Chap6 ALM,For Asiignmnt

8/10/2019 Chap6 ALM,For Asiignmnt

1/69

RoseHudgins: Bank II. Financial Statements 6. Measuring and The McGrawHill

Management and Financial and Financial Firm Evaluating the Companies, 2008

Services, Seventh Edition er!ormance er!ormance o! Banks and

"heir rinci#al

$om#etitors

$ H % " E R S I &

Measuring andEvaluating the

er!ormance o! "an#sand Their rincipalCompetitors'e( "o#ics in "his $ha#ter

1$toc# %alues and ro!ita&ilit' (atios

2Measuring Credit, )i*uidit', and +ther (is#s

3Measuring +perating E!!icienc'

4er!ormance o! Competing inancial irms

5$i-e and )ocation E!!ects

6The ."( and Comparing er!ormance

/1 ntroduction

Humorist and poet +gden 3ash once wrote, 4"an#ers are 5ust li#e an'&od' else,e6cept richer7 t turns out that statement ma' or ma' not &e true9 a lot depends

upon how suc:cess!ul &an#ers and other !inancial:service managers are asper!ormers in the !inancial mar#etplace7 ndeed, in toda';s world, &an#ers andtheir competitors are under great pres:sure toperformwell all the time7

owners?, emplo'ees, depositors and other creditors, and &orrowing customers7 @t the

same time, !inancial !irms must !ind a wa' to #eep government regulators satis!ied that

their operating policies, loans, and investments are sound, protecting the pu&lic interest7

The success or lac# o! success o! these institutions in meeting the e6pectations o! others

is usuall' revealed &' a care!ul stud' o! their !inancial statements7


2/69

into the open mar#et to raise mone' means that a !inancial !irm;s !inancial statements will

)6*




"heir rinci#al

$om#etitors

)6+ art Two Financial Statements and Financial Firm Performance

&e gone over 4with a !ine tooth com& &' stoc# and &ond mar#et investors, creditrating agencies >such as Mood';s and $tandard A oor;s?, regulators, and scoreso! other people and institutions7

This development has placed the management o! &an#s and man' o! their competitors

under great pressure to set and meet the institution;s per!ormance goals or su!!er serious

!inancial and reputational losses7 n 2002 B7 7 Morgan Chase, the second largest &an#ing

compan' in the .nited $tates, &ecame a prominent e6ample7 The !irm;s credit rating came

under review and, !or a time, it !aced rising &orrowing costs as ma5or depositors and other

creditors reacted negativel' to the &an#;s potential loan losses and the adverse pu&:licit'

!rom its alleged involvement with Enron Corporation and other trou&led companies7

$u&se*uentl', B7 7 Morgan Chase;s position strengthened and improved7@t the same time, as we saw in Chapters 1, competition !or traditional loan and deposit

customers has increased dramaticall'7 Credit unions, mone' mar#et !unds, insurance com:

panies, &ro#erage !irms and securit' dealers, and even chain stores are !ighting !or a &igger

slice o! nearl' ever' credit or deposit mar#et7 "an#ers have &een called upon to continuall'

reevaluate their loan and deposit policies, review their plans !or growth and e6pansion, and

assess their returns and ris# e6posure in light o! this new competitive environment7

n this chapter we ta#e a detailed loo# at the most widel' used indicators o! the *ualit' and

*uantit' o! &an# per!ormance and at some per!ormance indicators used to measure &an#ing;s

principal competitors7 The chapter centers on the most important dimensions o! per!or:manceD

profitabilityand risk.@!ter all, !inancial institutions are simpl' &usinesses organi-ed to ma6imi-e

the value o! the shareholders; wealth invested in the !irm at an accepta&le level o! ris#7 The

o&5ectives o! ma6imum >or at least satis!actor'? pro!ita&ilit' with a level o! ris# accepta&le to the

institution;s owners is not eas' to achieve, as recent institutional !ailures around the glo&e

suggest7 @ggressive pursuit o! such an o&5ective re*uires a !inancial !irm to &e continuall' on

the loo#out !or new opportunities !or revenue growth, greater e!!icienc', and more e!!ective

planning and control7 The pages that !ollow e6amine the most important measures o! return and

ris# !or &an#s and some o! their toughest competitors7

/2 Evaluating er!ormance

How can we use !inancial statements, particularl' the (eport o! Condition>&alance sheet? and (eport o! ncome >income statement?, to evaluate how wella !inancial !irm is per:!orming=


