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How to Read Your Bank's Financial Statement - and Protect Your Deposits

Contributed by Farmers & Merchants Bank

Fort 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.

Likewise, 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.

Liquidity - 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.

Net 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?

Capital 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.

Although 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.

As 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.