Download Financial Statement Analysis of Depository

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
Balance Sheet
Financial Outputs
(uses of Bank Funds or Assets)
Cash (primary reserves)
Liquid Security Holdings
(secondary Reserves)
Investments in Securities
Loans
Consumer
Real Estate
Ag
Fin Institutions
Mics Loans
Misc
Financial Inputs
(Sources of Funds or
Liabilities and Owners Equity)
Deposits from Public
Demand
NOW’s
Money markets
Savings
Time
Nondeposit Borrowings
Equity Capital
Stock
Surplus
Retained Earnings
Capital reserves
Balance Sheet continued
As with any balance sheet
Assets = Liabilities + Owners Equity
or
Accumulated uses
Accumulated sources
of bank funds
of bank funds
=
Balance Sheet Components Assets
The Cash Account
includes: Cash in the vault, deposits with other
banks, cash items in the process of collection
and reserve accounts with the Federal Reserve
Traditionally banks attempt to keep this account
as low as possible
Primary reserves since it is banks first line of
defense against withdraws
Generate little income
Balance Sheet Components Assets
Investment Securities: The Liquid Portion
Quickly converted into cash
Secondary reserves
Investment Securities: Income Generating Portion
Taxable and nontaxable
Can be recorded at original cost or market value or
the lower of the two
More important recently
Balance Sheet Components Assets
Loans
Largest Asset
Generally broken down by purpose of loans –
Different risk (& return) and liquidity of each loan type
Choice of loan type impacts interest income
Gross loans -- total of all outstanding
Allowance for Loan losses (ALL account)
PLL on income statement
Gross minus ALL = Net Loans
Balance Sheet Components Assets
ALL account
often divided into two sections, specific reserves,
and general reserves
Tax reform Act of 1986
only loans actually declared uncollectable can be
expensed through the ALL accounts
decreased use of ALL accounts
Permanent capital
Balance Sheet Components Assets
Federal Funds Sold
Securities Purchased under Resale Agreements
Customers liability Acceptances
Misc Assets
Balance Sheet Components Liabilities
Deposits (Impacts Interest expense)
Noninterest bearing
Savings
NOW accounts
Money Market Accounts
Time Deposits
Borrowings from Nondeposit sources (Int Exp)
Capital Accounts
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 values
Fair Value -- current market value
Arguments against Fair Value
Increased in the volatility of earnings
Greater instability in stock prices of banks
Loss of bank capital cushions
Lack of resale market
Income Statement or
Report of Income
Revenue Items
Interest 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
Report of Income
Expenses
Interest Expense
largest expense is interest paid on deposits,
often between 50 and 60% of total expenses
Varies based on type of deposits
fed funds borrowing and repurchase agreements
have grown in importance.
Non interest expense
wages, salaries and other personnel expenses+
Income
Net Interest Income
= Total Interest Income -Total Interest Expense
Also referred to as interest margin
Net income
Adds non interest income and subtracts non interest
expense to net interest income.
Income Statement
Interest Income
Interest on loans, Interest on securities, Other
Interest Expense
Deposit Interest, Short term debt, Long Term debt
Net Interest Income
Non interest Income
Service Charges, Trust Department, Other
Non interest Expense
Wages, Net occupancy, Other operating expenses
Income before taxes
Provision for income taxes
Net income after taxes
Funds - Flow Statement
Dividends paid out to
Funds from operations
stockholders
+ decreases in bank assets
+ increase in banks assets
=
+ increases in bank liabilities
+ decreases in bank liabilities
Funds provided to the bank
Funds Used by the bank
Capital Account Statement
Beginning Balance
+ Net income
- Dividends paid to shareholders
+ New Shares of Stock issued
- Purchases of treasury stock
Balance at end of period
Common Characteristics of Banks Financial
Statements
Heavy dependence on borrowed funds
Earnings are exposed to risk if borrowings
cannot be repaid
Growing use of nondeposit borrowings
Bank 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.
Evaluating and Measuring
Bank Performance
Going to use ratio analysis to evaluate the
performance of depository institutions
Bank data is available in the call reports and via
the Uniform Bank Performance Report (UBPR).
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.
UBPR
Goal is to provide uniform reporting of
information
Developed by the Federal Financial Institutions
Examination Council’s quarterly reports.
Available online at www.FFIEC.org
Using the UBPR
Compare across years
each report has 5 years of data
Year end or current quarter plus 1 year prior to
current and three previous years
Compare to peer groups
also available are peer groups reports based on
both size of bank and geographic location
Allows you to benchmark
ROE and ROA
Net income after taxe s
ROE 
Total Equity Capital
ROE measure the rate of return flowing to the banks shareholders
Net income after taxes
ROA 
Total Assets
ROA measures managerial efficiency -- how well management converts
assets into net earnings. The UBPR uses average assets instead of
total assets.
Relationship between
ROE and ROA
Net Income Total Assets
ROE 

