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Ranking your bank.

How does your financial institution stack up?

Every now and then, something shakes some people's faith in the banking industry. In recent years Americans experienced the savings-and-loan calamity, and doom-sayers last year predicted a similar crisis with banks, a crisis that never materialized.

When the national headlines turn gloomy, many Indiana depositors turn to their banks and S&Ls for reassurance. "People want to know you're safe," says Christopher Murphy III, president and CEO of 1st Source Bank in South Bend. "Older people like to know that their banks are safe and secure, and investors like to know that there is quality in the earnings numbers and that they're likely to continue."

"I think the general public is very prone to believe a lot of bad things, and it's sometimes questionable whether they really understand," says Frank Pavlic, chairman, president and CEO of First Federal Savings Bank of Indiana in Merrillville.

Those who investigate usually find that the troubles they may have read about are not problems in the Hoosier state. How do concerned customers make such determinations? Bankers and experts say there are a number of ways to learn about the performance and soundness of one's financial institution.

"There are really three major things to consider," Murphy says. To consider them one needs a financial report from the institution. "The first thing is credit quality. Without credit quality you have no future. I'd look at the non-performing assets, see the trend, see the loan-loss reserve and see how much coverage there is of the non-performing assets."
Top-Performing Banks With Assets of $1 billion-plus
 1992 Return
Bank City on Assets
Bank One Indianapolis Indianapolis 1.87
Citizens National Bank Evansville 1.32
Old National Bank Evansville 1.27
1st Source Bank South Bend 1.06
Fort Wayne National Bank Fort Wayne 1.00
Top-Performing Banks With Assets of $500-999 million
 1992 Return
Bank City on Assets
Bank One Lafayette Lafayette 2.15
Bank One Merrillville Gary 1.41
Citizens Fidelity Bank New Albany 1.36
Calumet National Bank Hammond 1.19
Terre Haute First National Bank Terre Haute 1.18

The second important component, Murphy says, is profitability and efficiency. "Look at the expense-to-revenue ratio and see what direction it's going. The last piece is whether or not the bank is getting customers. Is it growing? Are there more deposits, more assets than last year?"

It may sound complicated, but customers don't necessarily have to go to such trouble to get an idea of a financial institution's performance. "It can be fairly simple," says Jackson Lehman, CEO of Fort Wayne National Bank. "Is your bank profitable? A bank that is profitable is not in trouble. I don't know of any bank that's unsound that's making money, at least in the long term."

One of the most widely quoted measures of profitability is a institution's return on assets. "This is the earnings generated on all assets of the bank," notes "Sheshunoff Banks of Indiana," one of the leading sources of financial-institution information. "This is the best indicator of earnings efficiency and shows whether bank management has achieved a favorable return," Lehman says.

"Clearly, return on assets is probably one of the most key measures," agrees Mike Alley, president of Fifth Third Bank of Central Indiana.

But making judgments based on ROA figures does take some know-how. "It's a good measure, but it tends to vary depending on the section of the country," Lehman says.

It also can vary depending on the size of the institution, the Sheshunoff book adds. "Larger banks tend to have a lower ROA than do smaller banks."

Jerry Von Deylen, president of Union Federal Savings Bank of Indianapolis, acknowledges that the definition of a good number can depend on a variety of circumstances. But he says there is a ballpark ROA that some observers traditionally have cited in the past. "About 1 percent was always seen as a number that was very good. Anything from 0.65 percent on up has been considered good."

Alley lists other key statistics to check, such as return on equity, price/earnings ratios and dividend yields. "Look at the whole earnings trend. Have there been a lot of fluctuations? Also, look at the level of capitalization, or capital to assets. It illustrates their real financial strength. The higher the capital ratio, the stronger they are."

How does one know what's considered TABULAR DATA OMITTED good when sorting through these kinds of numbers? It's not always easy, but "Bank Operating Statistics," a publication issued by the Federal Deposit Insurance Corp., can help. It summarizes the figures of various peer groups, such as banks in a certain region or of a certain size. As long as the peer group as a whole is in good shape, a bank whose numbers correspond relatively well can be considered sound.
Top-Performing Banks With Assets of $50-99 million
 1992 Return
Bank City on Assets
Rockville National Bank Rockville 2.11
American General Financial Center Evansville 2.05
Peoples T & Savings Bank Boonville 1.91
Franklin County National Bank Brookville 1.90
Columbus Bank & Trust Company Columbus 1.74

While profitability is a key consideration, bankers know that a decent segment of the public doesn't like businesses making too much money. So bankers are quick with explanations of why it's in everyone's best interest for financial institutions to be solidly profitable. "Those banks that earn well have a chance to add to their capital even if they have some losses in their loan portfolios," says Joseph Barnette, chairman, president and CEO of Banc One Indiana Corp. "You want a financially healthy company to have access to capital markets if they need to borrow money or sell stock, which could improve the quality or scope of their services to customers. They can invest in technology to provide better services."

