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Local banks get high ratings on capital-asset ratios
Polk County Enterprise - July 2008

LIVINGSTON – With gas prices at record highs, the Dow plumeting to two-year lows and the failures of investment banking giant Bear Stearns and California-based mortgage lender IndyMac, people around the country are wondering, “What’s next?” Livingston’s bankers are responding to the growing concern among local depositors by explaining FDIC guidelines and reassuring them of the historically solid foundations of our local banking institutions. Jay Estes, president of People’s State Bank, makes a strong point in reminding his bank’s customers that our local fi nancial markets are not experiencing the same fi nancial woes as those in other more vulnerable or risky markets. First State Bank president Robert Sebaugh agrees with that assessment and says that First State Bank is not having the fi nancial problems getting 24-hour attention in broadcast media. “First State Bank’s capital position is currently the highest it has been in the history of the bank,” said Sebaugh.

The capitalization of First National, First State, and Peoples State is above the average for banks in their peer groups according to FDIC reports. “Our capital to asset ratios are in the top 10 percent when compared to other banks our size. This should give our depositors a lot of confi dence in the bank,” said Sebaugh As a general rule, the higher the ratio the more sound the bank. A bank with a high capital-to-asset ratio is protected against operating losses more than a bank with a lower ratio, although this depends on the relative risk of loss at each bank.

This “relative risk” explains why customers at IndyMac, which engaged in Alt-A lending – a category of loans to consumers more credit worthy than subprime borrowers but typically without the complete documentation of income or assets necessary to receive a prime-rate loan – were at a greater risk than those at most local banks which operate under much stricter guidelines. However, the greatest factor in IndyMac’s failure was not its risky lending practices but the run on the bank that dried up its liquidity. Investors wirhdrew $1.3 billion in 11 days, causing the bank to fail. Depositors were mainly to blame for the failure of a bank that, according to OTS offi cials, was “actively seeking to arrange a signifi cant capital infusion or fi nd a buyer.” The run on the bank effectively evaporated any possibility of the bank modifying its operations to build a foundation for recovery.

The urge to run down and withdraw your life savings stems mostly from customers’ misunderstanding of FDIC insurance. First National Bank president John Slocomb said that, “while it is true that the FDIC provides insurance to $100,000, with account ownership structured correctly, more than $100,000 of coverage can result. IRA accounts are covered separately up to $250,000.”

Slocomb also advises that proper account ownership structure will suffi ciently cover most people, but customers should be sure it is structured correctly. Some of the common misunderstandings depositors have about FDIC coverage are debunked below. The most a consumer can have insured is $100,000. The reality is that your accounts at different FDIC-insured institututions are separately insured, not added together, and you may qualify for more than $100,000 in coverage at each insured bank if you own deposit accounts in different “ownership categories.” Suppose you have a variety of accounts at one bank. The funds you have in various checking and savings accounts (other than retirement accounts) in your name alone are insured up to $100,000. Your portion of joint accounts — those with other people — is also separately insured to $100,000. If you also have “revocable trust accounts” at the bank, the total can be separately insured up to $100,000 for each beneficiary if certain conditions are met. And, under new rules, certain retirement accounts are insured up to $250,000, up from $100,000 previously. “Depending on the circumstances, a family of four could have well over $1 million in deposit insurance coverage at the same bank,” said James Williams, an FDIC Consumer Affairs Specialist.

“And that coverage is separate from what is protected at any other FDIC-insured institution.” Changing the order of names or Social Security Numbers can increase the coverage for joint accounts. Many depositors mistakenly believe that by changing the order of Social Security Numbers, rearranging the names listed on joint accounts, or substituting “and” for “or” in account titles, they can increase their insurance coverage. “These moves will have no impact on joint account coverage. The FDIC will simply add each person’s share of all the joint accounts at the same institution and insure the total up to $100,000.” Note: Each person’s share is presumed to be equal unless stated otherwise in the deposit account records.

The FDIC only pays failedbank depositors a percentage of their insured funds. Federal law requires the FDIC to pay 100 percent of the insured deposits up to the federal limit — including principal and interest. If your bank fails and you have deposits over the limit, you may be able to recover some or, in rare cases, all of your uninsured funds. However, the overwhelming majority of depositors at failed institutions are within the insurance limit, and insured funds are always paid in full. Deposits in different branches of the same bank are separately insured. FDIC insurance is based on how much money is in various ownership categories (single, joint, retirement, and so on) at the same insured institution. It doesn’t matter if the accounts were opened at different branches — they are considered the same bank for insurance purposes. Any product sold by a bank is insured by the FDIC.

You know the FDIC insures deposits, such as checking accounts and certificates of deposit (CDs). But in recent years banks also have been offering an array of financial products — including stocks, bonds, mutual funds, annuities and other insurance products — either directly or through other companies. These other products are not FDIC-insured — even if they were sold by a bank — and in some cases they could lose value. To help minimize confusion, federal regulators require FDICinsured institutions offering or advertising an investment to a customer to disclose that the product is not FDIC-insured, is not guaranteed by the bank or savings institution, and is subject to investment risk, including the possible loss of principal (the money invested). Each beneficiary named on an IRA (Individual Retirement Account) increases the FDIC insurance coverage. No, the number of beneficiaries on an IRA does not affect insurance coverage.

Under the FDIC’s new rules that became effective April 1, 2006, up to $250,000 in insurance is provided for the deposits a consumer has in a variety of retirement accounts, primarily traditional and Roth IRAs, at one insured institution. The previous coverage limit in this category was $100,000. For more information regarding FDIC coverage, visit the FDIC website at www.fdic.gov. Another way for depositors to assure themselves of their bank’s stability is by visiting Bankrate. com. Bankrate.com is a leading aggregator of financial rate information, continually surveying approximately 4,800 financial institutions in all 50 states in order to provide clear, objective, and unbiased rates to consumers. The site ranks each financial institution on a one to five star scale and evaluates capitalization, asset quality, earnings and liquidity to generate a CAEL rating.

The most desirable Safe & Sound CAEL rating is one, the least desirable is five, in accordance with industry standards. The top star rating is five, the lowest star rating is one. Performing institutions will generally receive a rating of three or better stars with the majority of banks falling into the three to four star range. By contrast, the performing Safe & Sound CAEL range would be one, two and three with the majority of institutions falling into the two range. According to bankrate.com our four local banks size up as follows for the most recent reporting period of March 2008.

First National Bank received a four-star rating and a CAEL of two. First State Bank received a fivestar rating and a CAEL of one. Guaranty Bank – based out of Austin and rated as a single entity– received a one-star raning and a CAEL of five. Peoples State Bank received a four-star rating and a CAEL of two. For more detailed assessments of any bank, visit www.bankrate. com.

As economic storms gather on our country’s horizon, it’s a good time to visit with your banker and verify that your deposits are structured properly, regardless of the institution’s financial footing. Depositors should make certain they understand all the implications of FDIC insurance for their particular financial portfolio so that no matter which way the winds blow their hard-earned dollars will be safe.


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Copyright 2008
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