3/69

!or 5earl( %ll FinancialService Institutions


4/69


5/69




"heir rinci#al

$om#etitors

)66 art Two Financial Statements and Financial Firm Performance

e6pected constant growth rate at which stoc# dividends will grow each 'ear, and rmust &e greater than g7

or e6ample, suppose that a &an# is e6pected to pa' a dividend o! IJ per share in period 1,

dividends are e6pected to grow / percent a 'ear therea!ter, and the appropriate discount rate to

re!lect shareholder ris# is 10 percent7 Then the &an#;s stoc# price must &e valued at

o IJ>0710 070/? I12J per share

The two stoc#:price !ormulas discussed a&ove assume the !inancial !irm willpa' div:idends inde!initel' into the !uture7 Most capital:mar#et investors have alimited time hori-on, however, and plan to sell the stoc# at the end o! theirplanned investment hori-on7 n this case the current value o! a !inancialcorporation;s stoc# is determined !rom

o

1 2p

1 1r 21

1 1r 22

1 1r

where we assume the investor will hold the stoc# !or n periods, receiving the

stream o! div:idends 12, 777, n, and sell the stoc# !or price nat the end o! theplanned investment hori-on7 or e6ample, suppose investors e6pect a &an# topa' a IJ dividend at the end o! period 1, I10 at the end o! period 2, and thenplan to sell the stoc# !or a price o! I1J0 per share7 ! the relevant discount rate tocapture ris# is 10 percent, the current value o! the &an#;s stoc# should approach

IJ I10 I1J0

I1K/7L8 per share1

o 11 0710 21

1 10710 22

11 0710 22

$once#t $heck

/17


6/69




"heir rinci#al

$om#etitors

Chapter / Measuring and Evaluating the Performance of Banks and Their Principal ompetitors )6;

E : " @ 3 O 3 G @ 3 E : C + M M E ( C E

FI5%5$I%- FIRMS IMR/4EERF/RM%5$E B< /7"S/7R$I5=inancial !irms utili-e information handled &' computers !or nearl'

ever' service the' o!!er7 @s electronic data processing o! !inancial

in!ormation &ecomes more and more integral to the !unctions o!

!inancial:service !irms, their managers can reali-e cost advantages

!rom outsourcingDtrans!erring tas#s !rom inside the !inancial !irm itsel!

to outside !irms speciali-ing in in!ormation technolog', #nown as

vendors.+!ten the vendors are centered in distant locations, such asChina, ndia, and Costa (ica7

nstitutions li#e


7/69

(eturn on e*uit' capital 3et income

>6?+@1(+E 2 Total e*uit' capital(eturn on assets 3et income >6?@

1(+@ 2 Total assets

a

nterest income

3et interest marginnterest e6pense

&

>6?6@Total assets

2

a3oninterest revenues

3et noninterest 3oninterest e6penses&

>6?;@Total assets

2margin

3et operating margin

Earnings per share

o! stoc# 1E$ 2)i#e all !inancial ratios, eacho! these pro!ita&ilit'measures o!ten variessu&stantiall' over time and!rom mar#et to mar#et7

InterpretingProfitability Ratios

Each o! the

!oregoing

ratios loo#s at

a slightl'

di!!erentaspect o!

pro!ita&ilit'7

Thus, return

on assets

>R/%@ is

primaril' an

indicator o!

managerial

efficiency! it

indicates how

capa&le

management

has

&ee

n in

con

verti

ng

ass

ets

into

net

ear

nings7 (eturn on e*uit'

>R/E@, on the other

hand, is a measure o!

