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Held-to-maturity securities 0 0 0 Available-for-sale securities 2,, 2,, —, — The financial statements we see in this analysis, however, are focused on a single bank. The format of the UBPR is more detailed and extensive, but similar to the financial statements presented in Chapter 5. How well or how poorly has NCB performed in recent years? To put this analysis in context, we should recall that the U.

The year Treasury bond yield dropped to a year low in June of The lowered interest rates and disappointing stock returns inspired consumers to invest in real estate, which increased the prices of homes and other properties while increasing the demand for real estate loans. In a period characterized by low, but volatile interest rates, investors and lenders talked about whether a real estate bubble was about to burst!

Tables 6—5 and 6—6 indicate the principal assets, liabilities, and capital items held by this bank and show how these items and their components have increased or decreased in volume since the same time a year earlier.

In NCB increased its real estate loans item 1 by Essentially, NCB provided what customers wanted—financing for housing at a time when prices in the stock market were declining and securities i. In Table 6—6 we see that deposits in foreign offices item 8 increased significantly, up more than 53 percent, while core deposits item 6 increased a mere 2. Core deposits are the sum of items 1—5 in Table 6—6, representing sta- ble funds that are less likely to be removed from the bank.

Money market deposit accounts 9,, 8,, , Other savings deposits 4,, 4,, —40, —0. Core deposits 20,, 20,, , 2. Deposits in foreign offices 5,, 3,, 1,, Total deposits 27,, 24,, 3,, Federal funds purchased and REPOs 2,, 4,, —1,, — FHL borrowing with maturities less than 1 year , 22 , FHL borrowing with maturities greater than 1 year 1,, 1,, , Other borrowings with maturities less than 1 year 6,, 6,, —, —8.

Other borrowings with maturities greater than 1 year 7,, 2,, 4,, Acceptances and other liabilities 1,, 2,, —, — Total liabilities including mortgages 47,, 41,, 5,, Subordinated notes and debentures 1,, 1,, —20, —1. All common and preferred capital 3,, 2,, , Total liabilities and capital 52,, 46,, 6,, Overall, total deposits item 9 increased by As market interest rates increased the growth in core deposits subsided and NCB appar- ently worked to lock in longer-term nondeposit borrowings.

NCB reported substantial growth in security investments, driven by a sharp advance NCB apparently increased the liquidity of its investment portfolio by changing its composition while nearly doubling the overall size of that portfolio.

Liquidity choices on the asset side of the balance sheet teamed up with increases in long-term nondeposit borrowings as sources of bank funds to help this large banking firm get ready for rising market interest rates. Table 6—7 shows the composition of assets and liabilities held by NCB, using averages across the four quarters of the year, and presents analogous information for a peer group of banks.

The changes in assets and liabilities that we discussed in Tables 6—5 and 6—6 are based on year-end numbers whereas the percentages in Table 6—7 represent averages that tend to reduce the effects of seasonality and window dressing. From this point on, our dis- cussion will focus on average data for NCB and its peers. For NCB we see relatively small changes in asset composition in Table 6—7.

Net loans and leases as a percentage of average assets line 4 increased from However, in both years larger percentages of assets were accounted for by loans at NCB than was true for its peer group who reported ratios of net loans and leases to average assets of only NCB has slightly decreased its holdings of liquid assets short-term securities and cash assets. If we sum the percentages for items 5, 6, 7, 9, and 11 in Table 6—7, we find that interest-bearing liquid assets and cash assets accounted for In contrast, the peer group has about twice the por- tion of liquid assets relative to total assets.

In and , liquid assets accounted for Banks, like other firms, want to have enough liquid assets to meet their needs without oppressing profitability with excessive funds invested in relatively low-yielding instru- ments. On the sources of funds side, we note from Table 6—7 that NCB holds a significantly smaller proportion of core deposits item 22 than the peer group of banks.

The difference is derived for the most part from money market deposit accounts MMDAs in item The cost of MMDAs is comparable to the cost of many nondeposit sources of funds. Given that their checkable deposits are comparable—NCB has 8. Percentage of average assets 1.

Total loans Lease financing receivables 0. Loan and lease loss allowance 1. Net loans and leases Interest-bearing bank balances 1. Federal funds sold and resale agreements 1. Trading account assets 0. Held-to-maturity securities 0. Available-for-sale securities 4.

