Academic journal article ABA Banking Journal

Are There Early Warning Signs for New Banks?

Academic journal article ABA Banking Journal

Are There Early Warning Signs for New Banks?

Article excerpt

According to research conducted by Temple T. Moore, executive vice-president and chief financial officer of Southern Arizona Bank. Yuma, if you look at financial ratios during a bank's first few years of operation you can leam a lot.

Moore earned a Doctor of Business Administration degree from the United States International University in San Diego this year, For his dissertation, Moore set out to determine whether or not there were clues in industry ratios during banks' early years that indicated later success. He analyzed eight years' data for 136 banks that received charters in 1982-Southern Arizona Bank among them, He divided them into three categories: Those with a return on assets above 80% of the median were classified as successful (including his bank), those with an ROA below 80% of the median were nonsuccessful, and those that failed made up the third category. In charts plotting several financial ratios, early warning signs popped up after the first or second year among the banks that eventually failed.

For example, the 22 failed banks in the sample had a rapid drop in ROA after the first year of operation and in ROE after the second year. …

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