“Which is the best bank for my company, John?”
 
This is the question posed most often to me by business owners.  In response I always ask them three questions.

The first is about their bank’s financial condition, which is discussed below.  (The other two will be covered next month.)

Banks are very sound today.  Your ideal bank should always be eager to fulfill your company’s financial needs.  Its ability to deliver in both receding and rising economies hinges on its financial soundness.

Today the fiscal fitness of our local banks is excellent.  None of them is sickly.  Indeed, the whole banking industry is quite healthy. 

A dozen years ago banks were failing at the rate of 10 a month.  During this last quarter, our country’s 7966 banks set another earnings record, and just one of them went under.

Being in great shape is the most important characteristic of your company’s ideal bank.

Despite the absence of any warning signs, be attuned to your bank’s condition. 

It often explains behavior, and the data is readily available.

Bank health records are public knowledge.  Even if your bank is owned by a small coterie of private investors, you can access five years of data about its fiscal fitness today online.  And it is free.

You already know the Federal Deposit Insurance Corp. insures bank deposits up to $100,000 per account.  You may also know that banks must submit extremely detailed reports to the FDIC every 90 days.

Visit the agency’s Web site (www.fdic.gov/) and you may be surprised by how much data the FDIC reveals.  For instance, you can uncover the amount of a bank’s unused lines of credit, the notional amount of its credit derivatives, and even the loans made to its own officers.

Identify your bank’s trend lines.  It is human nature to compare our personal performance two ways: against our prior performance and against that of others.  Use the same approach for your bank.

First, compare the numbers from its last two quarters.  Note closely changes in asset quality.

When levels of loan delinquencies, foreclosed properties, and charge-offs start to grow, management reins in their lenders.  The new business loan hounds get the shortest leashes.

Then, contrast your bank’s performance against its competitors.

The FDIC makes this second trend line easy to see.  It calculates 52 statewide aggregates and averages.

Anyone can compare a local bank’s results against the other 199 Ohio-based banks.

Such an analysis obviously suffers from the reality that banks’ expense structures and revenue streams vary vastly depending on size and geographic reach.  (Consider the results of banking behemoths struggling with problems in Japan and Argentina.)

The FDIC, therefore, assigns each bank to one of 25 peer groups, based on its assets, number of branches and location.

This enables stacking your bank up against the composite of similar institutions nationwide.

For example, a $250 million Columbus-based bank with three branches is assigned to Peer Group 7, a class comprised of 837 banks.

Bank data are readily available and you should use it, especially if you’re still seeking the ideal bank.

Your bank is a critical supplier.  Reflect on the effort you expend tracking the financial performance of your most critical suppliers. 

Consider the quality and frequency of the information they provide.

You hope to spot problems that could affect reliability, despite limited financial disclosure.

Now ask yourself whether any vendor is more important than your bank.

Do you approach the selection and tracking of your funds supplier with the same vigor spent on your other suppliers?

Comprehensive bank data are available and analyzing it is not difficult.  It is the mandatory first step in evaluating your present bank and any potential replacements.

ACTION STEP:    Visit www.fdic.gov/ and review your lending institution’s financial performance.  Compare it to other Ohio banks and like-sized banks across the country.

Historical data provides the rear-view mirror scan of the path your bank has traveled.  The soundness of its position today is one crucial determinant of whether it is the ideal bank to travel with in the future.