The good news reflected in the bank and thrift ratings for the third quarter is 2,966 institutions rated “Superior”, 1,395 ranked “Excellent”, and 1,464 rated “Average”, or 77.5% of all banks and thrifts rated investment grade.  With over three-quarters of institutions with satisfactory to superior ratings, investors have an ample opportunity to invest and transact with highly rated banks and thrifts.

 The bad news is 372 banks and thrifts rated “One” (1), IDC’s lowest rating.  Institutions rated “1” (on a scale of 1 to 300) have a shortage of capital or severe amount of troubled loans and other assets over and above Tier I capital and the loan loss reserve.  Some of these banks and thrifts continue to write-down loans or realize losses on sale of assets, attempting to build cash on the balance sheet.  The impact, creating negative balance sheet cash flow, demonstrates the inability to grow out of a troubled state.  Over time, some 30% of banks and thrifts rated “1” recovered by raising new capital or selling troubled debt or assets.  The weakness in the economic recovery and housing limits a financial institution in selling mortgages or repossessed property at reasonable prices.

 Banks and thrifts with a rank in the “Lowest Ratios” (2-74) continue on IDC’s watch list.  Most of these 509 institutions have severe troubled loans or assets relative to Tier I capital and loan loss reserves and profit problems.  Together, institutions rated “One” and 2-74 total 881, make up IDC’s watch list and approximate the FDIC’s 884 troubled firms.

 Finally, “Below Average” banks and thrifts numbering 810 are considered below investment grade by the buyers of certificates of deposit.

 In recent quarters, the number of banks and thrifts rated “1” has fallen due to failure or recovery with new capital.  However, the percentage of institutions ranked “Average” to “Superior” has consistently remained above 75%.

This article is authored by John E. Rickmeier, CFA.  Mr. Rickmeier has over 30 years of experience in evaluating depository institutions.  As CEO of IDC Financial Publishing (IDC) since its founding in 1984, Mr. Rickmeier and his analytical team currently evaluate and rank quarterly over 16,000 banks, thrifts, and credit unions.  IDC ratings of financial institutions have become the standard in evaluating the safety and soundness of institutions issuing brokered certificates of deposit.  IDC ratings are also used by the Federal Reserve banks, Fannie Mae, Freddie Mac, Ginnie Mae, insurance and credit card companies, state and municipal governments, financial firms specializing in brokered certificates of deposit, individuals and institutions investing in certificates of deposit, and individuals concerned about their bank safety rating.

Why Select IDC Ratings to Judge the Safety and Soundness of a

Bank, Thrift, or Credit Union

The rating from IDC Financial Publishing is the standard for determining the strength and safety of financial institutions issuing certificates of deposits, a risk standard for the Federal Reserve Banks, Fannie Mae, and Freddie Mac, state governments, as well as, a risk measurement tool for credit management at independent U.S. banks, major New York banks, insurance companies, and firms selling products to banks, thrifts, and credit unions.  IDC ratings are especially useful for the individual investor.

 Timeliness – Preliminary bank ranks and advanced rating reports are released 45 days following the end of a calendar quarter (soon to be reduced to 36 days).  Final ratings are released two weeks after the preliminary release.

 Inquiry – Banks receive a two week period between preliminary and final ratings to question ratios used in the rating and provide any clarification of data filed with the FDIC.  Added information that is not easily obtained from the call report such as narratives explaining large non-interest income or expense items may be used to provide support for a change in the calculation on a particular institution.

 Accuracy – In the past 3 years, 99% of failed banks (excluding failed institutions due to fraud) were rated 74 or less (IDC lowest ratings).  Since 1989, bank and thrift failures ( excluding failed institutions due to fraud, small failed banks with less than $5 million in assets, and bank holding company failures) totaled 1,305 institutions of which 99% were ranked 74 or less (lowest ratings on a scale of 1 to 300).

