How secure is your Bank?

With all of the recent bank closures I began to wonder how safe is my money and how secure is my bank?  Could the FDIC come in and shut my bank down?  Would I lose my money?  Could this really happen to me?  What I found is that this could really happen to me but unless you have a large amount of cash holdings in one bank there is little chance of losing your money, but yes the FDIC could close your bank down.

When are my deposits at risk?

Any deposits you have up to $250,000 at any one bank are fully insured by the FDIC, in fact any deposits you have no matter what the amount are insured by the FDIC if they are held in non-interest bearing accounts.  If you have over $250,000 and want or need to keep all of your funds in one bank many banks now participate in the “Certificate of Deposit Account Registry Service” (CDARS) program.   The CDARS program is a special network of banks that allows you to have one agreement with your bank that then places your funds with other network banks in increments under the $250,000 FDIC limit.  With the CDARS program you sign one agreement with your bank and have one interest rate and only one regular statement.

How do I know when a bank is in trouble?

Publically traded banks are required to report quarterly to the SEC.  These quarterly reports are public information.  The SEC also requires publically traded corporations to file an 8-K report in the interim if any material event occurs, there are currently over 100 material events that could trigger an 8-K filing.   The FDIC does not receive any additional reports from a publically traded bank other than those required by the SEC.

The research that I have done has shown that the FDIC has many key ratios that they review when determining the strength of a bank.  These ratios are determined using the financial information filed in the quarterly reports submitted to the SEC.  The two ratios that have been consistently high in all the banks closed by the FDIC have been the Nonperforming Asset Ratio (NPA/Assets) and the Texas Ratio.

The NPA/Assets ratio tells you how much exposure your bank has to assets that are potentially problematic, for example loans that are overdue by 90 days or more are considered nonperforming assets.  This ratio is determined by dividing these problem assets by the banks total assets.  According to industry experts anything below 1% is really good; below 2% is OK, but when you start to get above 4% it is time to worry.

The Texas ratio was developed by the FDIC and other regulators during the 1980’s when there were a number of bank failures in Texas.  This ratio takes the total of non-performing assets that are 90 days or more past due and still accruing interest or are foreclosed properties, this number is then divided by the bank’s tangible capital or equity plus it allowance for loan losses.  When this ratio starts to approach or exceeds 100% the regulators become involved because the bank is in danger of failing due to their total problem assets exceeding the total allowance for loan losses and capital. 

Recently Columbia Bancorp of Oregon had a Texas ratio in excess of 100% and a NPA/Assets Ratio over 9%.  On February 9, 2009 the FDIC issued a Cease & Desist letter to Columbia outlining what needed to change and how quickly it had to happen to avert further investigation or closure.  As of Thursday August 6, 2009, Columbia is still in operation.

A Cease & Desist letter is issued by the FDIC to banks which are having troubles in any one or more of a number of areas.  This letter outlines where the bank is deficient and tells the bank what needs to be done for the bank to fix the problem.  If the bank does not fix the problems outlined in the letter it is very possible that the FDIC will close the bank.

Although I haven’t checked every bank closure, of the ones I checked, the FDIC issued a Cease & Desist order to each bank at least 30 days before closing down the bank.  Two banks in Oregon have recently been closed by the FDIC, Pinnacle Bank in Beaverton on February 13, 2009 and Silver Falls Bank in Silverton on February 20, 2009.  Pinnacle received their Cease & Desist letter in June of 2008 while Silver Falls received theirs in November of 2008.  In talking with different banking officials the consensus has been that it would be highly unlikely and would require incredible levels of mismanagement for the FDIC to close a bank without first ordering a Cease & Desist letter and then giving the bank time to cure the problem areas.  As long as the bank is a public company a Cease & Desist letter is a material event and would trigger an 8-K filing, which is public information.

So, to answer the question of “How do I know when a bank is in trouble?” you need to do a little research to determine if a “Cease & Desist” letter has been issued.  Even if the letter has not been issued it would serve you well to perform a little more research to determine what the banks NPA/Assets and Texas Ratio are.