In light of today’s turbulent banking environment and news of bank failures, business owners are wise to reevaluate the nature of their deposits and their bank’s financial health. Many banks have been negatively impacted by the economic climate caused in part by issues in the housing market.
What does this mean for the banking public and business owners who rely on financial institutions for capital to help grow their businesses?
“It’s critical to find out how your bank is performing, make sure its regulatory ratios are above well-capitalized and that it is in a position to continue serving as your partner as you rely on it for important banking products,” says Craig Johnson, president and CEO, Franklin Bank, Southfield, Mich.
Smart Business asked Johnson for advice on how you can ensure your bank is safe and your liquid money protected.
How much of an individual’s money is protected?
The Federal Deposit Insurance Corp. insures deposits of up to $100,000 per depositor per bank and $250,000 for most retirement accounts, including accrued interest. If your deposits are less than these limits, your money is safe. If not, there are no guarantees. It’s hard to pick up a newspaper or watch TV today without hearing about problems in the banking industry. The fact is, the vast majority of the banks around the country are well-capitalized and will survive this current economic cycle. If your deposits are less than $100,000, you’re safe with any bank. But many individuals and businesses do carry much higher balances. If this describes your accounts, you should make sure to do your homework on the financial institution and take precaution-ary measures if deemed necessary.
What should those with deposits that exceed $100,000 do to spread their risk, so to speak?
Don’t overact; do your due diligence. Discuss with your banker alternative ways to maximize FDIC insurance coverage. Do some research on your own by checking the bank’s Security and Exchange Commission (SEC) filings. Review their online press releases. Make sure the bank is well-capitalized any quarterly press releases or public statements will spell this out clearly for you. You can also check into private rating agencies, such as Bauer Financial (www.bauerfinancial.com), where you can search your bank and find out how it rates based on quarterly call reports and SEC filings. You can find this information on the FDIC Web site. All banks are marketing heavily now to earn your trust and your business. Before you open an account anywhere, find out if their message matches their true financial position.
What red flags should business owners look for to determine the financial health of a bank?
While an individual quarterly write-down isn’t necessarily a sign of trouble, a series of write-downs and consecutive quarterly losses tell a different story. Look at the bank’s core earnings. Those are earnings outside of any extraordinary income or expensed line items. If the core of your bank’s business is not producing consistent quarterly profits, that’s a potential red flag. Be frank with your banker and ask him or her, ‘What is the nature of your bank’s business?’ Ask your banker about loan delinquency and charge-offs. Has the bank remained profitable? All of this is public information.
What sort of business loan environment can an owner expect as a result of all this?
Because of the current economic cycle added on to the pressures on deposit growth, it’s not unrealistic in today’s market that banks will be more conservative in how they underwrite business loans. As a business owner, you need to be aware of this and have ongoing conversations with your banker, so he or she understands your future needs and you can understand where the bank stands from a lending perspective and whether it is in a position to meet your future needs.
At what point should a business owner consider reallocating deposits or coming up with a ‘Plan B’ for liquid money?
First, talk to your banker. Ask him or her pointedly, ‘What do you think?’ There is no enterprise in sugarcoating the situation, so you can expect an honest assessment of where the bank stands. Next, take a look at your deposits and retirement accounts. Do they exceed the FDIC-insured limit? If so, makes sure you are comfortable with the financial condition of the financial institution and if not, diversify the deposit among several institutions. There are programs in the marketplace that provide increased FDIC insurance coverage. Ask your personal banker for more details. Essentially, you need to follow the rules of investing: Be prudent and do your homework.
CRAIG JOHNSON is president and CEO of Franklin Bank in Southfield, Mich. Reach him at firstname.lastname@example.org or (248) 358-6459.