Selected Articles From OC Business Executives
to Read Your Bank's Financial Statement - and
Protect Your Deposits
& Merchants Bank
Knox - site of the U.S. Gold Depository, a 40-by-
60-foot underground chamber resting on impenetrable
Kentucky rock. This bombproof structure is protected
with mechanical devices, military personnel and
other scientific safety instruments. The reason
is simple enough: The U.S. Constitution, Declaration
of Independence, Magna Carta, Gettysburg Address
and most of the U.S. government's gold reserve
have called this chamber home. Most would agree
Fort Knox is worth protecting.
all would agree that their own valuable assets
are worth protecting. We entrust our consumer
and commercial deposits to more accessible chambers
called banks and expect our money to remain secure
there. But how can businesses tell if their banks
provide the same level of security for their financial
assets that Fort Knox does for the government?
Here are a few terms, tests and ratios that may
help businesses find greater confidence in their
choice of banks. Grab your bank's financial statement
and get ready to assess the following four indicators
of financial strength and health.
- How easily assets can be converted to cash on
the market. Though bank runs are not a threat
in today's economy due to FDIC insurance, businesses
characteristically have in excess of $100,000
in banks, leaving them susceptible to great losses
should the bank declare bankruptcy or call in
its loans. Compare "Total Cash and Securities"
to "Total Deposits" on your bank's financial statement
to determine if it can fully repay each depositor.
You'll be surprised - most cannot.
Worth - The amount by which a bank's assets
exceed their liabilities. As in business, a bank
should balance what it owns and what it owes to
retain a strong capital position. Compare your
bank's assets to liabilities. Which totaled amount
is more? Has that amount been increasing or contracting
in recent years?
Adequacy Ratio - A measure of the amount of
a bank's capital expressed as a percentage of
its risk weighted credit exposures. This ratio
is used to protect depositors and promote the
stability and efficiency of financial systems.
The equation: Total Shareholder's Equity (or Total
Capital) divided by Total Assets. The average
CAR is around 7 to 10%. By contrast, the CAR of
a strong bank can exceed the 20th percentile.
Debt-to-Worth Ratio - A measure of a bank's
total liabilities as expressed in a ratio to its
total equity. This ratio represents one component
of a bank's financial health. Larger lenders with
colossal liabilities that have considerably less
capital may find their debt-to-worth to be as
Bank of America's - 12:1. An example of a very
financially healthy bank is Farmers & Merchants,
whose debt-to-worth ratio is 3:1.
financial rating services such as Weiss Rating,
Inc. and the Findley Report can provide many other
ratios and tests to determine the strength of
financial institutions, these four financial indicators
represent a good start for individuals and businesses
to rate the health of their banks. Though today's
financial institutions cannot match the fortitude
of Fort Knox's security system, Southern California
has a few can rival its financial resilience.
local companies evaluate the financial stability
of peers, partners and competition, many may also
want to reconsider the quality of institutions
with which they bank. Assessing banks' financial
statements is a great way to start this process.
Farmers & Merchants Bank is
rated the strongest bank in California and among
the top five strongest in the nation (Weiss Ratings,
Inc., 2001). For more information about F&M Bank,
please contact any of the Orange County branches
located in Fullerton, Garden Grove, Lake Forest,
Orange, Santa Ana, San Juan Capistrano and Rossmoor.
To locate a branch near you, call (562) 437-0011
or visit their website at www.fmb.com. F&M
Bank is a Member FDIC.