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How Secure Is Your Bank?

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(This is a reprint of a newsletter from May 24, 2010.) We’ve had a lot of bank failures so far this year, and more to come.  Do you know how to evaluate the strength and stability of your bank?  Do you even care, if your deposits are insured by the FDIC? Yes, you should care.  You might have more money on deposit than the insurance limits. Some of your accounts might be added together and counted as one, reducing insurance coverage you thought you enjoyed.  In addition, banks in trouble typically make decisions that seem irrational to ordinary people.  If you are trying to borrow money, modify a loan, short sale a property or buy foreclosed real estate, your bank’s responses might be different if it were a sound bank or a bank in trouble.  Finally, you might be presented with an opportunity to buy stock in a bank.  For a fundamentally stable and well-run bank, this might be an ideal time to buy stock at bargain basement prices. If interested in your bank’s financial health, the best place to start is Once there, click on “Quick Links: Bank Ratings” in the upper right of the page. Type in the name of your bank in the place indicated, and then click on the “See Results” button. When you see the list of banks with the same or similar names, look for the one that interests you.  For our example, let’s use VisionBank of Iowa (I don’t want to pick on any in-state banks). Screen Shot 1 This bank is in a group of banks that have assets of less than $100 million.  When making comparisons to its “peer group,” the bank will be compared to other banks with assets of less than $100 million.  You will see that this bank has a “Star Rating” of one star. This is a rating system. The actual FDIC bank ratings are closely guarded secrets.  Star ratings go from a low of one to a high of five.  Next, click on the word “Memo”.  For this example, you can click HERE and go directly to the Memo page for VisionBank of Iowa. The Memo pages provide additional information, and give you details regarding the several categories of ratings that make up a total score of one star. The first category is “Earnings.”  The VisionBank of Iowa information appears below. It earned one star for the earnings component. Screen Shot 2 The return on equity is -89.73, meaning the bank has lost virtually the entire value of all its stock. The net interest margin is the difference between the interest earned on loans and the interest paid on deposits.  This bank’s might be low because it is paying very high interest in order to attract depositors, or many of its loans are bad and not earning interest, or both.  I like to pay attention to the “Overhead” part of this section. Very high overhead usually means high executive compensation or high legal fees. The second category is Asset Quality. VisionBank has one star. Screen Shot 3 The really important number here is the first one:  Nonperforming Asset Ratio.  For VisionBank of Iowa, that number is 127.67.  It doesn’t mean 127.67 percent of its loans are non-performing. That would be impossible.  It means that if you compare the non-performing loans and the foreclosed real estate to the equity and loss reserves, the number would be 127.67 percent.  As an example, if a bank sells $95,000 of stock (original issue stock) then it has $95,000 of equity.  If it thinks that $5,000 of loans will become worthless in the coming year, then it will put aside $5,000 of its earnings as a reserve for loan losses, rather than paying the money out as dividends.  Now the bank has $100,000 in equity plus loss reserves. But, suppose it has a total of $127,670 in loans on which the borrowers are not making their payments, and in foreclosed real estate.  Now, the bank has $127,670 in “nonperforming loans,” but only $100,000 in equity and loss reserves. Their ratio is now 127.67% This number is also called the Texas Ratio. The ratio was first developed by Gerard Cassidy, of RBC Capital Markets.  He analyzed bank failures in Texas in the 1980s and noticed that the closer this number approached 100, the more likely it was that the bank failed. He saw the same pattern in New England bank closings in the 1990s.  The Texas Ratio of VisionBank Iowa, 127.67, is an extremely troubling number.  On the other hand, you can’t go simply by this number. Colonial Bank had a Texas Ratio of around 26 for the quarter immediately before regulators closed it. The Capital Section is next.  VisionBank has one star for this category. Screen Shot 4 The Net Worth to Total Assets of 7.45 is “significantly below norm.” That means VisionBank is doing a lot worse than its peer group of banks with less than $100 million in assets.  On the other hand, the Regulatory Capital Ratio is 10.93, or “somewhat exceeded requirement.”  This means the bank has probably been able to sell additional stock in order to keep its capital ratios this high.  I would conclude that probably one or two financially strong families in town own this bank, and they have been buying more and more stock in order to keep the bank afloat until it weathers these bad times.  This is desirable behavior in the eyes of the regulators. Liquidity is next.  VisionBank has a very healthy three stars for this category. Screen Shot 5 This bank’s balance sheet liquidity is below normal.  In the example above, the bank’s liquid assets (cash, government securities and other things that are “liquid” and easily converted to cash) is 15.51 percent of its deposit liabilities.  If every depositor wanted to close their account, the bank could quickly obtain enough cash for only 15.51% of its depositors. That number seems scary, but banks never have 100% balance sheet liquidity. We see also that the bank has a “somewhat greater than average dependence” on “purchased liabilities.”  Purchased liabilities are bank deposits that come from investors outside the bank’s typical market area. If the bank is offering ¼ of a percent higher interest rates than almost any other bank in the country, then the brokers will place money on deposit from all over the world. The money is fickle, though. Once interest rates change, if someone else offers a higher rate, those CDs will be cashed on the money will be gone.  A high dependence on purchased liabilities raises fears there could be a run on the bank if there is an interest rate change. The remainder of the information on the web page is a recap and some analysis. You can read the bank’s financial statements on the website, but I like to view them on the FDIC’s website. That’s because the reports are much more complete, and it is easy to see reports for several years and quarters. To begin, go to Click on “Industry Analysis” at the top.  Next, click on “Institution Directory” in the “Quick Links” box to the right of your screen. Click on the “Bank Find” button. [caption id="attachment_16" align="aligncenter" width="370" caption="Screen Shot 6"][/caption] Type in the name of your bank, and then click “Find.” Scroll down to item 4, “Examine your bank’s financial data.”  Click on the words “CALL/TFR Financial Information.” Screen Shot 7 You will be presented with a screen similar to the one below.  In the case of VisionBank of Iowa, the most recent report is for the quarter ending March 31, 2010.  The easiest way to view earlier reports is to click on the URL at the top of your screen. For the report shown below, the last part of the report name is 03312010. Simply change that last part to the date you want—12312009 or 09302009 or 06302009, and so on.  You can now read the detailed financial information for your bank. Screen Shot 8 After this exercise, you will be an informed consumer who is better able to evaluate his or her banking relationships.  There can’t possibly be any down-side to that!

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