Four Helpful Hints for Evaluating a Bank

Feb 19, 2019

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Ben Mendenhall
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According to the Federal Deposit Insurance Corporation (FDIC), nearly 555 banks have failed nationally in the ten years since the Great Recession.* To put this into perspective, only 44 banks failed in a similar period of time from 1997 and 2007. This frightening comparison illustrates the catastrophic impact the economic downturn had on the banking world as a whole. 
 
With this in mind, what steps can you take as an investor of public funds to appropriately analyze your banking relationship? How can you be sure you have upheld your fiduciary responsibility to the public? Below are four simple ways to evaluate a bank and sleep better at night knowing the public’s funds are in good hands. 

1. Research Your Options

Prior to partnering with a bank, it is important to ensure that bank is well-capitalized and in good health in general. The FDIC is a great resource paired with rating/ranking services such as Highline. Having additional insights prior to signing on the dotted line will help put your mind at ease. 

2. Request a Client Analysis Statement

When working with any banking partner, it is always important to obtain a Client Analysis Statement. Unlike the asset management industry, banks are not required to disclose the fees they are charging to depositors. The client analysis statement provides a line-by-line fee disclosure for all services including the exact amount a depositor has paid to the bank for electronic checks, online access, electronic statement delivery, ACH, wire transfers, and more. Sometimes, clients are being charged for services they never utilize. 

3. Analyze the Analysis Statement

Banks should provide a client analysis statement upon request. Once the analysis is received, it is important to sit down and walk through the statement line-by-line. As mentioned above, each fee charged over the course of a year will disclosed as a line item. Make sure to review the feed being charged by the bank to ensure you are utilizing the services. 

4. Determine the Earnings Credit and Net Yield

Banks will determine a required balance to receive the stated “earnings credit.” For example, let’s say the earnings credit is .40% or 40-basis points. This figure is know as the gross yield. For this illustration, the client must have at least $4 million in deposits to receive the credit. This is where the feed come into play to determine the net yield (the yield the client is actually receiving). Once you have determined the fees, you can subtract the fees from the required deposit then divide by the gross yield to determine the net yield. Some banks communicate a high gross yield to clients but after the fees are taken into consideration, the net yield is significantly lower than what the client thinks they are receiving. Additionally, the required deposit to “earn” the yield is a way of keeping the deposits in the bank rather than moving to other liquidity options such as money market funds and local government investment pools. 
In summary, many banks nationally are not motivated to hold public funds. The collateralization requirements make holding large public deposits very expensive for banks. Over the last few years, many regional and local banks have started to turn away public deposits from government entities. The institutions that are accepting the deposits are adding on more fees to ensure that they are profitable on the deposits once the cost of collateralization has been determined. We hope these hints help you confirm that your banking partners are in good standing and are really offering you the rates you think you are receiving!
The information presented should not be used in making any investment decisions and is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events.

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