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Total earning assets Noninterest-bearing cash and deposits due from other banks 3. Premises, fixed assets, capital leases 1. Other real estate owned 0. Acceptances and other assets 5. Subtotal Total assets Demand deposits 8. Money market deposit accounts Other savings deposits 9. Core deposits Deposits in foreign offices 9.

Total deposits Federal funds purchased and REPOs 8. Total federal home loan borrowings 2. Total other borrowings Short-term noncore funding Acceptances and other liabilities 4.

Total liabilities including mortgages Subordinated notes and debentures 2. All common and preferred capital 6. Total liabilities and capital When we look at nondeposit liabilities, we see that total other borrowings are significantly higher for NCB than for the peer group.

To some extent, NCB has substituted nondeposit borrowings for money market deposits compared to its peers. Interest rates hit bottom in and then began to rise slowly.

The federal funds rate dropped below 1 percent in December and then climbed to 2. The year home mortgage interest rate dropped to a low of 5. While total interest income item 16 increased by Income from lease financing 86 Tax-exempt 2, 1, 3. Estimated tax benefit 7. Income on loans and leases tax-equivalent basis 2,, 1,, Income from U. Treasury and agency securities 2, 7, — Mortgage-backed securities MBS income 73, 69, 6. Estimated tax benefit 13 11 Income from all other securities 35, 50, — Tax-exempt securities income 27 25 8.

Investment income tax-equivalent basis , , — Interest on due from other banks 4, Interest on federal funds sold and resales 19, 15, Trading account income 5, 1, Other interest income 4, 4, —0. Total interest income tax-equivalent basis 2,, 2,, Interest on deposits in foreign offices 88, 33, Interest on all other deposits , , — Interest on trading liabilities and other borrowings , , Interest on subordinated notes and debentures 34, 25, Total interest expense , , Net interest income tax-equivalent basis 1,, 1,, Noninterest income , , 2.

Adjusted operating income tax-equivalent basis 2,, 2,, 8. Noninterest expense 1,, 1,, 7. Loan and lease losses , , — Pretax operating income tax-equivalent basis 1,, , Pretax net operating income tax-equivalent basis 1,, , Applicable income taxes , , Current tax equivalent adjustments 7.

Other tax-equivalent adjustments 0 0 0. Applicable income taxes tax-equivalent basis , , Net operating income , , Net extraordinary items 0 0 0. Net income , , Cash dividends declared , , — Retained earnings addition to , , We will soon be exploring the effects of these correlations in Chapter 7.

When Beginning in net interest income is measured relative to average total assets, the net interest margin federal law allowed NIM increases slightly as illustrated by the following: Management should firm.

Total interest income tax-equivalent basis 4. Interest expense 1. Net interest income tax-equivalent basis 3. Noninterest income 1. Noninterest expense 2. Provision for loan and lease losses 0. Pretax operating income tax-equivalent basis 2. Uniform Bank Performance Reports 8. Pretax net operating income tax-equivalent basis 2. Net operating income 1. Adjusted net operating income 1. Net income adjusted for Subchapter S status 1.

Net income 1. By this measure NCB outshines its peer group of banking firms. Its EPS changed as fol- lows between year-end and Remem- ber this calculation is based on the net income for the lead bank divided by the number of shares of National City Corporation, the bank holding company. Hence, caution in inter- preting these results is important.

Keeping this in mind, management would certainly like to see this trend continue.


As we move further down the income and expense statement in Table 6—8 we see that, while net interest income increased by This was due to a small 2. If you are a bit confused about what these accounts represent, please review the discussion in Chapter 5. The loan-loss allowance account decreased According to Table 6—7 the loan and lease loss allowance to average assets item 3 went from 1.

Management appears to be cashing in on the low loan losses that were characteristic of this time period. How did NCB do relative to its peer group with regard to income and expenses? Table 6—9 provides a glimpse of an answer for this question. NCB improved its performance in It outperformed its peer group on interest income item 1 and noninterest expense item 5 in both and The lower noninterest expense indicates that management has succeeded in controlling overhead costs relative to its peer group.

Overall, the successes regarding interest income and noninterest expenses illustrated in the upper portion of Table 6—9 led to both higher net operating income item 10 and higher net income item 13 relative to average total assets for NCB versus its peer group of banks in ROA increased by Equation 6—11 pro- vides the following breakdown using quarterly average figures for Report of Condition items: Management and the board of directors expanded the amount of equity capital through increased profits and reductions in stock dividend payments.

