The data point that proves small banks are being left behind

A fifth U.S. bank failed on Friday, bringing 2026's tally up to five, matching 2023's total. Five is not a big number, but bank failures have been so rare in recent years that it stands out.

Tioga-Franklin Savings Bank, with $68 million in assets and a single branch in Philadelphia, opened this morning as a branch of Second Federal Savings & Loan Association of Philadelphia, the end result of the usual process where the Federal Deposit Insurance Corp. takes receivership of a failing bank and auctions it off to another bank. It's a very smooth process. 

With four months to go in 2026, if one more bank fails, this will be the worst year – worst being an extremely relative word here – since 2017, when eight banks failed. The worst year before that was 2014, when 18 banks failed. Before that it starts getting messier, as we were still digging out from under the rubble of the Crash of 2008. Between 2008 and 2013, 489 banks failed.

There has been a sense that small banks are being left behind. The failure earlier this year of Kentland Federal Savings & Loan Association, the smallest bank in the nation, is an example of how government policy itself is contributing to these failures because it is focused on big banks and not small ones, Kenneth Thomas, the president of K.H. Thomas Associates, argued earlier this year in a BankThink essay.

But that general idea has been percolating for some time.

"Small banks in the United States are disappearing," Jelena McWilliams, who ran the FDIC from 2018 to 2022, told our Penny Crosman at the beginning of 2022. 

On the other hand, Tioga-Franklin had some real, actual problems, and it is not alone. On Thursday, S&P Capital IQ's Market Intelligence group reported that the median adjusted Texas Ratio for all U.S. banks had reached a five-year high. The ratio hit 3.9% in the second quarter. Overall, that is quite low. But the banks at the high end are really, really high. The worst Texas ratio came in at more than 500%. That bank is operating under a consent order issued by the FDIC. 

You may or may not be familiar with the Texas Ratio. It compares nonperforming assets as well as loans more than 90 days past due and divides that by tangible equity and loan loss reserves. It first became a thing in Texas in the 1980s, when the local banking system was under a ton of duress. It doesn't get talked about much anymore – American Banker hasn't referenced it since 2013 – but S&P apparently is still tracking it. 

The Texas ratio is a relatively handy way to discover banks that are undercapitalized or overleveraged or both and are in danger of failing. S&P found 14 banks in the U.S. with a Texas ratio of more than 75%. It found 24 with a Texas ratio of more than 50%. They were almost uniformly small banks; only two had assets of more than $1 billion.

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And there was one name on the second-quarter Texas ratio list that would immediately prove the ratio's value: Tioga-Franklin Savings Bank. When S&P reported on the ratio's 2025 year-end status, there was another bank on there that would later prove the ratio prescient: Kentland Federal Savings & Loan.

Obviously not every bank with a high Texas ratio fails, or we'd have a lot more bank failures. I think though that the fact there are several dozen small banks in the U.S. operating with these kinds of pressures points out that while the banking system as a whole is doing better than ever, and just about anybody seemingly can get approved to open a bank, small community banks are indeed being left behind.