The security and relative strength of your bank may be weighing heavy on your mind these days. Some questions you may have are: Is it better to be associated with a national bank rather than a local community bank? Is the strength of the institution related to the size? How can a bank's relative strength be evaluated and how do I compare my bank to the rest of the banks out there?

When these questions were posed to two different banks locally, the answer was the same from both. We need to dig into the quarterly and/or annual reports and look at some key indicators used in the banking industry. Since nobody likes long answers we will address four areas to question.

•1.      Is the bank profitable? 

• A bank may have lost money last year, but taken adequate reserves to cover non-performing loans. If this is the case, we would come to the conclusion the bank has made the difficult decision to cover its bad assets and taken the "one-time" adjustment. More and more we will find this to be the case as banks "clean up" their portfolios. But alone, this can not be considered a sign of financial weakness.

•2.        What is the bank's "Net Interest Margin" 

• We all know that banks make their money on interest from loans while they pay out interest to depositors and other funding sources. The difference between what they earn on loans and what they pay out to depositors is known as the "Net Interest Margin." According to the discussions with local bankers, a bank can not survive on a Margin of less than 3%. The two banks reviewed were at 3.38% and 5.23%. We should always remember this is a function of all sources of funding, not just from individual depositors.

•3.          What is the bank's "Total Risk-based Capital Ratio?" 

• This is an indication of the bank's capital percent of the total balance sheet. By today's standards a bank is adequately capitalized at 10%, but the industry has started wanting to see a capital base more along 12% or higher. As a note, a local bank that was seized by the Feds a few months back had a capital base of 8%. The two banks reviewed were at 12.8% and 12.24. Both banks are considered "Well" capitalized.

•4.        What is the bank's "Non-Accrual Assets" and what is the "Loss  Allowance to Non-Current Loans?" 

• Non-accrual assets are just as you would expect. These are the loans or other facilities that are delinquent and have been deemed as unlikely to collect.
• Loss Allowance to Non-Current Loans is the coverage of these non-performing assets or the % of reserves. The two banks reviewed had 104.82% and 260.37%.

Contact your local B2B CFO^® and have them give your bank a good once over. You will be glad for the peace of mind in knowing your bank is healthy.