Depositors without the desire or financial sophistication to learn and interpret numbers on their own can find plenty of expert opinions available. "You could look for analyst's reports prepared by investment bankers," suggests Anthony Heyworth, CEO of Society National Bank, Indiana.

"A number of brokerage houses have analysts who look at banking companies and do assessments of their potential growth and their earnings potential," elaborates Howard Passage, chief financial officer of First of America Bank -- Indiana.

Murphy cites a report on the relative strength of financial institutions put out by A.G. Edwards & Sons. "They base it on several different components that deal with things like non-performing assets, capital base and reserve coverage."

Bankers do offer a caveat about basing one's view of a financial institution solely on a brokerage report. These types of reports are aimed at investors, not depositors, and while a bank that looks good to investors is TABULAR DATA OMITTED TABULAR DATA OMITTED TABULAR DATA OMITTED likely to be a sound one, a perfectly sound bank may get lower marks from investment analysts.

Another factor to consider is that the reports from investment bankers typically focus on bank-holding companies rather than individual banks themselves. That's not necessarily a bad thing, Alley says. "The affiliate is a separate legal entity, but it often becomes like a distribution network for the bank corporation. You have the financial strength of the entire bank corporation."

Alley is particularly concerned with this distinction because of the circumstances of his bank, Fifth Third Bank of Central Indiana. Alley's parent company, Fifth Third Bancorp of Cincinnati, is one of the most highly-regarded bank-holding companies in the country. While the profitability ratios of his Indianapolis affiliate are respectable, they aren't as high as those of the holding corporation. This is due mostly to short-term costs incurred while Alley's bank expands to blanket the Central Indiana market. Once the expenses of rapid expansion pass, Alley expects local numbers to climb, and in the meantime he's pleased to point to the exceptional strength of the parent company.

Investment bankers aren't the only people rating financial institutions. "There are a number of reputable rating services," Passage says. "The first one that comes to mind is Sheshunoff. They rate banks and do surveys. There is a lot of financial information available."

Why should someone go to a rating service if he or she knows something about interpreting balance sheets? Even if one knows the numbers and how to interpret them, there are plenty of factors that can mislead amateur number crunchers. "One has to look at the asset quality of the company, and understand what its credit culture is," Heyworth says. "There are times that a banking institution might have acquired another that has had difficulties. Follow the trend to see how quickly it comes back. Also, you can have a large reserve for loan losses but have such a high non-performing assets ratio that you need all of that loan reserve."

One can even get a feeling about a bank's health that have nothing to do with numbers, Heyworth says. "One should look at how banks react within their communities. If they are supporting their communities, they're generally banks that have good performance."

The differences between various banks don't seem to matter to some people. Even in the midst of the S&L crisis, First Federal Savings Bank of Indiana didn't experience a flood of inquiries about its health, Pavlic says. "I can't tell you exactly why, but it was not a major issue," he says, surmising that the thrift benefited from its years of doing business in the area.

Even though no one wants their money in a failing bank, many customers don't pay much attention to their institution's health because they have confidence in deposit insurance. "If they have less than $100,000, it's often not an issue because they are covered," Von Deylen notes.

"A lot of people take comfort in the fact that deposits are insured to $100,000," Barnette agrees. "There have not been instances of bank failures that have resulted in consumer loss. You can have a bank that's on the endangered list and one that's healthy, and deposits in both places are protected equally."

Murphy, however, notes that "many people have more than $100,000 with a bank, want to do business with one bank and don't want to have to move their money around." For this reason, corporations are particular concerned about their bank's health.

In response, a number of banks have turned to marketing to ensure depositors and potential customers know that they're healthy. Fort Wayne National, for example, found it prudent recently to let the community know about its strength because one of its competitors was having financial difficulties.

"In some respects, that reflected badly on the industry, and that's not good," Lehman says. "We don't want to market fear, but we are well-capitalized and have been profitable, and we need to remind people of that."


Following is contact information about some of the major national bank-rating services:

Bauer Financial Reports, P.O. Drawer 145510, Coral Gables, Fla., 33114-5510; 800/388-6686.

Olson Research, 10290 Old Columbia Road, Columbia, Md., 21046; 410/290-6999.

Sheshunoff Information Services, 505 Barton Springs Road Suite 1100, Austin, Texas, 78704; 800/477-1772.

Veribanc, P.O. Box 461, Wakefield, Mass., 01880; 800/442-2657.

Weiss Research, 2200 N. Florida Mango Road, West Palm Beach, Fla., 33409; 800/289-8100.

Sources: Sheshunoff Banks of Indiana 1993, Sheshunoff S&L Quarterly December 1992
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Author:Kaelble, Steve
Publication:Indiana Business Magazine
Date:Jul 1, 1993
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