Sayings such as “It’s as safe as a bank” or “You can bank on it” may not be as popular as in the past. With increasing concern about the solvency of some of the nation’s biggest banks, people are taking a closer look at the safety of the banks with which they do business.
“Your money is safe in a bank,” said Mississippi Banking Commissioner John S. Allison. “We have the best banking system in the world. It is highly regulated. When we find any trouble with a bank, we immediately start regulatory actions such as requiring the bank to change lending practices, moving management out or whatever the situation demands. We have tools we can use to keep the banking industry safe and sound.”
Allison said banks in Mississippi are for the most part well run and well capitalized. While second quarter earnings this year are not nearly as high as have been seen in the past 12 to 15 quarters when there were some all-time record earnings, most banks are still showing a profit.
Conservative and cautious
There are pockets in the state where there had been a lot of development activity, and there has been a slowdown. That has challenged banks to be cautious. But Allison said the conservative nature of Mississippi banking separates it from banking in places like California, Florida and Nevada where there was exponential growth that people thought was never going to end.
“Banks in Mississippi have weathered the storm so far,” Allison said. “For seasoned bankers and regulators, this is not the first rodeo. We have great young bankers and examiners who have never seen downturns. But I have been at this 35-plus years, and we have seen numerous ups and downs in banking cycles. That is just the way things are. It is going to turn around. It may be two or three quarters, but we are cautiously optimistic things are going to start turning up again.”
After the Great Depression in 1929 when a run on banks led to closings and depositors losing their money, the FDIC was created to insure bank deposits up to $100,000. So, if someone has a concern that his or her bank might be having financial troubles, the first thing to do is make sure there isn’t more than $100,000 deposited in one bank.
There are ways to structure deposits so the entire assets are covered. For example, instead of a joint account, a husband and wife might want separate accounts of $100,000 each. Customers can go the FDIC website, www.fdic.gov, and click under “Is My Account Fully Insured?” to make sure they are covered. The FDIC website also has detailed financial statements of banks so consumers can make their own decisions about the soundness of the bank by looking at factors such as capital, earnings, loan losses and loan areas.
The FDIC and the Mississippi Department of Banking and Consumer Finance (DBCF) compile ratings of banks based on five factors known as CAMELS (capital assessment, management ability, earnings, liquidity and sensitivity). Each factors is rated from one (best) to five (worst). A composite rating of one and two is good, three is troubled and needs work, four is worse and five could be in imminent danger of failing or takeover.
“Depending on the rating, we go from there on enforcement actions,” Allison said. “We can do a memorandum of understanding between the regulator and bank or go all the way to a cease and desist order. We do progress reports to see how they are doing complying with orders that state what they must do.”
While the DBCF ratings system is confidential, most of the private rating systems use the same general factors used by the regulators.
Richard G. Hickson, chairman and CEO of Trustmark Bank, said customers should ask the following questions when evaluating a financial institution:
• Profitability. Does the company have a history of positive earnings?
• Level of capital. Is the company well-capitalized?
• History of success. Does the company have a track record of successfully working through various economic cycles?
• Diversified business mix. Does the company have a diversified business mix, including both geographic locations and product offerings excluding high-risk businesses such as subprime lending?
“Trustmark has never originated subprime mortgage loans,” Hickson said. “Throughout our 120-year history, we have endured many economic cycles and have taken the responsibility of safeguarding our customers’ money seriously. Trustmark is a sound, profitable and well-capitalized financial institution, which is especially important in today’s environment. Our diversified financial businesses have well-positioned Trustmark for continued success.”
If one’s research determines there is significant exposure to ARM loans, it would warrant a closer look. But BancorpSouth says there is nothing wrong with an adjustable rate mortgage as a product. BancorpSouth said the recent problems associated with them developed because of how they were underwritten on an individual basis to borrowers who instead needed the certainty and security of a fixed-rate loan to protect them against future increases in interest rates.
The institutions that uphold the fundamental principles of good banking are likely the banks that will endure difficult economic times the best, said Hancock Holding Company CEO Carl J. Chaney.
“The more publicized bank failures in recent months do seem to have a common denominator of subprime lending and a large number of customers struggling to meet adjustable rate mortgages,” Chaney said. “Customers should probably think twice about whether they wish to have accounts at institutions that engage in risky, highly speculative lending. Consumers should consider institutions that have a long history of financial stability and that adhere to basic good, sound business practices. Institutions with strong capital bases (“rainy-day” funds, so to speak), good asset quality and solid risk management typically weather economic storms well.”
Chaney said fortunately many of the major banks based in Mississippi, and particularly those headquartered on the Mississippi Gulf Coast, are traditionally strong institutions with strong capital bases. Those banks are institutions that have a record of maintaining their strength and stability through volatile economic times including the Great Depression, World Wars, the recessions of the 1970s and 1980s, the September 11th terror attacks and Hurricane Katrina.
“Well-capitalized institutions have had the foresight to study historical trends, minimize their risk exposure when the market fluctuates and realize that, regardless of prosperity, challenging economic times will occur at some point,” Chaney said. “Therefore, those banks typically retain a relatively conservative business philosophy to protect their customers and ensure the company can rely on its own financial reserves during economic slumps.”
Scrutinize that bottom line
Renasant chairman and CEO E. Robinson McGraw agrees scrutiny of a bank’s bottom line is prudent.
“Even during the current economic downturn, Renasant just completed another solid quarter as net income for the second quarter of 2008 was up nearly 13% as compared to same period in 2007,” McGraw said. “Our basic and diluted earnings per share were $0.38 for the second quarter of 2008, which is in line with consensus estimates from equity research analysts. In addition, Renasant, as with all FDIC-insured banks, is regularly and thoroughly examined by state and/or federal regulators who focus on institutional performance, soundness and risk management.”
McGraw said Renasant Bank is well-positioned to handle economic downturns and has the proper tools, conservative credit culture, underwriting processes and people in place to aggressively work through any credit issues while minimizing losses that may arise.
“Renasant Bank is well capitalized by financial regulatory standards and is prepared for economic fluctuations,” McGraw said. “Our risk management is strong. We have increasingly put enterprise-wide risk management processes in place, increased the use of sophisticated risk-management systems and tools and implemented strong schemes of checks and balances as well as external and internal audits. In addition, we hold a conservative banking culture and philosophy that is built on long-term growth and sustainability.”
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.