Total Equity Total Assets
Net Income Total Assets
ROE 

Total Assets Total Equity
 ROA  Equity Multiplier
DuPont Identity
Assets
ROE  ROA 
Total Equity
Net Income
Net Income Total Income
ROA 

x
Total Assets Total Income Total Assets
ROA 
Profit
x
Asset
Margin Utilization
Decomposition
ROE  ROA  Equity Multiplier
ROA 
ROE 
Profit
margin
Profit
Margin

x
Asset
Utilization
Asset
Utilitzation

Equity
Multiplier
Decomposition
Equity Multiplier
Reflects the leverage or financing policies (the
choice of debt or equity)
Profit Margin
Reflects the effectiveness of expense
management control
Asset utilization
Reflects the ability to manage the mix and yield
on the banks assets
Asset Utilization and
Profit Margin
Both reflect Management decisions regarding:
Mix of funds raised and invested
Size of Bank
control of operating Expenses
Pricing of Services
Minimization of tax liability
Asset Utilization
Asset
Utilization

Total Income Interest Income  Non Interest Income

Total Assets
Total Assets
Interest Income
Interest Earned
$ of
on each Asset
Total Assets
Each Asset
Total Assets
Earning Assets
Total Assets
Yield on
Composition of
Volume of
EachAsset
Each Asset
Earning Assets
Asset Utilization
Total Income Interest Income  Non Interest Income


Utilizatio n Total Assets
Total Assets
Asset
Non Interest Income
Fudiciary
Service Charges
Trading
Other
Income
Total Assets
amd Fees
Total Assets
Revenue
Total Assets
NonInterst Inc
Total Assets
Profit Margin
Profit
Net Income

Margin Total Income
Interest
Provision for
NonInterest
Income
Expense
Total
LoanLosses
Total
Expense
Total
Taxes
Total
Income
Income
Income
Income
Decomposition of ROA
Total

Total

Income
Net Income Revenue Expenses Taxes
ROA 

Total Assets
Total Assets
Total
Expense
Ratio

Interest
Expenses Expense


Total
Total
Income
Assets
Non Interest
Expense
Total
Assets
Provisons For

Loan Losses
Total
Assets
Decomposition of ROA Part 2
Total
Total
Income


Net Income
Revenue Expenses Taxes
ROA 

Total Assets
Total Assets
Net
Interest

Interest
Income Income Expense

Total
Assets

Non Interest

Non Interest
Income
Expense
Total Assets

Net Special
Income
Decomposition of ROA Part 2
Net
Non Interest Non Interest Net Special




Income Income Expense
Income
Expense
Income

Total
Total Assets
Assets
Net
Interest
Interest

Interest
Interest
Income Expense
Interest 
Total Assets
Margin
Non Interest Non Interest

Noninterest
Income
Expense

margin
Total Assets
Other Important Ratios
Net Interest
Margin
Net interest income

Earning assets
Interest Income
Interest Expense
Spread 

Earning Assets Interest Bearing Assets
Burden
Noninterest Expense - Noninterest Income

Ratio
Average Total Assets
Efficiency
Ratio
Noninterest Expense

Net interest Income  Noninterest Income
Harris National
Net Income / Average Assets
Large decline
Better relative to industry
Decomposition: Intrust Bank
ROE 
Profit

Asset

Equity
Margin Utilitzation Multiplier
Intrust Bank
Net Income
Total Income
Total Assets
total Equity
12/31/2011
43,341
190,346
4,065,989
355,988
12/31/2012
33,982
189,667
3,705,025
338,940
ROE
Profit Margin
Asset Utliization
Equioty Multiplier
12/31/2011 12/31/2012
0.1217
0.1003
0.2277
0.1792
0.0468
0.0512
11.4217
10.9312
Using the UBPR Intrust Bank
Page 1
Net
Interest
Income Income

Total

Interest
Expense

Non Interest

Non Interest
Income
Expense
Total Assets

Net Special
Income
Assets
Improvement in ROE, but decrease in ROA
Decrease in Int Income – Low Relative to
Industry
High real to peers in Non Int Income and Non
Int Exp
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?