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Managing Financial Intermediaries

Text: Chapters 15 17, 22 Rose: Chapters 4 & 5

Goal for the day

Develop a basic understanding of bank management Learn to interpret a banks financial information Get ready for our guest speakers and your bank projects

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Management objectives
Maximize shareholder wealth Profitability Liquidity Solvency

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Managements Challenges

Size of bank, trade area, product mix Portfolio of assets and liabilities Efficiency in operations Non-interest activities Pricing of assets and services Acquisition of loanable funds Risk management Interest rate Default Credit Tax management Human resources Others?
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Understanding bank management through financial statements

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Basic financial statements

Report of condition Report of income Funds flow statement Statement of stockholder equity

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Report of condition
Financial Outputs (assets, funds) Loans and leases Investment in securities Cash and deposits elsewhere Facilities and other assets Total Total Financial Inputs (liabilities, equity) Deposits from public Non-public borrowings Equity from stockholders

Assets = Liabilities + Equity

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Report of income
Financial Outputs (revenues) Loan income Security income Income from other deposits Income from fees and services Total Financial Inputs (costs) Deposit interest costs Costs of non-deposit borrowings Overhead expenses Taxes Total

Net Income after Taxes = Total Revenues Total Costs

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TTYN

ASSESS THE FINANCIAL CONDITION AND PERFORMANCE OF FIRST NATIONAL BANK OF WAVERLY, IOWA
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Measuring bank performance using DuPont analysis

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DuPont analysis for banks

Definitions ROE = NIAT/Equity ROA = NIAT/Assets ROE = ROA x Assets/Equity Assets/Equity = equity multiplier = EM EM = leverage, funding sources for bank FNB Waverly example ROA = 0.8%, EM = $258.9/$24.7 = 10.5 ROE = 0.8% x 10.5 = 8.4%

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If the equity multiplier is 10.5

Can you translate that into a more familiar measure of leverage say the D/A ratio? D/A = 90.5 What does this leverage position tell us about bank management?

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More DuPont analysis

PM = NIAT/Total operating income PM = profit margin Effectiveness of expense management and service pricing Total operating income = interest income + non-interest income AU = Total operating income/Assets AU = asset utilization Portfolio management, mix of bank products ROE = PM x AU x EM

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FNB Waverly example

Total operating income ($million) $13.2 + $1.4 = $14.6 NIAT = $2.1 Assets = $259.5 PM = $2.1/$14.6 = 14.2% AU = $14.6/$259.5 = 5.6% ROE = .142 x .056 x 10.5 = 8.4%

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Risk management measures

Credit risk Assets decline in value Non-performing loans to total loans Net charge offs to total loans Liquidity risk Insufficient liquidity reserves, need to borrow at higher rates Loan to deposit ratio Purchased funds to total assets
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Risk management measures

Interest rate risk Rate sensitive assets to rate sensitive liabilities GAP analysis Market risk Financial market volatility impact on asset values Ratio of fixed rate loans and securities to floating rate Duration analysis
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Risk management measures

Earnings risk Impact of earnings volatility on banks value Historical variability in ROA and ROE Solvency or default risk Risk of banks survival Equity to total assets

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Questions?

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