Typically it is a tough sell to get prospective depositors who are not familiar with Central Bank of Kansas City to consider parking their money in the $140 million-asset Missouri community development financial institution — particularly those who would deposit more than $100,000.
William Dana, its chief executive, said many people may be reluctant to trust Central with their deposits because they do not understand why the specially designated bank cannot grow as fast or make as much money as traditional banks.
But he is hoping Central’s recent credit rating by A.M. Best Co. will help solicit deposits from outside its low-income neighborhoods.
“We wear our designation” as a CDFI “proudly, because of our mission-based focus,” Mr. Dana said. “But it limits us from going out to the suburbs and growing exponentially like other banks. But we have a good story to tell, and we can also use the story told by A.M. Best, with its high-quality reputation, to help attract more deposits.”
This month, A.M. Best published its first set of ratings for Central Bank and its parent, Central Bancshares of Kansas City Inc. The Oldwick, N.J., agency assigned Central Bank a bank deposit rating and an issuer credit rating of BBB-plus. Central Bancshares received an issuer credit rating of BBB.
A.M. Best said Central Bank received favorable ratings because its strong earnings consistently have outranked both mainstream banks of similar size and CDFIs across the country. (As of June 30, Central had a return on assets of 1.65% and a return on equity of 13.03%. Both were well above the average for banks with assets of $100 million to $300 million, according to the Federal Deposit Insurance Corp.)
Next week A.M. Best is expected to publish a more in-depth analysis of Central Bank to back up its ratings, which the bank can use in its marketing to prospective depositors outside its market, including “socially responsible” investment firms across the country, Mr. Dana said.
Khanh Vuong, managing senior financial analyst for A.M. Best, which has been issuing credit ratings for insurance companies for years, said it launched a rating service for community banks last year. Central Bank is one of just two banks that has received a rating, but about a dozen more are under review.
A.M. Best saw an opportunity to issue qualitative ratings for small banks, Mr. Vuong said, because the prime bank rating agencies — Moody’s Investors Service Inc., Standard & Poor’s Corp., and Fitch Inc. — generally issue such ratings for much larger banks.
Moreover, A.M. Best’s new ratings are more qualitative than the ratings banks receive from agencies such as IDC Financial Publishing of Hartland, Wis., Highline Data LLC of Austin, and BauerFinancial Inc. of Coral Gables, Fla., he said.
These agencies typically base their ratings on Federal Deposit Insurance Corp. call reports and financial performance, but A.M. Best’s ratings incorporate discussions with bank managers and take into account not only the bank’s performance, but also its strategy and outside factors that could pose risks, Mr. Vuong said.
(A more detailed comparison of various rating services is available
“These ratings are not just for accessing the public bond markets, but it’s all about banks managing their public image,” he said. Bankers can enhance their reputations by giving their credit rating reports to various constituencies, including correspondent banks, insurance companies, state and municipal governments, and depositors.
For example, over the last year, A.M. Best has been flooded with telephone calls and e-mails from consumers asking if a bank was in danger of failing because of the subprime mortgage meltdown, Mr. Vuong said, and the agency would have been able to offer an informed answer if it had rated the bank.
Though he would not say how much the service costs, Mr. Vuong said that it was much less than what the major bank rating agencies charge. A.M. Best is getting the word out by presenting at state and national trade group conventions, he said, and he expects business to pick up as more bankers learn of the service.
Manuel J. Mehos, a Texas banker, said that A.M. Best could get a leg up on its competition if it continued to visit its bank clients after issuing its initial rating.
In 2003, Mr. Mehos had complained that Moody’s had not visited his bank, Coastal Banc of Houston, for at least five years but had continued to issue a rating below investment grade. He was the CEO of the bank and its parent, the $3 billion-asset Coastal Bancorp Inc. in Houston, before Hibernia Corp. in New Orleans bought it in 2004. (Capital One Financial Corp. acquired Hibernia last year.) Mr. Mehos is now the chairman of the $235 million-asset Green Bancorp in Houston.
Greg Bauer, managing director of Moody’s North American banking team, said in an interview Wednesday that his agency would not comment specifically about Coastal Banc. However, he said that Moody’s has a policy of meeting physically with its clients at least once a year.
Richard A. Soukup, a partner with the Chicago office of the consulting firm Plante & Moran PLLC, said that some community banks could find A.M. Best’s ratings useful in attracting deposits from outside their local markets.
For those looking to issue bonds, however, A.M. Best has a long way to go to compete effectively with Moody’s, S&P, and Fitch, he said. “These are the dominant names in the industry, and the names you expect to see. A.M. Best certainly has built their credentials in the insurance industry, but they need to build that in the banking industry, too.”
But Bert Ely, a banking consultant in Alexandria, Va., said that all the rating agencies have had their credibility questioned lately. The major ones have faced increased scrutiny from Congress after failing to spot problems at companies such as WorldCom Inc. and Enron Corp. and, more recently, failing to adequately assess mortgage-backed securities and collateralized debt obligations that had contained subprime mortgages, he said.
A.M. Best also has been criticized for “being too easy” with some of its insurance clients, Mr. Ely said.
“Ratings are something to look at, but you can’t rely on them to catch all things,” he said. “Many banks fail due to internal fraud, and no one can spot that if they’re from the outside.”
