Wednesday, October 15, 2008

Bank Safety and the Hidden America Not In Crisis

There's a story that the financial media is missing entirely, and it's about the segment of the banking system that is working just fine. These are not the largest banks, and--for the most part--they don't operate in the largest markets. Rather, they tend to be located in small towns that have seen neither boom nor bust in real estate markets. They did not involve themselves in subprime lending, and they did not make large real estate construction and development loans. They have never involved themselves in trading in derivatives; they take in deposits, make prudent loans, and stick to what they know best: the needs of their communities.

As part of a research project, I went to two sites that are devoted to rating banks for safety and performance. The first is Veribanc (, and it generates "blue ribbon" lists of banks that stand out on such metrics as profitability, liquidity, low problem assets, and a high ratio of deposits to total assets. Banks that excel in all these measures are called "Blue Ribbon banks". In my research, I focused on banks that achieved blue ribbon status for each of the past eight quarters.

The second site I visited was Bauer Financial, which rates banks with a star system. Those with four and five stars are deemed strongest and safest. Those receiving two and fewer stars are considered troubled. The basis for the stars is similar to the CAMELS criteria, which focuses on capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk.

For my research, I identified all Illinois banks in my region that met the highest blue ribbon criteria from Veribanc *and* the five star rating from Bauer. Interestingly, 13 banks made the cut--a large number considering I was examining one segment of a single state. Of those 13 banks, none were from Chicago or even large cities in the region. All were located in small communities. For all but two of the banks, total assets were under $500 million, and eight were under $200 million. By contrast, a regional bank well represented in our area, Fifth Third, has assets of over $50 billion. Most of the 13 high quality banks are headquartered in towns I had never heard of; many well west of Chicago, far from any real estate booms.

There's an America that doesn't live by credit cards, that is grounded in community, that treats banking as a stewardship, and that makes decisions prudently and conservatively. We don't hear about that America very much in recent media reports, but it may just hold the keys to unlock many of our current dilemmas.

PS - I would love to name the 13 banks if only to acknowledge their excellent performance, but I also need to honor the proprietary information from the two ratings services. Note that Bauer's stars can be downloaded free of charge via the link above; Veribanc charges a modest fee for their ratings of various states and regions.