CHAPTER 2

BANK PERFORMANCE VS. FAILURE

In 2007, I decided to take a bold step and sell my first business, returning to the banking world in Chattanooga. With my background as a banker and examiner, it felt like the natural move. I joined a community bank that boasted the highest Return on Equity in the country the previous year—a metric often celebrated as the pinnacle of performance in the banking industry. Signs in the lobby flaunted this achievement to customers, but instead of feeling elation, I felt a twinge of unease. High returns frequently come with high risks, and this flashy metric hinted that the bank had taken some significant gambles. It was 2007, and the shadow of the impending “Great Recession” loomed large.

What followed was a predictable chain of events. As the economy buckled, the bank’s once-admired asset quality began to crumble. High-yield loans defaulted, and the real estate market—serving as collateral—plummeted. Regulatory authorities soon placed the bank under formal enforcement actions. While the bank managed to survive for a few more years, shareholders eventually opted to sell. Today, its assets are owned by an out-of-town institution, leaving the bank as little more than a faded memory in local banking history.

The truth is, the bank’s dazzling performance was only half the story—the other, more critical aspect, was the lurking probability of failure. Though depositors didn’t lose their money, it wasn’t entirely out of the realm of possibility. For years, regulators have been fixated on metrics of performance, championing tools like the CAMELS ratings—a framework covering Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity. While useful, CAMELS metrics often leave non-experts overwhelmed, especially when banking articles debate endlessly over which ratio matters most. The reality is, each metric must be viewed holistically. For instance, strong Capital levels can offset a low Return on Assets (ROA).

Uninsured depositors face the greatest risks, with roughly 40% of deposits uninsured. While individuals can creatively structure accounts to maximize FDIC coverage, businesses often hold larger sums, making it impractical to open dozens of accounts just to gain coverage. The logistical nightmare of reconciling transactions across numerous accounts would hardly be worth the effort.

This is where our products shine. We bring clarity and peace of mind with solutions like our Probability of Failure (POM) analysis. POM evaluates a bank’s risk of failure in real-time, giving you crucial warnings to safeguard your assets before disaster strikes. One of the most frequent questions I hear is, “If my bank fails, can I offset my deposits against outstanding loans?” The likely scenario is that deposits above the insurance threshold would vanish, while loans might be auctioned off to recover losses. Our watchlist identifies banks with an 80% or higher chance of failure—this group makes up an astounding 90% of all bank failures.

While regulators, analysts, and investors fixate on glowing performance reports, our mission is to unveil the risks that hide behind the curtain. Bank failures aren’t as rare as one might think—they’re just poorly publicized. Yet, they’re highly predictable. Our approach taps into conventional and unconventional metrics to calculate the probability of failure with precision. So the next time you hear about a bank’s stellar performance, pause and ask yourself: what risks are they embracing to achieve it? And more importantly, what’s their probability of failure?