The dollar amount of dividends declared in was half the dividend declaration and this tended to lower the equity multiplier. We can expand this analysis a bit further using Equation 6—14 for ROE: The key factors were: For average equity capital equaled 6. These positive effects were mitigated to some extent by the 2.

The relevant equation is: For every dollar of pretax operating income NCB paid out about 27 cents in taxes in , which rose further to nearly 37 cents in On a brighter note, however, the measure of expense-control efficiency pretax net operating income to total operating revenue advanced by more than 38 percent, pointing to improved expense control.

NCB appears to be more focused on the traditional business of lending than is the average large bank today. Its operations have generated higher revenues and lower expenses than its peers and this performance superiority generally broadened between and We have also noted that many of the measures of financial-firm performance provide key insights regarding the interindustry competition today between banks, thrift institutions, security brokers and dealers, mutual funds, finance companies, and insurance firms.

Increasingly, bankers and their competitors are being forced to assess their performance over time, analyze the reasons for any performance problems that appear, and find ways to strengthen their performance in the future. The latter risk measure focuses upon the probability of ultimate failure if a financial firm is undercap- italized relative to the risks it faces. This financial report on individual FDIC-insured commercial and savings banks has become one of the most widely used performance summaries available to bankers, regulators, customers, and the general public.

Key Terms profitability, net profit margin, operational risk, ROA, asset utilization, legal risk, ROE, equity multiplier, compliance risk, efficiency, credit risk, reputation risk, net interest margin, liquidity risk, strategic risk, net noninterest, market risk, capital risk, margin, interest rate risk, UBPR, Problems 1.

Depositors Savings Association has a ratio of equity capital to total assets of 7. In contrast, Newton Savings reports an equity-capital-to-asset ratio of 6 percent. Suppose that both institutions have an ROA of 0.

What do your calculations tell you about the benefits of having as lit- tle equity capital as regulations or the marketplace will allow? The latest report of condition and income and expense statement for Galloping Mer- chants National Bank are as shown in the following tables: Using these statements, calculate the following performance measures: The following information is for Shallow National Bank: Suppose interest income, interest expenses, noninterest income, and noninterest expenses each increase by 5 percent while all other revenue and expense items shown in the preceding table remain unchanged.

Alternative scenarios: What will happen to its ROE? If total assets and equity capital hold their present positions, what change will occur in ROE? How would a decline in total assets and equity by half with ROA still at 0. How will the ROE for Monarch State Bank change if total operating expenses, taxes, and total operating revenues each grow by 10 percent while assets and liabil- ities remain fixed?

Suppose a stockholder-owned thrift institution is projected to achieve a 1. What must its ratio of total assets to equity cap- ital be if it is to achieve its target ROE of 12 percent?

If ROA unexpectedly falls to www. Saylor County National Bank presents us with these figures for the year just con- cluded. Please determine the net profit margin, equity multiplier, asset utilization ratio, and ROE. Lochiel Commonwealth Bank and Trust Company has experienced the following trends over the past five years all figures in millions of dollars: Are any adverse trends evident?

Tax management efficiency ratio.

Expense control efficiency ratio. Asset management efficiency ratio. Funds management efficiency ratio. Suppose Wilmington Hills State Bank experienced a 20 percent rise in net before-tax income, with its tax obligation, operating revenues, assets, and equity unchanged. What would happen to ROE and its components? Valley Savings reported these figures in millions on its income statement for the past five years.

Are there any adverse trends? Any favorable trends? What seems to be happening to this institution? We examined a wide variety of profitability measures for that bank, including ROA, ROE, net profit mar- gin, net interest and operating margins, and asset utilization.

However, the various mea- sures of earnings risk, credit risk, liquidity risk, market risk price risk and interest rate risk , and capital risk were not discussed in detail. What steps would you recommend to management to deal with any risk exposure problems you observe?

You have been asked to compare the growth rate in assets and deposits of several banks that are regarded as takeover targets for your growth-oriented company.

These banks include: Amsouth Bank www. Which would you recommend as a pos- sible takeover target and why? A guest speaker visiting your class contends that Bank of America is one of the most profitable banks of its size in the United States. Check these claims out on the Web for example, at www.

Who is right and what makes you think so? Property and Casualty, Insurance: Life and Health, and Savings and Loans. In each category of financial firms found in the Comparative Company Analysis, identify the firm with the highest return on equity capital ROE. How do the ROEs compare across categories and subindustries?

