Outline

1
Outline

• Bank Accounting Performance
• Performance evaluation
• Analysis tools
• Liquidity analysis
• Asset Quality
• Profitability/Efficiency measures

2
Discussion question

• Objectives for performance evaluation may vary
  across regulators, shareholders, depositors, and
  managers.
• Identify different objectives
• What goals do they share?

3
Financial Statements

• Balance Sheet
• Individual components
• Income Statement
• individual components
• Schedules
• Off Balance Sheet Activities
• Sample Problem

4
Allowance for loan loss
Provisions (income statement)

Allowance for Loan Loss(Balance Sheet Contra
asset)
-
Loan Charge Offs
5
Allowance situations

• 12/2001 Allowances LL 1,000
• 1/01 - 12/01 Provisions 100
• 1/01 - 12/01 Charge offs 0
• Effects on financials
• Ending Allowances LL increase 1,000 100 -
  0 1,100
• Net loans reduced by 100
• Assets reduced by 100
• Profits reduced by 100
• Retained earnings reduced by 100

6
Allowance situations

• 12/2001 Allowances LL 1,000
• 1/01 - 12/01 Provisions 0
• 1/01- 12/01 Charge offs 100
• Effects on financials
• Ending Allowances LL decrease 1,000 0 -
  100 900
• Total loans reduced by charge off of 100
• Net Loans remain the same
• Total Assets remain the same
• Equity/Profits are not affected

7
Analysis Tools

• Common Size Analysis
• All BS items divided by total assets
• All IS items divided by gross income (Interest
  income noninterest income)
• All IS items divided by average earning assets
• Trend statements
• All items represented on a base year
• Component Analysis
• loan categories to total loans
• deposit categories to total deposits
• Peer-group and bench marking

8
Handout
9
Peer Group Analysis

• FDIC site www.fdic.gov
• Sheshunoff
• FIN 301 bank data home-page

10
Market Valuation of Intermediaries

• Why is it an important issue?
• What are the pros-cons?

11
Analysis Areas

• Liquidity
• Asset Portfolio/Mix
• Liability Portfolio/Mix
• Asset Quality
• Efficiency
• Earnings/Profitability
• Repricing Analysis
• Leverage/Capital Adequacy

12
Liquidity

• Defined
• Sources of liquidity
• asset
• liability -- purchased liquidity

13
Liquidity Measures

• Liquid Assets
• Cash
• Fed Funds Sold and securities/resell
• Assets in trading accounts
• Debt securities with remaining mat. less than 1
  year (fixed or variable rate)
• Adjust for pledged securities

14
Liquidity Measures

• Liability
• dependence on large deposits
• purchased funds
• fed funds purchased
• brokered deposits
• Ratios

15
Portfolio

• Asset Mix
• Liability Mix
• Off-balance sheet
• unused commitments
• letters of credit
• swap activity

16
Asset Quality

• Potential Measures (absolute )
• Allowance for Loan Loss
• Provision for Loan Loss
• Nonperforming Loans
• 90 days past due
• nonaccruing
• Other Real Estate Owned (OREO)
• Charge-offs
• Ratios
• Each divided by total loans
• Provisions divided by TOI
• (interest plus noninterest)
• Components
• by loan category
• by nonperforming category

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Leverage

• Net worth (equity) /Total Assets
• Revisit others when we talk about capital and
  capital definitions and risk weighted assets

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Efficiency Productivity

• Utilization and control of noninterest expenses
• Efficiency Measures
• common size analysis (items of operating
  income)
• Each overhead expense component in numerator
• Productivity

19
Profitability

• Profitability
• ROA
• ROE
• Income before extraordinary items divided by
  AVERAGE
• Average beginning plus ending divided by 2.

20
Decompose - DuPont Analysis
21
Example
22
Other Profitability Measures

• Net interest margin
• Yield on assets
• Costs of funds
• Components of operating income (common size)

23
Evaluate Sample Bank