We are experiencing unprecedented financial times. Whether you are a consumer or a Wall Street professional, bank failure is suddenly a more common occurrence than ever before. The US banking industry is plagued by defaults, losses, and rising failure rates as you can see on any list of failed banks And, while the FDIC has taken action to restore consumer confidence in the US banking sector by increasing deposit insurance to $250,000 per account and providing unlimited coverage for non-interest bearing transaction accounts, a bank failure is still no fun for customers.
Even where customers do not suffer direct losses of deposited funds, a bank failure can create hardship for depositors who may face reduced interest rates on savings accounts and term CD’s. And when a bank is in distress, borrowers may find credit suddenly unavailable. To avoid the consequences of dealing with a bank failure, you should take some time to identify and direct your personal and commercial business to healthy banks and thrifts.
A variety of services provide bank and thrift financial safety and soundness information. While many of these services rely on similar analysis, some review different aspects of a bank’s financials or they may provide a different perspective, so it is wise to review more than one bank rating service in your search for a financially strong institution. Some rating services are free, while others charge for reports. Look for a service that provides current information (usually for the prior fiscal quarter) and a service that has a reliable track record for correctly identifying failed institutions well in advance of regulatory action.
Usually, the institution rating services use numerical, star, or letter ratings to make it easy for consumers to review their ratings. Some services go a step further and provide important financial information and key ratios to help consumers gain insight. The table below shows historical industry norms for key measures of bank and thrift safety and soundness. Use this table to compare individual bank or thrift financial ratios that you find at one or more of the rating services to the industry benchmarks displayed here. This comparison will give you a view of the institution’s financial strength relative to the industry.
INDUSTRY STATISTICS |
Dec-00 |
Dec-01 |
Dec-02 |
Dec-03 |
Dec-04 |
Dec-05 |
Dec-06 |
Dec-07 |
Dec-08 |
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| BANKS |
% |
% |
% |
% |
% |
% |
% |
% |
% |
| Net Interest Margin |
4.1 |
4.0 |
4.1 |
3.8 |
3.6 |
3.6 |
3.4 |
3.4 |
3.2 |
| Non-interest Income/Earning Assets |
3.0 |
2.9 |
3.0 |
3.0 |
2.7 |
2.7 |
2.6 |
2.3 |
2.0 |
| Non-interest Expense/Earning Assets |
4.2 |
4.0 |
4.0 |
3.9 |
3.7 |
3.7 |
3.5 |
3.5 |
3.3 |
| Return on Assets |
1.3 |
1.2 |
1.3 |
1.4 |
1.3 |
1.3 |
1.3 |
1.0 |
0.2 |
| Return on Equity |
15.3 |
14.0 |
14.5 |
15.3 |
13.8 |
12.9 |
13.1 |
9.3 |
2.1 |
| Equity/Assets |
8.5 |
9.1 |
9.2 |
9.1 |
10.1 |
10.1 |
10.2 |
10.2 |
9.5 |
| Non-performing Assets/Assets |
0.6 |
0.7 |
0.9 |
0.8 |
0.6 |
0.5 |
0.5 |
0.9 |
1.8 |
| Source: FDIC |
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INDUSTRY STATISTICS |
Dec-00 |
Dec-01 |
Dec-02 |
Dec-03 |
Dec-04 |
Dec-05 |
Dec-06 |
Dec-07 |
Dec-08 |
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| THRIFTS |
% |
% |
% |
% |
% |
% |
% |
% |
% |
| Net Interest Margin |
3.1 |
3.0 |
3.4 |
3.3 |
3.2 |
3.1 |
2.9 |
3.0 |
2.8 |
| Non-interest Income/Earning Assets |
1.1 |
1.0 |
0.9 |
1.3 |
1.3 |
1.3 |
1.5 |
1.3 |
1.0 |
| Non-interest Expense/Earning. Assets |
2.4 |
2.5 |
2.5 |
2.6 |
2.7 |
2.6 |
2.7 |
3.0 |
2.6 |
| Return on Assets |
1.0 |
0.9 |
1.2 |
1.3 |
1.2 |
1.2 |
1.0 |
0.3 |
-0.6 |
| Return on Equity |
11.7 |
11.1 |
12.4 |
13.7 |
10.9 |
10.4 |
8.7 |
2.7 |
-5.9 |
| Equity/Assets |
8.5 |
8.6 |
9.5 |
9.4 |
11.2 |
11.2 |
12.3 |
11.2 |
9.1 |
| Non-performing Assets/Assets |
0.6 |
0.6 |
0.7 |
0.6 |
0.5 |
0.6 |
0.6 |
1.5 |
2.4 |
| Source: FDIC |
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The financial deterioration shown in this table for both 2007 and 2008 did not happen uniformly across institutions. During 2008, commercial banks with assets of less than $100 million, the relatively small institutions, performed considerably better, with respect to profitability, capitalization, and asset quality, than did the segment of banks with assets greater than $10 billion.
When you review institution safety to identify the “right” institution for you from a financial safety perspective, there are some important things you should watch for:
- Since aggressive behavior can lead to heightened financial risk, avoid banks that have increased total assets by more than 25%, on an annual basis.
- Equity/Asset ratios for both banks and thrifts currently exceed 9.0% for all asset size ranges, with the exception of thrifts with assets of $5.0 billion, or more, and we, therefore, would advise caution in dealing with institutions that do not currently report Equity/Assets of at least 9.0%.
- For 2008, profitability has worsened very significantly, as have the components of profitability, as you can see looking at the table above. As a customer or potential customer, you should inquire with the management of unprofitable institutions when that condition can be expected to change. If a satisfactory reply is not forthcoming, the banking decision is obvious.
- Real estate problems are behind the asset quality deterioration sustained by many banks and thrifts. Institutions with commercial real estate loan exposure in excess of 15% of total assets could present higher than prudent risk. And institutions with nonperforming assets (the total of 90+ day delinquencies, loans no longer accruing interest, and foreclosed properties) greater than 2.0% of total assets could also represent higher than prudent risk. Again, customer inquiry is most certainly warranted.
The state of the US banking industry will continue to have a very direct impact upon the health and outlook for the nation’s economy and the nation’s consumers. The government is still formulating a response to the present situation that will be a key determinant of the viability of a number of the nation’s banking institutions. If you do your homework checking rating services, compare individual banks to the industry benchmarks in the table, and follow the practical advice in this article, you should be able to make banking choices that avoid involvement with a bank that fails.
Milton Joseph is a financial analyst with over 30 years of bank industry experience.
Check these bank rating services:
Bankrate.com
Bauer Financial
The Street.com
Veribanc
Bank Failure List
Safety Of Your Money
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