Bank Safety: The Hidden America That's Not in Crisis

by: Brett Steenbarger October 15, 2008    
Brett Steenbarger

Brett Steenbarger

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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 (www.veribanc.com), 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 (FITB), 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.

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This article has 19 comments:

  •  
    Oct 15 05:18 PM
    Why is Bank of America, et.al. stepping up to suckle from the breast of the American taxpayer? After all, all of these banks are so strong, safe, secure... If all of this is true, JUST SAY NO when Bush-Paulson offers to buy shares in your company. After all, you don't really need do you?

    Or do you?
    Reply | Link to Comment
  •  
    Oct 15 05:39 PM
    Ironically, the 'small' banks that are strong based on slow capital growth would tell Paulson to take a hike if the offer came about. But it won't. They don't need it.

    Curbs, have you read 'the forgotten man'? It will make your head explode!

    my advice, change your business model now if it is not already based on dealing with clients with cash. Government intervention is going to make this nasty over several years rather than 18 awful months
    Reply | Link to Comment
  •  
    Oct 15 07:51 PM
    It's not just small towns. There are well-run banks everywhere. A relation of mine owns a small bank in Los Angeles -- one of the epicenters of the real-estate bubble. But they are flush with cash because they are conservative, didn't even consider any exotic securities, loaned smartly and kept high cash reserves. They run their bank the old-fashioned way and now they've got their pick of borrowers.
    Reply | Link to Comment
  •  
    Oct 15 08:50 PM
    Realistic article. There are many steady, well-funded banks on Main Street whose stock valuations were thrown out with the big banks dirty bath water.

    It is only fitting that these valuations be the first to recover.
    Reply | Link to Comment
  •  
    Oct 15 10:07 PM
    A majority of baks are well run. Only the biggest tied to the brokerage industry are in trouble because they used the brokers to multiply their leverage beyond the normal approved bank amount of about 10x which is already excessive in most banker's eyes. They complain because the bailout only helps make the lest competitive banks the most competitive "as in they get to suckle the taxpayers teats" as they sit back and claim small banks are in trouble. JP Morgan was the first bank to cause the first bank run in the US to profit off it. This is just more of the same.
    Reply | Link to Comment
  •  
    Oct 15 11:09 PM
    You may overlooking one thing here...

    A small town banker I know participated in the risky loans.

    He made a fortune on the business, but dumped all of the junk on the big banks.

    Now his bank is in great shape to swoop in after the great deflation and pick up the stuff he sold to the big banks for pennies on the dollar...LOL

    Justice can bee sweet...
    Reply | Link to Comment
  •  
    Oct 16 12:31 AM
    Jamie Dimon of JPM says they don't need the money. Henry Paulson says the program is optional.

    Who is lying?
    Reply | Link to Comment
  •  
    Oct 16 11:38 AM
    Paulsen is lying. The fact is the bailout is a cover up of the practices of goldman sacs and the other brokerages. Goldman was fast tracked to become a bank, previoulsy unheard of, so they could take part in the bailout and jp morgan and the other banks were forced to go along to give the plan validity. The banks were forced to accept this plan primarily because they were co-conpsirators due to the fact that they originated all of the junk loans that created this mess The american people would have never gone along with a program that only bails out the two new so-called banks that combined payed its executives in excess of 8 billion dollars last year alone. This is what happens when you put a stock broker in charge of the treasury.

    Reply | Link to Comment
  •  
    Oct 16 11:56 AM
    For many years i could not figure out why so called quality lenders such as jp morgan, countrywide etc. would make such terrible loans. I am a real estate appraiser and for the last 10 years i could see, in the course of my practice, that there were tons of loans that should have never be made. It has become abundantly clear know why these loans were made. They were simply concieved as products for the secondary market, very similar to the .com's that everybody knew were valueless but were pushed to the unwiiting investor. These terrible loans would not have been made if the banks had to assume the responsibility. The fact is they made these loans because they knew they had a buyer who would buy anything. If this doesnt prove that banks, brokerage firms and insurance companies should be seperated, as was mandated by the glass- steagull act, i dont know what will.
    Reply | Link to Comment
  •  
    Oct 16 12:13 PM
    Brett has made a great point that no one at the treasury or fed have even recognized. In fact i fell the key to any bailout, with a goal of creating a bottom in the housing market, must include a program that utilizes the lenders who have made quality decisions within the last 10 years. I personally believe providing large amounts of capital to the smaller banks and credit unions under a mandate that they lend this money "today" with loser qualifications than they are used to would alleviate the problem in a short time. This would reward those who acted prudently as opposed to simply correcting the balance sheet of those who didnt. A funny fact. Countrywide is currently not accepting short sales or loan modifications unless the borrower does not finance their loans through them. Is anybody interested in hearing the truth about all the ajustable rate mortgages that are a large part of this problem.
    Reply | Link to Comment
  •  
    Oct 16 03:51 PM
    Mr. D

    Agreed.

    This crisis won't be over until home prices revert to historical income/price means. Last time I checked, we were about 20% away (there was on excellent article on this site a month or so ago). We might return to fair value in 2009 if mortgages become hard to get or interest rates on them continue to rise. Overshoot could happen if mortgages become unavailable. The $350k middle class home was never sustainable anyway. At $150k, though, maybe!

    Once housing bottoms, mortgages will have known values and default rates and we move on.
    Reply | Link to Comment
  •  
    Oct 16 04:11 PM
    thedozer:

    Potter's buying! Fifty cents on the dollar!
    Reply | Link to Comment
  •  
    Oct 16 04:15 PM
    Mr. D & Chris,

    know that the government may go ahead and buy these bad mortgages in order to place a 'bottom' in the market.
    That will NOT fix the problem...

    because, just as an appraiser sets the 'value'... I, the buyer, determines 'worth'

    they are not interchangeable. artificial bottoms/prices only create artificial fixes.

    the blind can no longer lead the blind!
    Reply | Link to Comment
  •  
    Oct 16 04:17 PM
    curbs,

    did you hear last night that Obama is about to unleash his wrath on "BIG PLUBMING"

    That Joe the plumber has had it coming!
    Reply | Link to Comment
  •  
    Oct 16 04:18 PM
    thedozer:

    PS: Maybe Brett here can do an analysis of crowd psychology after tyrants have robbed people blind and led their country to ruin. Perhaps he could start by looking at a photo of Mussolini and his wife, or perhaps a video of Nikolai Ceausescu and Maybe Doe in Liberia.

    I hear those crowds can get really angry...
    Reply | Link to Comment
  •  
    Oct 16 04:23 PM
    curbs:

    Brett did perform some analysis on unruly crowds... hence the deployment of NORTHCOM!

    see ya in the bunker
    Reply | Link to Comment
  •  
    Oct 16 08:06 PM
    thedozer:

    Joe the plumber is going to get the shaft.
    Reply | Link to Comment
  •  
    Oct 17 03:07 AM
    Joe the Plumber is a smart guy.
    He knows what's good for this country.
    Country First. Very important.
    "CHANGE" maybe the beginning of something bad.

    Reply | Link to Comment
  •  
    Oct 17 09:17 AM
    ...and "stay the course" is probably the beginning of something worse.
    Reply | Link to Comment
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