the rate of return

flo"ing to

shareholders. t

appro6imates the

2Man' authorities pre!er

to use total earning

assetsin the denominatoro! the net interest margin

and noninterest margin7

Earning assets are those

generating interest or !ee

income, principall' loans

and securit' investments7

The reasoning is that net

interest income as well as

net noninterest income

should &e compared, not to

all assets, &ut rather to

those assets that account

!or the ma5orit' o! all

income7


8/69




"heir rinci#al

$om#etitors

)6A art Two Financial Statements and Financial Firm Performance

net &ene!it that the stoc#holders have received !rom investing their capital in the

!inan:cial !irm >i7e7, placing their !unds at ris# in the hope o! earning a suita&le pro!it?7The net operating margin, net interest margin, and net noninterest margin are

e!!icienc(measures as well as pro!ita&ilit' measures, indicating how well management

and sta!! have &een a&le to #eep the growth o! revenues >which come primaril' !rom

loans, investments, and service !ees? ahead o! rising costs >principall' the interest on

deposits and other &orrow:ings and emplo'ee salaries and &ene!its?7 The net interest

margin measures how large a spread &etween interest revenues and interest costs

management has &een a&le to achieve &' close control over earning assets and pursuit o!

the cheapest sources o! !unding7 The net noninterest margin, in contrast, measures the

amount o! noninterest revenues stemming !romservice !ees the !inancial !irm has &een

a&le to collect relative to the amount o! noninterest costs incurred >including salaries and

wages, repair and maintenance o! !acilities, and loan:loss e6penses?7 T'picall', the netnoninterest margin is negative#3oninterest costs generall' outstrip !ee income, though !ee

income has &een rising rapidl' in recent 'ears as a percent:age o! all revenues7

@nother traditional measure o! earnings e!!icienc' is the earnings spread$ orsimpl' the spread$ calculated as !ollows

Earnings Total interest income Total inte

Total earning assets Total intespreadlia&ilities

The spread measures the e!!ectiveness o! a !inancial !irm;s intermediation !unction in &or:

rowing and lending mone' and also the intensit' o! competition in the !irm;s mar#et area7

Greater competition tends to s*uee-e the di!!erence &etween average asset 'ields and

average lia&ilit' costs7 ! other !actors are held constant, the spread will decline as

competition increases, !orcing management to tr' to !ind other wa's >such as generating

!ee income !rom new services? to ma#e up !or an eroding earnings spread7

$once#t $heck

/J7 including ta6es? will e*ual I10L

million this 'ear7 ts lia&ilities total I,P/0 million while its

e*uit' capital amounts

to IJ2 million7


9/69




"heir rinci#al

$om#etitors

Chapter / Measuring and Evaluating the Performance of Banks and Their Principal ompetitors )6

Factoidleverage? and minimal use o!owners; capital7

n !act, the (+E(+@ relationship

illustrates *uite clearl' the !undamental

trade:o!! the managers o! !inancial:service

!irms !ace &etween ris# and return7 or

e6ample, a &an# whose (+@ is pro5ected

to &e 1 percent this 'ear will need I10 in

assets !or each I1 in capital to achieve a

10 percent (+E7 That is, !ollowing

E*uation >/11?

Totalassets

(+E (+@

Total e*uit'capital


10/69

0701 I10100

1

0

p

er

c

e

n

tI1

!, however, the &an#;s (+@ is e6pected to !all to 07Jpercent, a 10 percent (+E is attain:a&le onl' i! eachI1 o! capital supports I20 in assets7 n other words

(+E 0700J I20 10010percentI1

ndeed, we could construct a ris#:return trade:o!!

ta&le li#e the one !ollowing that will tell us how much

leverage >de&t relative to e*uit'? must &e used to

achieve a !inancial institution;s desired rate o! return toits stoc#holders7 or e6ample, the trade:o!! ta&le on

page 1L0 indicates that a !inancial !irm with a J:to:1

assets:to:capital ratio can e6pect >a? a 27J percent(+E i! (+@ is 07J percent and >b? a 10 percent (+E i!

