financial analysis of depository institutions
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Financial Analysis of Depository Institutions . Finance 129 Drake University. Basic Financial Statements. Report of Condition Balance Sheet Report of Income Income Statement Funds Flow Statement Sources and Uses of Funds Statement of Stockholders Equity. Financial Outputs - PowerPoint PPT PresentationTRANSCRIPT
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Financial Analysis ofDepository Institutions
Finance 129Drake University
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Basic Financial Statements
Report of ConditionBalance Sheet
Report of IncomeIncome Statement
Funds Flow StatementSources and Uses of Funds
Statement of Stockholders Equity
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Balance Sheet
Financial Outputs(uses of Bank Funds or Assets)
Cash (primary reserves)Liquid Security Holdings
(secondary Reserves)Investments in SecuritiesLoans
ConsumerReal EstateAgFin InstitutionsMics Loans
Misc
Financial Inputs(Sources of Funds or
Liabilities and Owners Equity)Deposits from Public
DemandNOW’sMoney marketsSavingsTime
Nondeposit BorrowingsEquity Capital
StockSurplusRetained EarningsCapital reserves
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Balance Sheet continued
As with any balance sheetAssets = Liabilities + Owners Equity
orAccumulated uses Accumulated
sourcesof bank funds of bank funds
=
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Balance Sheet Components Assets
The Cash Accountincludes: Cash in the vault, deposits with other banks, cash items in the process of collection and reserve accounts with the Federal ReserveTraditionally banks attempt to keep this account as low as possiblePrimary reserves since it is banks first line of defense against withdraws Generate little income
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Balance Sheet Components Assets
Investment Securities: The Liquid PortionQuickly converted into cashSecondary reserves
Investment Securities: Income Generating Portion
Taxable and nontaxableCan be recorded at original cost or market value or the lower of the twoMore important recently
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Balance Sheet Components Assets
LoansLargest AssetGenerally broken down by purpose of loans –
Different risk (& return) and liquidity of each loan typeChoice of loan type impacts interest income
Gross loans -- total of all outstandingAllowance for Loan losses (ALL account)
PLL on income statementGross minus ALL = Net Loans
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Balance Sheet Components Assets
ALL accountoften divided into two sections, specific reserves, and general reservesTax reform Act of 1986
only loans actually declared uncollectable can be expensed through the ALL accountsdecreased use of ALL accountsPermanent capital
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Balance Sheet Components Assets
Federal Funds Sold Securities Purchased under Resale AgreementsCustomers liability AcceptancesMisc Assets
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Balance Sheet Components Liabilities
Deposits (Impacts Interest expense)Noninterest bearingSavingsNOW accountsMoney Market AccountsTime Deposits
Borrowings from Nondeposit sources (Int Exp)Capital Accounts
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Book vs. “Fair Value”
Banks have traditionally recorded balance sheet entries at original cost (book value or historical cost accounting -- ammoritzed cost)Implies that interest rate fluctuations would not impact valuesFair Value -- current market value
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Arguments against Fair Value
Increased in the volatility of earningsGreater instability in stock prices of banksLoss of bank capital cushionsLack of resale market
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Income Statement or Report of Income
Revenue ItemsInterest Income (interest generated from loans normally accounts for most income -- generally more than 2/3 of total income)Non interest income (fee income, etc.) Increasingly important. Non interest income also includes securities gains (or losses). Now subject to standard tax rate
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Report of IncomeExpenses
Interest Expenselargest expense is interest paid on deposits, often between 50 and 60% of total expensesVaries based on type of depositsfed funds borrowing and repurchase agreements have grown in importance.
Non interest expensewages, salaries and other personnel expenses+
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Income
Net Interest Income = Total Interest Income -Total Interest ExpenseAlso referred to as interest margin
Net incomeAdds non interest income and subtracts non interest expense to net interest income.
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Income Statement
Interest IncomeInterest on loans, Interest on securities, Other
Interest ExpenseDeposit Interest, Short term debt, Long Term debt
Net Interest IncomeNon interest Income
Service Charges, Trust Department, OtherNon interest Expense
Wages, Net occupancy, Other operating expensesIncome before taxesProvision for income taxes
Net income after taxes
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Funds - Flow Statement
Funds from operations+ decreases in bank assets+ increases in bank liabilitiesFunds provided to the bank
Dividends paid out to stockholders
+ increase in banks assets+ decreases in bank
liabilitiesFunds Used by the bank
=
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Capital Account Statement
Beginning Balance + Net income - Dividends paid to shareholders+ New Shares of Stock issued - Purchases of treasury stockBalance at end of period
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Common Characteristics of Banks Financial Statements
Heavy dependence on borrowed fundsEarnings are exposed to risk if borrowings cannot be repaid
Growing use of nondeposit borrowingsBank must hold a significant proportion of high quality and marketable securities
Financial Assets are more important than plants and equipment
few fixed costs and limited use of operating leverage.
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Evaluating and Measuring Bank Performance
Going to use ratio analysis to evaluate the performance of depository institutionsBank data is available in the call reports and via the Uniform Bank Performance Report (UBPR).
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Obtaining Information on Banks
Data for banks is available from the Uniform Bank Performance Report (UBPR).UBPR developed by the Fed, FDIC, and office of the comptroller of Currency so that there would be a standardized way to compare institutions.Also peer group and state reports for comparable banks.
