Your bank may need a wellness check

With some financial institutions getting sick and a handful dying, physicians might want to do a checkup on their own bank.

Twelve banks had closed by late September, including IndyMac, a California bank pulled down by the mortgage crisis. However, many private analysts have hundreds more on their sick list. For businesses, an unhealthy bank could mean less access to credit, or no access at all. If a bank closes or merges, it could mean an interruption in cash flow, and even a loss of money.

"Most people and businesses don't have to worry at all about bank closings. But it is time to be aware of how much money you have in the bank. Don't assume it won't go out of business," said Andrew Schwartz, a certified public accountant with Schwartz & Schwartz in Boston. He also is founder of MDTAXES Network, a national network of certified public accountants who specialize in providing tax services to health care professionals.

There were 420 troubled banks in June, a jump from 281 in the first quarter of the year, according to Karen Dorway, president of BauerFinancial Inc., a Coral Gables, Fla., bank and credit union ratings firm. She said 63% of banks received four or five stars, the highest ratings, which is a slight drop compared to 67% in the first quarter. Troubled banks have two or fewer stars, and three stars means a bank is adequate.

Some economists warn that June was just the beginning, and these numbers underestimate the magnitude of the problem ahead.

Many depositors don't have a clue that their bank is on the bubble. The Federal Deposit Insurance Corp. doesn't have a list of troubled banks. "That would be a self-fulfilling prophecy," according to Schwartz. But there are several independent bank rating firms such as BauerFinancial and Bankrate that allow you to look up your own bank's rating free of charge on their Web sites. The firms look at several factors including profitability and capital assets to come up with the ratings.

Experts say there often are signs that a bank is failing, such as the bank's stock beginning to tumble. Other signs are more subtle: the bank starts offering interest rates on deposits that are higher than their competitors', but not lower loan rates. Some begin restricting their loans. Banks list their savings and loan rates online and in-house, so they are easy to compare.

Physicians shouldn't worry unless they have more than $100,000 in any one bank, or have the possibility of having more than that amount, said Richard Rosenbaum, president of Skokie, Ill.-based Rosetree & Co., which provides financial planning services to health care professionals.

The FDIC insures up to $100,000 per depositor per bank, and up to $200,000 for a joint account.

However, Rosenbaum said business owners often look at how much money they have in an account, not including how much money is outstanding as well.

"What trips some businesses up is they go by the balances in the bank, not in their own books. If you have $90,000 in the bank, and $30,000 in outstanding checks, you will have $120,000 in the bank once those checks come in," he said.

Experts say there are several ways to protect yourself:

• Understand what the FDIC insures and doesn't insure. The FDIC insures all deposits at insured banks including savings accounts, money market deposit accounts and certificates of deposit up to the FDIC's insurance limit. It does not insure stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if they are purchased from an insured bank. You can check the FDIC Electronic Deposit Insurance Estimator on its Web site to calculate the exact amount of insurance coverage your business has at each bank www2.fdic.gov/edie/.
• Understand how FDIC defines account ownership categories, said Robert C. Seiwert, senior vice president of the American Bankers Assn.'s Center for Commercial Lending and Business Banking. He said if more than one person is signatory to an account, then each person has equal authority to withdraw funds. The FDIC might then include these funds in the joint category, allowing additional FDIC insurance.
• Make sure your bank has adequate insurance. In addition to being FDIC-insured, more than 2,000 U.S. banks have secondary insurance such as Certificate of Deposit Account Registry Service. CDARS offers up to $50 million in federal deposit insurance by spreading the deposits among several banks for you, while you keep all your money in one bank, Seiwert said. Find out if your bank offers this insurance by going to the CDARS Web site (link).
• If your bank doesn't have CDARS, spread your money among different FDIC-insured banks yourself, making sure each bank has less than $100,000. Edward Lotterman, a St. Paul, Minn., economist and former regional economist with The Federal Reserve Bank in Minnesota, said physicians might want to consider putting their payroll account in a separate bank, depending on the size of the practice.
• Make sure any "sweep" accounts are swept into FDIC accounts. Sweep accounts are ones that earn interest on small business deposits. Seiwert said if the sweep accounts are not FDIC-insured at your bank, make sure the bank collateralizes the swept deposits with U.S. government securities. He said the contract you sign with the bank will detail which securities you are pledged to. You can also go to the FDIC's EDIE Web site to find which accounts are insured.
• Know what to do when a rival bank purchases a troubled one. If an insured bank is merged with another insured bank, the FDIC provides separate insurance coverage for deposits at both institutions for a limited time, usually six months. Ask the bank the length of the grace period, and move money if necessary to another bank before it ends.