(+@ is 2 percent7 n contrast, with a 20 to 1 assets:to:

capital ratio a !inancial !irm can achieve a 10 percent(+E simpl' &' earning a modest 07J percent (+@7

Clearl', as earnings e!!icienc' represented &'(+@ declines, the !irm must ta#e on more ris# in the!orm o! higher leverage to have an' chance o!achieving its desired rate o! return to itsshareholders >(+E?7


11/69




"heir rinci#al

$om#etitors

);C art Two Financial Statements and Financial Firm Performance

RiskReturn "rade/!!s !or Return on %ssets >R/%@ and Return on EDuit( >R/E@

R/E 8ith an R/% o!:

Ratio o! "otal %ssets to "otal

EDuit( $a#ital %ccounts C. ).C ).

J1 27JQ J70Q L7JQ

101 J70 1070 1J70

1J1 L7J 1J70 227J201 1070 2070 K070

Breaking o8n EDuit( Returns !or $loser %nal(sis

@nother highl' use!ul pro!ita&ilit' !ormula !ocusing upon (+E is this one

(+E

3et income Total operatin

Total operating revenue Total as

Total assets

Total e*uit' capital

or

(+E3et pro!it margin @sset utili-ation ratio E*uit' multiplier

where

The net 3et

#ro!it margin 13M2 Total operThe degree o! Total oper

asset utili3ation [email protected] TotThe eDuit( Total a

multi#lier 1EM2 Total e*uEach component o! this simple e*uation is a telltale indicator o! a di!!erent aspecto! a !inancial !irm;s operations7 >$ee E6hi&it /17?

or e6ample

The net pro!it margin re!lects

>3M?

The degree o! asset re!lectsutili-ation >@.?

The e*uit' multiplier re!lects>EM?

e!!ectiveness o!e6pense

management >costcontrol? and servicepricing policies7port!oliomanagementpolicies, especiall'the mi6 and 'ield on

assets7leverage or

!inancingpolicies thesources chosento !und the!inancialinstitution >de&tor e*uit'?7

! an' o! these ratios &egins to decline,

management needs to pa' close attention and

assess the reasons &ehind that change7 or

e6ample, o! these three !inancial ratios the

e*uit' multi:plier >EM?, or assets to e*uit' ratio,

is normall' the largest, averaging a&out 1JR or

larger !or most

&an#s7 "igger

&an#s o!ten

operate with

multipliers o!

20R or more7

The

multiplier is

a


12/69




"heir rinci#al

$om#etitors

Chapter / Measuring and Evaluating the Performance of Banks and Their Principal ompetitors );)

E&HIBI" 6?) Elements that etermine the Rate o! Return Earned on the StockholdersInvestment >R/E@in a Financial Firm

Equity multiplier (EM)

or the employment offinancial leverage to

raise net earningsfor the stockholders

(total assets/

Rate of returnequity capital)

earned on thestockholders

investmentNet profit(ROE or net

margin (netincome/equity

income/capital)operating

Return on assets revenues)(NPM)

(ROA) as a measureof overall operating

efficiency (ROA Assetor net utilization

income/total assets) (AU) as a

measureof asset

managementefficiency(operating

revenue/total

assets)

Management decisions regarding capital

structure:

What sources of funding

should be used?

What dividends should be

paid to stockholders?

Management decisions regarding:

The mix of funds raised andinvested

How big the institution should be

Control of operating expenses

The pricing of services

How to minimize the financial firmstax liability

Factoidn the 'ears since 3M?, or the

ratio o!

net

income

to total

revenue

s, is

also

su&:5ect

to some

degree

o!

manage

mentcontrol

and

directio

n7 t

reminds

us that

!inancia

l:

service

corpora

tions

can

increa

se

their

earnin

gs

and

the

return

s to

their

stoc#

holder

s &'succe

ss!ull'

contro

lling

e6pen

ses

and

ma6i

mi-in

g

reven

ues7

$imilarl', &' care!ull' allo:

cating assets to the highest:

