Before the rash of bank and saving association failures in the late '80s, you probably didn't give much thought to the health of your bank. In fact, you probably didn't think about it at all. There was little reason to: Bank failures were few and far between; even the term "bank failure" was unfamiliar to most people. Then came the '80s, when the failure rate started to escalate. By 1985 bank failures reached triple digits and stayed there through the next seven years, peaking at 206 in 1989. As the failure numbers grew alarmingly, people soon began to pay a lot of attention to the health of their bank. Even today, when the number of failures has declined to a trickle, one of the most frequently asked questions received at the FDIC is, "How can I tell if my bank is safe?"
Before we describe the various options and available information for assessing your bank's health, here are some important points to keep in mind: (1) There is no easy, one-stop answer; (2)Your ability to determine a bank's health from available records may depend on your financial I.Q. (Do you understand a financial statement? Most people don't. But don't despair; other indicators are available.); and (3) Any financial assessment of a bank - or any other financial institution, OR any corporation or business, OR your own finances - is just a "snapshot" of what the scene looks like at the time you are looking at it. Each of these financial pictures changes over time - perhaps in minutes! So one rule of thumb when assessing the financial condition of your bank (or anything else) is to take several "snapshots'' over time and compare them. How? More on that shortly.
Information about the condition of a financial institution (bank, savings association, credit union or other type) is available from three sources: (1) the institution itself; (2) the regulators, usually the institution's primary supervisor; and (3) third parties, such as professional companies that rate the health of financial institutions (for a fee), publications and brokerage houses. Here's what is typically available and the cost, if any.
DOCUMENTS AVAILABLE FROM REGULATORS
Report of Condition and Income Statement (Call Report) -commercial and savings banks: Each report is $6.00; you can be billed. Write to the FDIC Disclosure Group, Room F-518, 550 17th Street, N. W, Washington, D.C. 20429. Provide institution's name and location, year and quarter (first, second, etc.) being requested, contact person, phone number and mailing address. For savings associations' Thrift Financial Reports, write to the Office of Thrift Supervision, Information Services Division, 1700 G Street, N. W., Washington, D.C. 20552.
Uniform Bank Performance Report (UBPR) (commercial banks): Each bank report is $45, payable in advance to the Federal Financial Institutions Examination Council. Mail request and check to: UBPR, Department 4320, Chicago, IL 60673.
Registered Bank filings (banks with more than 500 shareholders): A list of these institutions (there are about 200 of them filing with the FDIC) and copies of filings can be requested by writing to the FDIC Registration and Disclosure Section, Division of Supervision, 550 Seventeenth Street, N.W., Washington, D.C. 20429, or by calling (202) 898-8913. Filings also may be inspected between the hours of 8:30 a.m. and 5: 15 p.m., Eastern Time, at Room 643, 1776 F Street, N. W., Washington, D.C. Call ahead to make sure the filings are available (if the number of shareholders drops below 300, an institution no longer may need to meet the SEC filing requirements).
Various filings required by the Securities Exchange Act of 1934 for banks with more than 500 shareholders, including annual and quarterly reports, as well as annual proxy statements. Copies from the FDIC for state-chartered nonmember banks that file these forms are ten cents a page after 250 free pages. For the same types of filings required from national banks, state member banks, or savings associations, contact the Office of the Comptroller of the Currency at 1025 Connecticut Ave, N.W., Suite 708, Washington, D.C., 20036, the Federal Reserve Board or the Office of Thrift Supervision.
DOCUMENTS AVAILABLE FROM INSTITUTIONS
Institutions make available, on request, an annual financial statement, which is basically a balance sheet (assets and liabilities) and income statement and often may highlight some basic information like how profitable the institution is and how much capital there is to cushion any future losses. For many institutions, public availability of these statements is mandated by law or regulation. Larger institutions must include a narrative management discussion. A quarterly report also may be available and is often published in a local newspaper. If your bank or savings association is owned by a holding company, you should be able to obtain an annual report of the parent company that explains its financial position in some detail. There is usually no charge or a nominal copying fee for any of the reports available from the institutions.
DOCUMENTS AVAILABLE FROM PRIVATE SOURCES
For non-mathematical folks, these sources may be the most useful.
Several rating companies provide financial reports on specific banks for a fee. Here are some of the companies that provide them. [NOTE: Some financial background and familiarity with financial terminology may be needed to gain the maximum benefit from these reports. Readers are reminded that the FDIC does not specifically endorse any rating company.]
Bauer Financial Reports, Inc., Gables International Plaza, Penthouse l-C, 2655 Le Jeune Road. Coral Gables, Florida 33134 [1-800-388-6686] - Rates banks, savings associations and credit unions using a system of 0 (lowest) to 5 stars. Information free for certain banks. $10 for the first institution and $2 for each additional institution. Statewide and other lists also available.
IDC Financial Publishing, P O. Box 140, 300 Cottonwood Ave., Hartland, Wisconsin 53029 [1-800-525-5457] - Rates all banks, bank holding companies, thrifts and credit unions reporting to the federal government. Rates institutions on a scale of 300 (best) to 1, based on financial statistics and ratios. Institutions also are classified into one of five peer groups, ranging from superior to lowest. Rating categories by phone ($30 each) are followed up with a five-page report.
Sheshunoff Information Services Inc., 505 Barton Springs Road, Suite 1100, Austin, Texas 78704 (l-800-456-2340) - Evaluates banks and savings associations based on capital adequacy, asset quality, earnings and liquidity. A rating report for one institution costs $25. For $50, ratings of all the banks or savings associations in one state will be provided.
