The statement of a bank reveals its condition on a certain date, and when several past statements are compared its record over a given period of time may be ascertained. The various items will gradually come to bear certain more or less definite relations to one another. Their relations will vary in considerable manner among banks, both according to the section in which they are located and the type of business which they handle, and for banks in general they will also vary in response to changes which take place in general business conditions. Banks, especially in the larger centers, which regularly lend to other institutions, consider carefully the statement of condition which a prospective bank borrower furnishes before a loan is granted. They regularly analyze the statement and study the relations which certain of the items bear to one another. While these relations, as just indicated, are by no means absolute, certain general limits have become established.

In analyzing the bank's statement several tests are applied. On the one hand, the profitableness of the account of the institution is considered. This is supplemented by an analysis of the character of its assets, especially for the purpose of seeing if the bank is in a sufficiently liquid condition.

The profitableness of the prospective borrower is shown in several ways. The primary test is to consider the ratio which deposits bear to the capital investment, including in the latter term capital, surplus, and undivided profits. It is generally accepted that a bank which shows a ratio of less than five to one between deposits and capital investment is conducting too small a volume of business for the capital investment. On the other hand, a bank which shows a ratio of more than ten to one is conducting too large a business and should increase its capital, as the high ratio does not provide sufficient margin of safety in the event of the bank's failure. This test may be supplemented by observing the ratio which loans bear to deposits, to discover any tendency toward overlending. This test is less satisfactory because the ratio varies greatly according to monetary conditions, decreasing as stringency is noted. The third test lies in comparing the growth of surplus and undivided profits over a series of years as well as the dividend record of the institution.

In studying the character of the assets, attention is directed to the proportion of fixed assets, such as bank building, real estate, furniture, and fixtures. The amount which a bank invests in its premises should be proportioned to the volume of its business and to its capital, while similarly it should not hold real estate other than that which is necessary to conduct its affairs. Other assets which may possibly become slow are also considered - for example, unlisted stocks and bonds. Of primary importance with respect to liquidity is of course the reserve position of the institution, and attention will always be given to the reserve ratio which the bank's statement shows.

Supplementing these two types of information, a lending bank considers the past record of the applicant with respect to borrowings. The lending institution is often furnished with a statement of the total borrowings of the applicant from other sources as well as from itself. This serves to indicate how the applicant has been conducting its affairs and also to show whether it has borrowed only for seasonal and extraordinary needs and has followed the usual practice of "cleaning up" its indebtedness to the banks each year. Another source of information will be the manner in which the borrowing bank has in the past conducted its accounts with the lending institution, especially whether it has made a practice of overdrawing against uncollected items or whether it has been conservatively and carefully managed.