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How Healthy Is Your Bank?

With more failures expected in 2009, CFOs should subject their banks to a thorough checkup.

On March 27, Omni National Bank of Atlanta was closed by federal regulators. The Office of the Comptroller of the Currency put the $956 million (in assets) bank in receivership because losses had depleted most of Omni National’s capital, and there was “no reasonable prospect that the bank [would] become adequately capitalized without federal assistance,” according to the Comptroller’s office.

Omni National became the 21st U.S. bank to fail during the first three months of 2009. That number approaches the 25 bank failures for all of 2008 and is seven times 2007′s total. More are sure to fail. In December, the Federal Deposit Insurance Corp. disclosed that its list of problem banks numbered 252, the most since the middle of 1995, with combined assets of $159 billion. The FDIC won’t name the banks, for fear of triggering panics, but it’s probable that the list is not comprehensive. Analysts point out that giant Washington Mutual ($307 billion in assets) wasn’t on the problem list prior to its demise.

CFOs can take comfort that analysts expect relatively few of the nation’s more than 8,200 FDIC-insured banks to go bust. “The vast majority of banks will be OK,” says Scott Valentin, a managing director at FBR Capital Markets. Historically, only about 13% of the banks on the FDIC’s problem list have failed. FDIC chairman Sheila Bair said in March that 98% of banks were well capitalized by regulatory standards.

Still, loan portfolios are deteriorating rapidly in the downturn, and some banks are going to become just another statistic. The FDIC forecasts that bank failures over the next five years will cost the agency $65 billion, on top of last year’s $18 billion tab. Christopher Whalen, managing director and senior vice president of Institutional Risk Analytics (IRA), a bank-rating firm, predicts that some 100 U.S. banks with assets totaling more than $800 billion will fail in 2009. Other observers have been even more pessimistic.

CFOs appear braced for some bad news. According to CFO’s Q4 2008 Business Outlook Survey, 72% of finance chiefs said they had “moderate” or “significant” concerns about the condition of the financial institutions they deal with.

Capital seems steady but asset quality is deteriorating.

Federal regulators are expected to announce some results of their stress tests for the nation’s 19 largest banks in May. But companies can perform their own check of a bank’s health the same way that analysts do, by reviewing the bank’s key capital ratios and loan-performance trends. That information is easily accessible on the Internet, via Securities and Exchange Commission filings and the quarterly call reports that every FDIC-insured bank is required to file (see www.fdic.gov/quicklinks/analysts.html).

Evaluating a bank’s health falls into two parts, says Mark J. Flannery, a finance professor at the University of Florida’s Warrington College of Business Administration. One, how well capitalized is the bank — how much loss can it stand without failing? Two, what is the quality of its assets — how much loss risk is the bank exposed to?

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