'ielding loans and investments

while avoiding e6cessive ris#,

management can raise the

average 'ield on assets >@.,

or asset utili-ation?7

@n interesting case inpoint is the recent trac#

record o! average (+E !or all

C:insured depositor'institutions &etween 1PP2

and 200J, shown in Ta&le /17 Care!ul perusal o! the

!igures in this ta&le revealsver' attractive (+Es !or

C:insured deposi:tor'

institutions covering morethan a decade7 The lowest

earnings over this period !or

depositor' institutions, asmeasured &' (+E, were a

ver' accepta&le 12721

percent in 1PP27 The average(+E !or the industr'


13/69


14/69




"heir rinci#al

$om#etitors

);9 art Two Financial Statements and Financial Firm Performance

"%B-E 6?)$om#onents o! Return on EDuit( >R/E@ !or %ll FI$Insured Institutions

>)9?9CC@

$ource ederal eposit

nsurance Corporation7


15/69

5et ro!it %sset EDuit(Return on Margin >5M@ 7tili3ation >%7@ Multi#lier >EM@

EDuit( >5et %!ter"a2 >"otal >"otal %ssets$a#ital Income"otal Revenues "otal EDuit(

R/E@ G Revenues@ & "otal %ssets@ & $a#ital@

200JS 127/8Q 1878PQ /7PKQ P7/K6

200 1K72L 1P781 /7J1 P7L26

200K 1J70 1P78/ /7PJ 107PK6

2002 1711 1L710 L7/0 1078L6

2000 1K7JK 12702 P78 117L86

1PP8 1K7J1 127LK P711 117L61PP/ 1K7K1 12721 P701 1271L6

1PP 1K7KK 127JP 87K 127806

1PP2 12721 P7JJ P711 1K726

Sigures !or 200J are !or !irst hal! onl'7

@.? ratio !ell mainl' &ecause

mar#et interest rates sta'ed low and

were declining much o! the time7 The

e*uit' multiplier >EM? !ell &ecause e*uit'

capital increased due to record pro!itsand encouragement !rom government

regulators that depositor' institutions use

more e*uit' and less de&t to !inance their

purchases o! assets7 (egulators urged

depositor' institutions to increase their

capital in hopes o! protecting depositors

and preserving the government;s deposit

insurance reserves7 @t the same time

&an#s managed to slow their asset

growth &' ma#ing much heavier use o!

o!!:&alance:sheet transactions >as we

saw in Chapter J? and &' increasing

revenues !rom the sale o! !ee:&ased

services rather than &oo#ing so man'

new assets7

@ slight variation on this simple(+E model produces an e!!icienc'e*uation use!ul !or diagnosingpro&lems in !our di!!erent areas in themanagement o! !inancial:service!irms

(+E

3et income

reta6

net operatingincome

Total operating

revenueTotal assets

or

Ta6 E6pense

(+Emanagementcontrolmanagementmanagemente!!icienc' e!!icienc'

n

this

case

we

have

merel

' split

the

net

pro!it

margi

n

>3M

? into

two

parts

>1? a

ta6:

mana

geme

nt

e!!icie

nc'

ratio,

re!lect

ing

the

use o!

securi

t'

gains

or

losse

s and

otherta6:

mana

geme

nt

tools

>such

as

&u'in

g ta6:

e6em

pt

&onds

? to minimi-e ta6 e6posure, and

>2? the ratio o! &e!ore:ta6income to total revenue as anindicator o! how man' dollarso!


16/69




"heir rinci#al

$om#etitors

Chapter / Measuring and Evaluating the Performance of Banks and Their Principal ompetitors );*

E T H C $ 3 " @ 3 O 3 G @ 3

3 @ 3 C @ ) $ E ( % C E $

7ES"I/5%B-E %$$/75"I5= R%$"I$ES $%5

"7R5 B%5' ERF/RM%5$E S/7Rn 2001 $uperior "an# o! ChicagoDa !ederal savings &an#D

!ailed and was ta#en over &' the ederal eposit nsurance

Corporation >C?7 This !ailed &an#ing !irm provides a classic

e6ample o! how misleading accounting practices that in!late asset

values and revenues and de!late lia&ilities and e6penses can hurt

a !inancial institution;s per!ormance and ultimatel' &ring it down7

n 2002 the C, acting as receiver and li*uidator, !iled suit against

the pu&lic accounting !irm o! Ernst and Noung )), claiming that the

!irm;s auditors detected !lawed accounting practices at $uperior "an#,

&ut did not report their !indings until months later7 @llegedl', this dela'

on the part o! the out:side auditors prevented regulators !rom acting

*uic#l' to min:imi-e losses to the government;s insurance !und7

Ernst and Noung allegedl' had &oth an auditorclient and a

consultantclient relationship with $uperior7 The C charged

that this dual relationship

compromised the auditors;

