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The First State Bank, Oklahoma: Importance of Liquidity for a Bank

The First State Bank, Camargo, Oklahoma, was closed on Jan 28, 2011 by the Oklahoma State Banking Department, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. This makes it the eighth ailing bank to be shut down nationwide in 2011.

Safety Ranking

BankVega safety ranking for this bank for the last quarter was 13. The safety rank for its peer banks in the country (banks with similar size and mix of assets and deposits) was 83. Thus this metric for the Bank was very low as compared to its peers and we had raised it as a matter of serious concern for the bank in our safety report for the bank.

Recovery Rate

Our estimates suggest that the bank will be able to recover 75.20 % of its value in post-failre auctions. In our opinion this is relatively a poor recovery rate as compared to similar bank failures in the past.

Key Performance Indicators

An interesting aspect of the failure of First State Bank emerges from a study of the trends of its key financial performance indicators. The reasons for the failure of this bank were not the same as those that have led to the bankruptcy of most banks in recent times.
This bank was not plagued by bad mortgage exposure and non performing assets. In fact real estate exposure formed only 13% of the banks total assets. The strength of its assets is reflected in its Asset Quality Indicator (78) which has been consistently higher than its peer banks (61).
Further the Bank’s Earnings index has been very high as well compared to its peer banks. Earnings Index was 98, 97, and 96 for 2010 Q1, Q2, Q3 respectively for First State Bank while these values for its peers were 50, 51 and 50. Based on these indicators one could easily make the mistake of assuming that First State Bank, Oklahoma was a safe bank.

The Bank however failed and the reason was its poor liquidity position. The bank had put itself into risk of sudden withdrawal of funds by depositors or drawdown by their borrowers by maintaining low level of liquidity. The liquidity index for 2010 Q1, Q2, Q3 was 1, 1, and 7 respectively for First State bank, Oklahoma while corresponding values for national peer banks were 68, 63, and 61. The graph shows that the bank had consistently had poor levels of liquidity compared to its peer banks. This led to the bank’s eventual demise

The above analysis shows that there are many critical factors that need to be taken into account in order to make a judgment on the financial health and stability of a bank. Any ranking based only on the assets quality (proportion of nonperforming loans) and earnings would have failed to capture the problems with this bank. This demonstrates the strength of BankVega safety rankings in recognizing financial distress in banks.