could fail over the next couple of years. According to NPR, 115 banks failed in 2008. A Wall Street Journal story said the number of banks on the FDIC’s troubled banks list had risen to 416, and according to the AJC, Georgia has 57 banks with a Texas Ratio greater than 1:1. Georgia, and in particular Metro Atlanta, has the highest number of banks with Texas Ratios greater than 100.

As with the larger banks, smaller regional and community banks are struggling because of the mortgage market collapse. However, smaller banks weren’t done in by the actual mortgages, but rather by the large number of loans they gave out to builders and developers.

When people stopped buying houses, builders and developers were unable to sell their houses and lots and had to default on their loans. Local banks were much more heavily involved in this side of the market then they were in mortgages, said local banker Fred Vick previously.

According to mortgageinsider.net, commercial and development loans typically have higher down payment requirements and most probably weren’t in the same category as subprime mortgage loans. However, these loans were much larger and with the collapse of house and land prices, the banks were unable to break even by selling the foreclosed properties.

While some larger banks received bailout money and others were able to raise capital by selling stock shares, many smaller banks are not in the same position and won’t be able to weather the bad debts.

According to the FDIC’s Web site, as of Sept. 30, 2009, Peoples Bank of Covington had nearly $16.4 million in real-estate owned property and only $10.9 million in total equity capital. The company employed 46 employees and its total assets were $164.3 million.

Peoples Bank declined to answer questions or provide any comment at this time.

Eastside Commercial Bank in Conyers also posted a high Texas Ratio at 108.

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