CHAPTER 1

In the Beginning

When I was a young man, I had heard that how you spend you spare time determines where you will be in ten, twenty, even thirty years.  This might be an indictment on my younger years, but I spent a lot of time in the library.  When I think of the public library, I consider it sort of a refuge. It’s an interesting mix of society what with students, business people, librarians, and less fortunate homeless individuals.  Some seek knowledge, others want a respite from the elements outside, and others just want a few moments of silence.  I look back on those hallowed halls of the Dewey Decimal System as in investment in the future. It’s been a long time since I have spent any time in the library, what with the internet.  Sometimes I wonder how they even exist. I probably didn’t spend my time there as you might expect.  Instead of pouring over a good book, or thumbing through magazines, I was obsessed with bank statistics. 

The public library was the only place you could access the Uniform Bank Performance Report (UBPR) for free. I stumbled upon them early in my career as a bank examiner and became obsessed. For me, it was akin to my love for balance sheets and income statements—rows and rows of numbers telling their own stories. Think of it like a scoreboard at a sporting event, except you have to decipher the score. I decided to make a career out of uncovering what those numbers meant. For the past 35 years, I’ve been chasing the truth hidden within those figures.

Banking, perhaps more than any other industry, has a treasure trove of data, thanks to government involvement. Access to this bank data has only become more accessible over time. As a young bank examiner, I learned the UBPR was like a doctor’s stethoscope for diagnosing a sick patient or celebrating a recovery by ringing the bell. Currently, there are over 4,000 banks in the United States alone. To my knowledge, this is a unique scenario to the US. Some countries have just one central bank, while others have a handful of banks. But in a land where we love choices, we’ve got thousands. Remember the movie “The Bank of Dave”? He started a new bank in England, and the regulators were so flabbergasted by his application and scrambled to figure out what to do—they hadn’t seen one in a century!

But not all banks are created equal. So how do you choose a bank? An internet search on what consumers look for won’t mention bank performance at all. The reality is, banks fail or get bought out due to struggles, and most consumers remain blissfully unaware until it hits their community.

When choosing a bank, your first thought should be: “Is my money safe?” If the bank fails, will I lose my money? Most consumers have at least a passing knowledge of FDIC insurance, which covers up to $250,000 in the event of a bank failure. But a struggling institution can also impact the rates they offer for both borrowing and deposits. Prompt Corrective Action (PCA) guidelines limit how much a bank can pay if it’s considered “less than well-capitalized.” That means Certificates of Deposit, Money Market accounts, and Savings accounts may all be affected. So how does a bank become “less than well-capitalized,” you ask? Poor operating performance for a myriad of reasons too numerous to cover in this blog.

Other considerations include whether a bank can invest in infrastructure—think convenient branches, tech for easy account access, and enough customer service reps to assist you. All of these require strong operating performance to not only keep the lights on but thrive in a competitive banking world.

A quick search in Copilot estimates that 40% of all deposits in US banks are uninsured. With the number of millionaires skyrocketing in recent years, depositing large sums of money has become more common. Investment advisors, corporations, bankers, and even your next-door neighbor need a simple go-to resource to gauge a bank’s risk. That’s where we step in. Our analysis lays it out in simple terms, focusing on one key statistic: the probability of failure. Most firms analyzing bank performance follow regulatory techniques, which involve dozens of ratios and hundreds of data points. While this is standard practice, the average bank customer needs to understand those metrics—and most do not. Probability of failure narrows the risk down to one understandable statistic. We’ve compiled years of data and have statistical proof that our analysis is highly accurate. We’ll lay out our proprietary analysis in future blogs. Or at least as much as we can to help you understand and come to depend on our analysis.  In the meantime, you can access our “Free Bank Risk Grade” on this website.  While it doesn’t narrow the probability of failure to one number, we do assign a grade (A-D) to different levels of risk.   

Brett Johnson

owner of bankeroverboard.com