Should I Change Banks? Understanding Bank Ratings

With headlines of economic downturn, health care reform, and decreased reimbursements, many physicians are asking the questions, “Is My Money Safe?” “Should I Change Banks?”

The first step to take in answering these questions would be to determine your bank’s rating. To help educate the average depositor, we researched the methodology behind bank ratings. Bauer Financial is a nationally recognized independent bank rating firm. The information that Bauer uses to rate banks is obtained from an approximately 30 page report that each bank is required to file quarterly with government regulators. No bank with assets greater than $1.5 million can be excluded from this rating process nor does a bank pay to be rated or for the rating that it receives.

There are a number of factors considered in the rating process including:

• Capital ratio;
• Number and value of delinquent loans;
• Number and value of charge offs;
• Repossessed assets;
• Profit/(loss) trends;
• Value of investment portfolio;
• Regulatory supervisory agreements;
• Community reinvestment rating;
• Historical data; and
• Liquidity

This rating process occurs each quarter and the results are published about six months after the rating process occurs, so the data that we review is somewhat dated.

An overview of the ratings a bank can receive are as follows:

• 5 Superior
• 4 Excellent
• 31?2 Good
• 3 Adequate
• 2 Problematic
• 0/1 Troubled

Bauer Financial prepares a report each quarter of banks that fall in the “Troubled” category, and it recommends banks that are rated either a 4 or a 5.

The FDIC, until December 31, 2013, will continue to insure each deposit account up to $250,000, whether it is a personal or business checking or savings account per institution. The amount could change after December 31, 2013 but is fixed at this point. There is somewhat of an opportunity to insure more than $250,000 as there are some banks that belong to a unique network called Certificate of Deposit Account Registry Services (CDARS). When you place a large deposit with a CDARS Network member, that institution uses the CDARS service to place your funds into CDs issued by other bank members of the CDARS Network. This occurs in increments below the standard FDIC insurance maximum so that both principal and interest are eligible for full FDIC insurance. By working directly with just one institution, you can receive insurance coverage from many and all transactions are recorded on one consolidated account statement. Because the funds are locked into a CD, there is a time commitment associated with access to the funds, which can vary from 4 weeks to 13 weeks to 26 weeks to multiple years. The longer the asset is invested, the greater the return rate.

In an effort to gain some comfort around the stability of the bank holding group funds and in addition to the fact that interest returns are minimal right now, some physicians have made the decision to modify the frequency of their payroll and/or bonus schedule... choosing to withdraw their funds more frequently in smaller amounts rather than building in the bank account. There is no perfect way to protect that your bank will not fail or be bought by a larger financial institution; however, looking at what makes fiscal sense for your specific practice may result in a change in your banking practices. Of course, it is necessary to discuss your concerns and ideas with your accountant and practice business advisors so that funds are readily available for your various expenses and opportunities as they come due.