 Unique Financial Analysis – IDC’s method of financial ratio analysis converts the bank or thrift to a cash basis, computing the after-tax operating profitability compared to the after-tax cost of funding and leverage profitability.  Together, these separate measurements of risk provide a Net Operating Profit Return on Equity.  Standard measures of ROE distort profitability measures due to loan loss reserves and provisions.  Finally, for troubled institutions, balance sheet cash flow measures the ability to grow out of trouble, compared to simply realizing write-offs and storing cash.

 IDC’s CAMEL analysis allow credit and risk managers to spot deficiencies in capital, adequacy of capital to cover delinquent loans, margins as a measurement of managements effectiveness, earnings from operations or leverage, and liquidity as defined as balance sheet cash flows.

 Convenience of Use – IDC’s rating procedures and financial calculations are primarily unchanged since 1984 and similarly presented in database or book format for banks, bank holding companies, thrifts and savings banks, as well as, credit unions.

 Special Features of Bank Holding Companies – For analysis of banks, the subsidiary banks are listed below and compared to the respective bank holding company.  In some cases, a strong bank holding company can assist a low rated subsidiary.  On the other hand, a weak bank holding company can endanger the health of a non-troubled subsidiary.

 IDC’S ratings are more timely, open to question, accurate, unique in calculation, and convenient to use.  Select IDC ratings for your analysis of a bank, thrift, or credit union.  For more information, visit our site at www.idcfp.com or call us at 1-800-525-5457.

This article is authored by John E. Rickmeier, CFA.  Mr. Rickmeier has over 30 years of experience in evaluating depository institutions.  As CEO of IDC Financial Publishing (IDC) since its founding in 1984, Mr. Rickmeier and his analytical team currently evaluate and rank quarterly over 16,000 banks, thrifts, and credit unions.  IDC ratings of financial institutions have become the standard in evaluating the safety and soundness of institutions issuing brokered certificates of deposit.  IDC ratings are also used by the Federal Reserve banks, Fannie Mae, Freddie Mac, Ginnie Mae, insurance and credit card companies, state and municipal governments, financial firms specializing in brokered certificates of deposit, individuals and institutions investing in certificates of deposit, and individuals concerned about their bank safety rating

Bank Holding Company Quality

 Bank holding companies in the United States are usually defined as “any company that has control over a bank”.  The Federal Reserve Board of Governors has responsibility for regulating and supervising bank holding company activities, such as establishing capital standards, approving mergers and acquisitions and inspecting the operations of such companies.  This authority applies even though banks owned by a holding company may be under the primary supervision of the Comptroller of the or the Federal Deposit Insurance Corporation.

Becoming a bank holding company makes it much easier for the firm to raise capital than as a traditional bank.  The holding company can assume debt of shareholders on a tax free basis, borrow money, more easily acquire other banks and non-bank entities, and issue stock with greater regulatory ease.  It also has more legal authority to conduct share repurchases of its own stock.

The downside includes responding to additional regulatory authorities, especially if there are more than 300 shareholders, at which point the bank holding company is forced to register with the Securities and Exchange Commission.  There are also added expenses of operating with an extra layer of administration.

As a result of the Global financial crisis of 2008, many traditional investment banks and finance corporations such as Goldman Sachs, Morgan Stanley, American Express, CIT Group and Ally Bank successfully converted to bank holding companies in order to gain access to liquidity and funding.

Because of the effects of moving capital between holding companies and their subsidiary banks through the use of such things as dividends, there can be quite a disparity between the financial conditions of the two entities.  Some holding companies can be well capitalized while their subsidiary bank(s) may be only adequately or under-capitalized.  There are also instances where holding companies are on the verge of failure, but their subsidiary shows financial strength.  It is important when reviewing the quality of a particular bank that the investor determines if the bank is owned by a holding company and what condition that holding company is in.  IDC Financial Publishing, Inc. (IDC) publishes holding company ratios and ranks along with their subsidiaries to make that determination easier.