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June 3, 2016

Amid a considerable boom in local bank loan books, it’s worth keeping an eye on the overall health of Nashville lenders’ balance sheets.
As we reported a couple weeks ago, the surge in both net income and loans at Nashville banks continues to throttle ahead into unchartered territory. Locally based banks collectively smashed through their most recent first-quarter highs set just last year, reeling in nearly $89.5 million worth of income, a 27.5 percent jump compared to last year’s first three months.
For comparison, community banks nationwide increased their net income by 7.4 percent from the first quarter of last year. Meanwhile, loan balances — excluding acquisitions by local banks — grew nearly 19 percent among Nashville banks year-over-year, compared to a roughly 7 percent increase nationwide(which was the largest 12-month growth rate nationwide since before the financial crisis of 2008, according to the FDIC).

So as Nashville bank’s expand their balance sheets, it’s a positive sign that they’re also maintaining robust health. The largest of these local banks have more money to lend and can help fuel future business expansion. (We’ll get to Nashville’s major out-of-market banks, who have exponentially more lending power, in a moment.) Additionally, the figures outlined below suggest that borrowers are not only tapping more credit, but are able to repay it.
The report, by Atlanta investment bank Banks Street Partners, pulls the Texas Ratio for each bank in Tennessee and other states in the Southeast at the end of the third quarter. The Texas Ratio, often used to gauge the possibility of an institution failing, measures a bank’s nonperforming loans to its capital and loan-loss reserves, the latter being money set aside to cover loans that go bad. The lower the ratio, the better the bank’s condition. A Texas Ratio of 100 or above is an indication a bank could potentially fail, suggesting a high volume of bad loans on the bank’s books. A ratio close to zero indicates the opposite: a strong bank with very few bad loans.

As yet, the credit expansion at Nashville banks hasn’t resulted in significant changes to banks’ Texas Ratios. For a handful of Nashville’s biggest community bank players, their Texas Ratios inched up slightly during the first quarter — Pinnacle Bank, Reliant Bank, First Farmers & Merchants Bank and CapStar all had this happen. Yet, as outlined below, those were slight — and I mean slight — changes. All four banks still have a Texas Ratio below 10.
Others such as FirstBank reduced their Texas Ratio in the first three months of the year. And Truxton Trust — well, you can’t do any better than Truxton, which posted a Texas Ratio of zero. It’s worth repeating: zero is as good as it gets.

Here’s a look at several of Nashville banks with the best bills of health:

  • Truxton Trust: 0
  • Southern Bank of Tennessee: 0.4
  • Franklin Synergy Bank (NYSE: FSB): 0.8
  • Avenue Bank: (Nasdaq: AVNU): 1.1
  • First Farmers & Merchants Bank: 4
  • InsBank: 4
  • CapStar: 4.9
  • Wilson Bank & Trust: 5.1
  • Pinnacle Bank (Nasdaq: PNFP): 7.2
  • Reliant Bank (Nasdaq: CUBN): 7.7
  • FirstBank: 11

Banks Street Partners’ report calculated the Texas Ratio by taking each bank’s nonperforming assets and loans 90 days past due, minus government guaranteed loans and other real estate owned. It then divided that total by each bank’s tangible equity and loan loss reserves. The firm used data from SNL Financial in its report.
Perhaps more consequential is the status of the biggest players in Nashville banking, (national and regional banks headquartered out of the state), their Texas Ratios also suggest sure-footed credit conditions:

  • Regions Bank (NYSE: RF): 16.8
  • Bank of America (NYSE: BAC): 13.1
  • SunTrust Bank (NYSE: STI): 18.4

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