Veribanc, P.O. Box 461, Wakefield, MA 01880 [1-800-442-2657] - For $10 you can find out where your bank, savings association or credit union falls in their 8 categories of safety. $5 more for each additional rating. Each $10 rating includes ratings for the past three quarters. For $25 you can get a short report that includes the rating and a paragraph of related financial data. For $35, you get a list of banks in your region (or any region you choose) that meet exceptionally high standards. The company will provide at no charge the definitions for its ratings, number of banks in each rating category and historical records of the number of bank failures in each rating category.
Readers are cautioned, however, that some financial background and an understanding of financial terminology may be needed to gain the maximum benefit from these reports.
Publications that profess to give you the inside financial scoop are too numerous to mention. You may wish to subscribe to a financial newspaper or periodical, but look at a few issues in your local library first to make sure it meets your needs. Major newspapers in larger cities carry enough financial information to give readers some idea of major trends. Local newspapers often carry stories about local financial institutions; these papers also may carry advertising from local institutions that includes some notable facts in addition to the usual rate and product information. Some examples: "Serving your community since 1950" tells you the institution has been around for a while (but doesn't necessarily mean it will be around forever). Or perhaps a bank or thrift sponsored a local civic event or demonstrated its commitment to the community in some other way. Activities like those should enter into your assessment of an institution even though they don't provide specific financial data or direct information about its financial performance.
Stock brokers are another possible source, and can provide financial information to their customers, usually about companies or financial institutions whose securities they are selling as well as the companies whose securities the customer already owns.
If you're really intent on learning about your financial institution, and its stock is traded on an exchange (ask a bank officer if it is), you could buy some shares; then you might receive plenty of information about it, including not only its health, but perhaps its plans for the future, too.
By now you're wondering why the regulators just can't say right out whether your institution is healthy or not. After all, the regulators must know the condition of the institution: they periodically send in examiners who write detailed reports about the institution's health. And they assign a rating which is called "CAMEL RATINGS" to each institution according to an interagency system that would tell you instantly - if you could understand it - whether you should have concern, and if so, how much. The name "CAMEL" comes from the first letter of each of the five following key criteria used by bank and thrift regulators to determine a bank's health:
Let's suppose the agencies decided to give these ratings to the public. You find out that your financial institution is rated 4 or 5 (the two lowest ratings) on the CAMEL rating system. You now know your bank is having difficulties. If it's a 4, it may well pull itself out of the hole; if it's a 5: Chances are slim. You'd probably run, not walk, to the nearest entrance and withdraw all of your money. Sure it's insured, but who wants to go through the hassle of filling out papers and waiting a few days for their funds and maybe even having to open new accounts and get new loans and lines of credit somewhere else? Other depositors come to the same decision, they all run to the bank and withdraw their funds, and Bingo! The bank is broke. No, "It's'' NOT "A Wonderful Life" and you are not going to go to the rescue of your bank president. That only happens in the movies.
And the so-called "bank run" that Jimmy Stewart experienced isn't confined to sick institutions, either. Suppose your bank is experiencing temporary problems that could be solved within an acceptable (to regulators) time period. Somehow, you and other depositors get wind of possible problems at the institution and remove your funds, causing the bank's capital to fall below required minimum standards or become insolvent, thus forcing regulators to close it. The recovering patient, denied an air supply, dies.
That's one reason - disclosure could cause unnecessary failures - why regulators don't reveal the names or ratings of ailing institutions. They also are prohibited by law from disclosing that information (except in specific circumstances), and if they do could face stiff fines, jail or both. The primary purpose of government supervision is to prevent problems and, if problems do develop, to get them corrected before the public or the economy are affected.
Now, how do you compare "snapshots" of your institution's financial health? If you're familiar with terminology like earnings, capital, assets and liquidity, you can use the institution's quarterly or annual reports or the Call Reports from the FDIC (or the Office of Thrift Supervision for savings associations' reports) to compare these and other "line items" that are used to assess financial health. Obviously, you want to see a steady maintenance or an increase over time in each of these categories, or a good explanation why there isn't one (perhaps the bank purchased a subsidiary that in the long run will make the bank more profitable). You also want to see that these items are in proper proportion to each other. For example, is capital increasing at the same or better ratio than assets, so that the percentage of capital protection is maintained or improved? Even if you're NOT comfortable with financial terminology, you certainly can compare the numbers on the abbreviated annual statements that the institutions themselves make available, to see if they're going up or down from year to year (you can request the annual financial statement for prior years).
But don't use these measurements as the only indicators. Try to obtain additional information from the third-party category described earlier (rating companies, publications, etc.). If you still don't like what you see after your comparison efforts, ask the institution for more information, although anything beyond what we've described is usually hard to come by. Now, with all of this voluminous (or so it seems) information available, what if you are still not satisfied that you know whether your bank is healthy or not? And what about those of us who really are not comfortable with numbers, and even if we're okay with them, can't fully understand the information available? Simple: just make sure your funds are fully insured - that you don't have more than $100,000 in any one ownership capacity (e.g., single or joint) in the same bank (including its branches) and sit back and RELAX. You won't lose any of it if the worst - your bank fails - should happen.
The bottom line (that's a financial term we ALL understand): There is NO surefire way to predict when or if a bank will fail; even the closing authorities have had to deal with occasional surprises over the years. And by ensuring that your deposits are fully protected by FDIC insurance, you've really done all you have to do.