The security and relative strength of your bank can have a significant impact on the growth and continuity of your business.  Some questions that 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. Here are the four key areas that an owner should consider when choosing a bank for your business.

Profitability

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. This alone should not be considered as a sign of financial weakness.

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 3.5%. The two banks reviewed were at 3.68% and 5.23%. We should always remember this is a function of all sources of funding, not just that from individual depositors.

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 12%, but the industry has started wanting to see a capital base more along 14% 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 12.5%. Both banks are considered adequately capitalized.

Non-Accrual Assets 

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 and the bank has stopped accruing interest on the loan.

Give me a call and we can give your bank a good once over. You will be glad for the peace of mind in knowing that your bank is healthy.