The lack of research about local banking institutions leaves many large depositors worried about whether their bank will be the next to fail. Regulators don’t like to make rankings public so that they don’t cause a run on a troubled institution.
As a result, savers may be overly anxious about keeping their savings in a local bank, depriving local lenders of resources that could be invested in the community to create jobs. Instead, money flows toward “too big to fail” institutions who are increasingly investing in government bonds – funding the big government juggernaut – but leaving local job creators without sufficient expansion capital. While big banks increase fees to make up for their lack of interest income with a host of new fees, including the appropriately-named new Durbin fee on debit card transactions, smaller institutions are prevented by the regulators from making loans in the areas they know best, to local investors who are best suited to take over management of the millions of homes across the country that sit in foreclosure portfolios.
Finding objective information is difficult, but relying on rumors just increases the level of anxiety. Several local banks have been the subject of rumors in the past year, including Community Banks.
Large depositors with concerns about their deposit institution should do the research for themselves on the Federal Financial Institutions Examination Council web site. (https://cdr.ffiec.gov/public/) The site makes it easy to view or download data for individual institutions.
In our research for a local foundation client, we focus on a few key statistics to keep the analysis manageable. The first ratio we review is the Tier One Leverage Capitalization which measures the amount of investor money at risk before losses would impact depositors with savings above the FDIC guarantee levels. Most of the local institutions have nearly 10% in tier one capital. As of June 30, Community Banks of Colorado’s capital ratio had declined to only 1.66%, meaning another 2% in bad loans was all it took to wipe out the equity.
We also look at the total past due loans and leases. At Community Banks of Colorado, there was another 11.31% in past due loans as of mid-summer, so it shouldn’t have been a big shock when the equity was wiped out. In our review, we concluded that only one of the remaining twelve institutions is “under water” in the sense that its past due loan percentage is greater than its current tier one capitalization. In all of the other banks, even if every past due loan went bad, there would still be equity left to protect depositors from future losses.
In our review of thirteen local institutions, Community Banks was far and away the most likely institution to fail. Unfortunately, as tight regulatory policies force banks to walk away from more and more borrowers, forcing additional foreclosures, these numbers do change over time so you need to perform the analysis on an ongoing basis.
The benefit of performing this research, which only takes about an hour to complete, is that depositors can make an informed decision before allowing a local bank to keep deposits in excess of the FDIC lending limits. The data is reliable, compiled by the bank regulators who are paid to look over the shoulder of the industry. And while it isn’t exactly kept in an easily understood format, analysts who identify a few key ratios can make sense of the mountain of data that is available.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .
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