We often take for granted that financial institutions will be around indefinitely, but failures do occur – a dozen U.S. banks have gone under this year. Sometimes even the biggest topple, such as Wachovia and Washington Mutual in 2008. While federal deposit insurance protects your funds – up to $250,000 per bank – in the event of a collapse, no one wants to be caught up in one. Yet assessing a bank’s financial health can be difficult, particularly for those that are privately owned. Still, there are ways to find indicators of soundness, or the lack of it.
Regulatory agencies periodically take enforcement actions involving banks, which may provide a glimpse of the institutions’ operations. The Federal Deposit Insurance Corp. in Washington makes the latest of these measures public on its website’s news section. But the FDIC doesn’t identify the banks on a “problem list” it keeps – the number fell to 411 in the first quarter, down from a post-crisis peak of almost 888 in March 2011. The regulator only makes public information about troubled banks when it takes a specific action, such as ordering a closure or demanding an increase in capital.
While FDIC officials refrain from commenting on specific institutions, the agency does release aggregate data on the banking industry as a whole each quarter. Looking at these numbers can help in determining a baseline for certain indicators to see how your bank compares with the rest of the industry. Financial institutions are required to provide statements of their financial condition to federal regulators every three months, according to the agency, and those filings, known as Call Reports, are available to the public free of charge. Be forewarned though, the information is set up to help regulators and is tough to evaluate for those who aren’t financial analysts or accountants.
Two indicators, average return on equity and net interest margin, are both good measures of an institution’s financial health, and should be at least 2% each. The average return on equity for most banks was about 9%, the FDIC said in November, and the average net interest margin – a measure of how much profit a lender is making loans – was about 3.25%.
Now that you know what the benchmarks are, it’s time to compare your bank to the industry as a whole to see how it stacks up. If the bank has publicly traded shares, look over its recent quarterly and annual financial reports to see if they reflect healthy profit and revenue growth. If they don’t, you'll need to look deeper to determine why not and what it may mean for the organization’s future. The NASDAQ website has a tool that lets users obtain annual financial reports free of charge. Typically, publicly traded companies also make their financial reports available on their websites and you can find most regulatory filings through the U.S. Securities and Exchange Commission’s Edgar site.
BankTracker - There’s nothing better than having an investigative reporter on your side, except of course a whole team of them. Washington-based American University’s Investigative Reporting Workshop maintains BankTracker, an online tool that lets users search for specific banks and see a summary of key financial data for each one as well as a chart showing how the lender’s ``troubled asset ratio’’ compares with the national median. The group describes troubled assets as a combination of the value of nonperforming loans (where the borrower isn’t making payments) and of repossessed property as a proportion of required capital and reserves. Access to the site and its data is free.
BauerFinancial’s Bank Star Ratings - BauerFinancial in Coral Gables, Fla., maintains a database of banks and credit unions, giving them rankings of one to five stars based in part on Call Report data. The company recommends only doing business with four- or five-star rated institutions. The site charges for detailed reports, but the ratings are available for free.
Watch your backing
As securities brokers, insurers and other nonbank organizations enter the field of taking deposits, it’s a good idea to use the FDIC’s Electronic Deposit Insurance Estimator tool as a way of determining which of your accounts are backed by government agencies and what assets, if any, are unprotected. But if you keep tabs on your bank by using resources like those outlined above, you may never need to draw on that insurance anyway.
John Stephens is a Los Angeles-based writer and editor. He covers banking and finance for NerdWallet and spends his spare time collecting pudding labels to accrue airline miles. Follow him on Twitter: @ItsJohnStephens