PROBLEM LOANS
The color classification discussed on the Color Code page indicates the institution’s actual financial condition as of the reporting date. To help determine the possible future trend of an institution’s health, VERIBANC considers information about the amount of money that it has lent or invested in securities for which repayment is late or in doubt. Many institutions maintain loan loss reserves to provide a first line of defense against borrowers who default on their loans and securities investments that go sour. The amount of problem loans, problem securities and securities-type contracts, in excess of an institution’s loan loss reserve, measures the degree its equity could suffer as a result of future loan losses. Since they do not directly impact equity or earnings, problem loans, securities and contracts do not affect an institution’s color classification. However, these items are incorporated into VERIBANC’s star rating as described below.
THE VERIBANC STAR RATING SYSTEM
In addition to the color code, VERIBANC classifies each institution with Three Stars (***), Two Stars (**), One Star (*) or No Stars (None - "U"). The star rating considers future trends and contingencies not accounted for in the color classification. The star rating also incorporates problem assets (along with equity strength and profitability) as a measure of an institution’s future prospects. The criteria used by VERIBANC to determine the number of stars assigned to an institution are as follows:
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An institution must meet the following primary conditions: equity which exceeds five percent of assets, equity as a percentage of assets after deducting problem loans, securities and derivatives contracts in excess of its loan loss reserves must not fall significantly below five percent and the institution must have positive net income for the indicated reporting quarter. An institution (where applicable) must also satisfy all three regulatory capital requirements (see below) and not have any recent serious regulatory sanctions against them. If the institution is a one-bank holding company, neither the holding company nor its member bank has been subject to a recent serious regulatory sanction. In addition, insider lending as a percentage of equity must not be substantial. If the bank is owned by a holding company, all of the holding company's banks, taken together as if they were a single bank, must meet the criteria necessary to receive at least a Two Stars rating. An institution may only have two or fewer volatile periods of asset growth/shrinkage over the past ten quarters. Problem investments also include securities being held to maturity that, if sold, would realize less than their cost. |
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An institution meets any two of the three primary conditions for the Three Stars category and has equity that exceeds its unreserved problem loans, securities and derivatives contracts. If the institution had a net loss during the most recent reporting quarter, the loss was not significant. An institution (where applicable) must also satisfy all three regulatory capital requirements (see below) and not have any recent serious regulatory sanctions against them. If the institution is a one-bank holding company, neither the holding company nor its member bank has been subject to a recent serious regulatory sanction. Additionally, if the bank is owned by a holding company, all of the holding company's banks, taken together as if they were a single bank, must meet the criteria necessary for the group to receive at least a Two Stars rating. A Two Stars rating is applied to an institution that has three volatile periods of asset growth/shrinkage over the past ten quarters. For institutions (where applicable) that have held-to-maturity securities investments with a current market value that is less than their cost, that difference must not exceed equity. |
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An institution meets at least one of the primary conditions required for the Three Stars category, reports equity which exceeds three percent of assets and also exceeds unreserved problem loans, securities and derivatives contracts. If the institution had a net loss during the indicated reporting quarter, the loss was not significant. Moreover, the institution (where applicable) meets at least two of the three federal capital requirements for tier one (core) capital and total capital as a percentage of risk weighted assets and tier one capital as a percentage of average assets. An institution may receive no higher than a One Star rating if it has been subject to a serious regulatory sanction. A one-bank holding company may receive no higher than a One Star rating if the holding company has been subject to a recent serious regulatory sanction. Moreover, if all of the banks in its holding company, taken together as if they were a single bank, receive a One Star or No Stars ("U") rating, the bank may not receive a higher rating than One Star. A One Star rating is assigned if an institution has four or more volatile periods of asset growth/shrinkage over the past ten quarters. Also, an institution (where applicable) may receive a One Star rating if, absent other reasons for downrating as stated above, the difference between cost and current market value of its held-to-maturity securities investments exceeds the institution's equity. |
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NO STARS - The institution does not meet the criteria above. |
DATA THAT VERIBANC USES
All federally-insured commercial banks, S&Ls, savings banks and credit unions, by law, must make certain financial records available to federal bank regulatory agencies such as the OCC, FRB, FDIC, OTS and the National Credit Union Administration ("NCUA"). The data must be provided to these agencies at specified intervals, usually quarterly. VERIBANC, Inc. has taken the portions of this information which are released to the public periodically by such agencies and has assembled a database that considers every financial institution operating under federal deposit insurance. This includes approximately 20,000 depository institutions.
A Warning Signal - If VERIBANC’s rating system produces a high rating in the color code but confers a low score in the star classification, a warning signal exists. In such a case, the color code indicates the institution’s reported basic financials appear strong but the star classification projects some possible deficiencies in other areas. Since the two parts of the rating system examine different criteria, the full color and star rating often hints about the specific nature of an institution’s problems.
An Investment Grade Rating or Better - In 1994, the VERIBANC Green, Three Stars rating was recognized by the Office of Management and Budget as an investment grade or better rating and as such was acceptable for a letter of credit in which the U.S. Government is the beneficiary.
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