Are there any other performance measures that could be compared across financial-service sectors? As a result there is keen interest today in the compara- tive financial performance of firms in these four competing industries.

You may find it useful to select certain firms from the Market Insight file to com- pare performances across these industries. For example, you can compare the financial statements of such companies as MetLife Insurance Inc.

In Chapter 6 we focus on the evaluation of financial statements. The spreadsheet containing items expressed as percentages Key profitability ratios are introduced and ROE and ROA are bro- of assets developed for Comparisons with the Peer Group in ken down into component ratios to aid interpretation.

Corporation, to illustrate trends comparison of December with December bank data and for comparative analysis a. Write one paragraph comparing the asset composition comparison of bank data with peer group data.

You will be eval- for your BHC with that of the peer group. Write one paragraph comparing the sources of funds your dollar data and interpreting this information; 2 comparing composition for your BHC with that of the peer group. Open your Excel Workbook and go to the spreadsheet con- taining dollar amounts for Year-to-Year Comparisons.

Delete Part Two: A Breakdown of Returns any numbers in columns D and E. Refer to Tables 6—5, 6—6, A. Open the Year-to-Year Comparisons spreadsheet. Immedi- www. Calculate ately below the income and expense data, add the rows the dollar changes in Column D and the Percentage Changes illustrated below: Incorporate the basic and then for the prior year in column C using the formula equation and interpret the information for your bank.

Rows 63 through 65 call for a breakdown of the net profit ate the entries. For example, the formula for ROE entered in margin, as illustrated by Equation 6— Write one para- cell B54 would be: In rows 54 through 58, calculate the key profitability ratios for your bank and the implications of the changes occur- from Equations 6—4 through 6—8 in the chapter.

Write one ring across the years. Rows 66 through 69 provide the framework for a break- D. Rows 59 through 62 provide the framework for a break- down of ROA Equation [6—20] in this chapter. Write one down of equity returns using Equations 6—14 through paragraph discussing the change in ROA and its compo- 6—17 in this chapter. Write one paragraph discussing the nents for your bank. References 1.

Gilbert, R. Alton, Andrew P. Meyer, and Mark D.

Funneling Financial Data into Failure Probability. Louis, April , pp. Kristad, Jeffrey, and Pat Donnelly.

Rose, Peter S. Wright, David M. For information on how to read bank financial statements and make comparisons among different institutions, see the following: Federal Financial Institutions Examination Council. Washington, D. Alton, and Gregory E.

2. Create a financial supermarket

How Different Are Community Banks? Gunther, Jeffrey W. Do Trou- bled Banks Tell All? Klee, Elizabeth C. Commercial Banks in Wetmore, Jill L. However, mere measurement of other trade associations, dozens of journals and books are the dimensions of performance is not enough.

Managers released each year by book publishing houses, magazine pub- must have the tools and the knowledge necessary to lishers, and government agencies. Among the most impor- improve performance over time. The chapters that follow tant of these recurring sources are the following: The same Association at www. Among the most ketingNetwork. Other Sources of Data on Individual Banks professional schools are often devoted to specific problem and Competing Financial Firms areas, such as marketing, consumer lending, and commercial lending.

Among the most popular published by the American Bankers Association at trade associations publishing problem-solving information www. Depart- ment of Commerce at www.

Louis at www. Directories for many industries give lists of businesses in an industry by name, city, state, and country of location. An annual anal Embed Size px. Start on. Show related SlideShares at end. WordPress Shortcode. Published in: Full Name Comment goes here. Are you sure you want to Yes No. Be the first to like this. No Downloads.

Banking and Financial Services Minor

Views Total views. Actions Shares. Embeds 0 No embeds. No notes for slide. The ninth edition discusses the major changes and events that 4. You just clipped your first slide!Among the more popular measures of overall risk for a financial firm are the following: Financial Services homework has never been easier than with Chegg Study. One reason is that similar-size financial firms tend to offer the same or similar services, so you can be a bit more confident that your performance comparisons have some validity.

Check these claims out on the Web for example, at www. Recent turmoil in financial markets has demonstrated the need for knowledge of monetary policy and financial services in all professions.

Wetmore, Jill L. This is why comparison of financial firms in different countries is often so difficult and must be done with great caution. Gilbert, R. Functions of money, monetary systems, history of banking, functions of the commercial bank, bank assets and reserves, loans and discounts, bank supervision, the Federal Reserve System, central banking policies, monetary and fiscal policies.

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