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UBPR
Goal is to provide uniform reporting of informationDeveloped by the Federal Financial Institutions Examination Council’s quarterly reports.Available online at www.FFIEC.org
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Using the UBPR
Compare across yearseach report has 5 years of dataYear end or current quarter plus 1 year prior to current and three previous years
Compare to peer groupsalso available are peer groups reports based on both size of bank and geographic locationAllows you to benchmark
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ROE and ROA
ROE measure the rate of return flowing to the banks shareholders
ROA measures managerial efficiency -- how well management converts assets into net earnings. The UBPR uses average assets instead of total assets.
CapitalEquity Totalsafter taxe incomeNet ROE
Assets Totalsafter taxe incomeNet ROA
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Relationship between ROE and ROA
Assets TotalAssets Total
Equity TotalIncomeNet ROE
MultiplierEquity ROAEquity TotalAssets Total
Assets TotalIncomeNet ROE
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DuPont Identity
Equity TotalAssetsROA ROE
Assets TotalIncome Total
Income TotalIncomeNet
Assets TotalIncomeNet ROA x
nUtilizatioAsset
x MarginProfit
ROA
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Decomposition
MultiplierEquity
onUtilitzatiAsset
MarginProfit
ROE
MultiplierEquity ROAROE
nUtilizatioAsset
x marginProfit
ROA
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Decomposition
Equity MultiplierReflects the leverage or financing policies (the choice of debt or equity)
Profit MarginReflects the effectiveness of expense management control
Asset utilizationReflects the ability to manage the mix and yield on the banks assets
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Asset Utilization and Profit Margin
Both reflect Management decisions regarding:
Mix of funds raised and investedSize of Bankcontrol of operating ExpensesPricing of ServicesMinimization of tax liability
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Asset Utilization
Assets TotalIncomeInterest Non IncomeInterest
Assets TotalIncome Total
nUtilizatioAsset
Assets Earningof Volume
AssetEach
ofn Compositio
AssetEachon Yield
Assets TotalAssets Earning
Assets TotalAssetEach of $
Assets Total
Asseteach on EarnedInterest
IncomeInterest
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Asset Utilization
Assets TotalIncomeInterest Non IncomeInterest
Assets TotalIncome Total
nUtilizatioAsset
Assets TotalInc NonInterst
Other
Assets Total
RevenueTrading
Assets TotalFees amdCharges Service
Assets Total
IncomeFudiciary
IncomeInterest Non
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Profit Margin
IncomeTotalTaxes
Income
IncomeTotal
ExpensetNonInteres
IncomeTotal
LoanLossesforProvision
IncomeTotal
ExpenseInterest
Income TotalIncomeNet
MarginProfit
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Decomposition of ROA
AssetsTotal
Losses LoanFor Provisons
AssetsTotal
ExpenseInterestNon
AssetsTotal
ExpenseInterest
IncomeTotal
ExpensesTotal
RatioExpense
Assets TotalTaxes
IncomeExpenses
TotalRevenue
Total
Assets TotalIncomeNet ROA
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Decomposition of ROA Part 2
Assets TotalIncome
SpecialNet Expense
InterestNon Income
InterestNon ExpenseInterest
IncomeInterest
AssetsTotal
IncomeNet
Assets TotalTaxes
IncomeExpenses
TotalRevenue
Total
Assets TotalIncomeNet ROA
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Decomposition of ROA Part 2
Assets TotalIncome
SpecialNet Expense
InterestNon Income
InterestNon ExpenseInterest
IncomeInterest
AssetsTotal
IncomeNet
Assets TotalExpense
InterestNon Income
InterestNon
margintNoninteres
Assets TotalExpenseInterest
IncomeInterest
MarginInterest
Net
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Other Important Ratios
assets Earningincomeinterest Net
MarginInterestNet
Assets BearingInterest ExpenseInterest
Assets EarningIncomeInterest Spread
Assets Total AverageIncomet Noninteres - Expenset Noninteres
RatioBurden
Incomet Noninteres Incomeinterest Net Expenset Noninteres
RatioEfficiency
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Harris National
Net Income / Average AssetsLarge declineBetter relative to industry
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Decomposition: Intrust Bank
MultiplierEquity
onUtilitzatiAsset
MarginProfit
ROE
Intrust Bank12/31/2011 12/31/2012 12/31/2011 12/31/2012
Net Income 43,341 33,982 ROE 0.1217 0.1003Total Income 190,346 189,667 Profit Margin 0.2277 0.1792Total Assets 4,065,989 3,705,025 Asset Utliization 0.0468 0.0512total Equity 355,988 338,940 Equioty Multiplier 11.4217 10.9312
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Using the UBPR Intrust BankPage 1
Improvement in ROE, but decrease in ROADecrease in Int Income – Low Relative to IndustryHigh real to peers in Non Int Income and Non Int Exp
Assets TotalIncome
SpecialNet Expense
InterestNon Income
InterestNon ExpenseInterest
IncomeInterest
AssetsTotal
IncomeNet
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Questions: Intrust Bank
Does well in Net Income – how is there business model different than a traditional bank? How does it generate income – how well does it manage expense?Does the loan mix used by Intrust add risk?