Bank Financials “Needle Movers”
Today’s Agenda 1.The “business” of banking – how Banks make money 2.Financial statements 3.How each area can impact financial results.
What is the basic business of a Bank?
What are a Bank’s products: What do Banks “Sell”? Assets? Loans Investments Liabilities? Checking accounts Savings / NOW accounts CDs, etc. Wholesale Funds (brokered CDs, FHLB) Both Assets & Liabilities?
The basic business of a Bank: A Bank is a Financial Intermediary that buys and sells money
Basic Bank Income Statement: Revenues:Interest Income (loans & investments) Less:Interest Expense (deposits & borrowings) ________________________________ Net Interest Income (NII) Less:Provision for Loan Losses Plus:Other Income (Fees, etc.) Less:Operating Expense ___________________________ Net Income Before Taxes Less:Taxes ________________________________ Net Income ________________________________ Asset/Liability Management: Primary Focus
A more detailed look at Net Interest Income (NII) NII comprises between 75% and 90% of total income for most community banks. NII is a function of: Yield on assets (mix and rates) Cost of funds (mix and rates) Size of balance sheet (volume)
Net Interest Calculations Net interest spread calculation –Average yield on earnings Assets 4.46% –Average cost of funds on liabilities (1.67)% –Net interest spread 2.79% Net interest margin calculation –Net interest income$15,856,555 –Average earning asset$528,605,076 –Net interest margin = 3.05%
A bank’s goal is to Maximize NII (over both the short and long run) while managing levels of: Liquidity Interest Rate Risk Capital Adequacy
Liquidity Defined The ability of the Bank to raise money quickly at a reasonable cost and with minimal principal loss
Why is liquidity important to a Bank? Repay depositors Make loans and investments Money is our raw material!
Where does a Bank get its “raw material”? Core deposits “Non-core” deposits Wholesale sources of funds: –FHLB –Brokered CD’s –National Market CD’s –Repurchase Agreements –CDARS
Concluding comments on liquidity A Bank’s success in obtaining liquidity and the will impact role of wholesale funding will impact its: Deposit pricing Loan strategy Investment strategy Growth strategy its earningsAnd, therefore, its earnings!
What types of “non-interest income” do Banks generate? Fees on deposit relationships (service charges & NSF charges) and other services (safe deposit, etc.) Fees on trust & investment relationships (Wealth Management) Gains on the sale of loans “Other” non-interest income (International Fees, BOLI, Visa Check Card Fees and ATM Fees, etc.) Mortgage loan and related fees
What types of “non-interest expense” do Banks incur? Salaries and benefits Occupancy costs & FFE costs Professional and data processing fees Insurance & regulatory Loan / Lease Postage and telephone Advertising and marketing Stationery and supplies Bank service charges
Loan pricing example: 15 year fixed rate Mortgage-$250,000 Interest collected (life of the loan) Loan rate 5.00% Interest collected $105,856 Loan rate 4.85% Interest collected $102,350 Loan rate 4.50% Interest collected $94, similar loans 15bps higher generates an extra $35,000 of interest income for the Bank.
HELOC $50,000 balance assuming no rate change Interest collected (each year) Loan rate 6.00% Interest collected $3,000 Loan rate 5.00% Interest collected $2,500 Loan rate 4.00% Interest collected $2,000
Deposit pricing example: $500,000 Money Market Interest Paid (per year) Deposit rate 0.55% Interest paid $2,750 Deposit rate 0.45% Interest paid $2,250 Deposit rate 0.25% Interest paid $1,250 We want to price deposits at or below rates we can get wholesale funding for.
Needle Movers Questions?