5udgment and discouraged

them !rom 4&lowing the whistle

on the &an#;s accounting

pro&lems7 The dela' in

reporting overvalua:tion o! the

&an#;s mortgage:related assets

allegedl' caused the C;s

loss to eventuall' &alloon to

a&out three:*uarters o! a &illiondollars7 The $ar&anes:+6le'

@ccounting $tandards @ct o!

2002 now restricts com&ined

auditing and consult ing

relationships in order to

promote auditor o&5ectivit' and

inde:pendence7 However, that

law was passed after the

$uperior "an# !ailure occurred7

n short, strong

per!ormance on the part o!

!inancial:ser:vice providers

depends on honest

reporting that !airl' valuescurrent and e6pected

revenues, operating costs,

assets, and lia&ilities so

that &oth insiders and

outsiders get a clear picture

o! how well a !inancial !irm

is per!orming and where it

seems to &e headed7

Source: ederal epositnsurance Corporation7


17/69

revenue survive a!ter operatinge6penses are removedDa measureo! operating e!!icienc' and e6pensecontrol7 or e6ample, suppose a&an#;s (eport o! Condition and(eport o! ncome show the !ollowing!igures

3et income

I170million

reta6 net operating

income I17Kmillion

Total operating

revenue IKP7Kmillion

Total assets

I12270 million

Total e*uit'

capital IL7Kmillion

ts (+E must &e

(+E

I170 mil I17K mil

I17K mil IKP7K mil

(+E 07L/P 070KK 07K22

1/7L1 071KL, or 1K7L percent

Clearl', when an' one o! these !our

ratios &egins to drop, managementneeds to reevaluate the !inancial!irm;s e!!icienc' in that area7 n the&an#ing e6ample shown a&ove, i! theratio o! net income to preta6 netoperating income !alls !rom 07L/P to07/10 ne6t 'ear, management willwant to loo# closel' at how well the&an#;s ta6 e6po:sure is &eingmonitored and controlled7 ! preta6 netoperating income to operatingrevenue drops !rom 070KK to 0702J inthe coming 'ear, the &an#;se!!ectiveness in con:trolling operatinge6penses needs to &e reviewed7 @ndi! the ratio o! operating revenues toassets plummets !rom 07K22 to 072L0,a care!ul ree6amination o! assetport!olio poli:cies is warranted to seei! the decline in asset 'ields is due to!actors within manage:ment;s control7


18/69




"heir rinci#al

$om#etitors

);+ art Two Financial Statements and Financial Firm Performance

Breakdo8n %nal(sis o! the Return on %ssets

(+@? into its component parts,

as shown in Ta&le /27 @ctuall', (+@ is &ased on three simple component ratios

omponents of %&'

3et interest margin 1nterest income nterest e6pens

Total assets

-7S

13oninterest income 2

3et noninterest margin 3oninterest e6pense 2

Total assets

-ESSrovision !or loan losses

$pecial transactions 9 securities gains 1or losses 2

a!!ecting its netta6ese6traordinar' net gains

Total assetsincome

(eturn on assets 1(+@, 2 E7%-Sor the a&ilit' o! 3et income

management to generate incomeTotal assets

!rom assets 2$uch a &rea#down o! the components o! return on assets >(+@? can &e ver' help!ul in

e6plaining some o! the recent changes that !inancial:service providers have e6perienced

in their !inancial position7 or e6ample, as shown in Ta&le /K, the average (+@ !or all

C:insured institutions &etween 1PP2 and 200J rose !rom 078L percent in 1PP2 to a high

o! 17K8 percent in 200K &e!ore leveling out in 200 and 200J7

noninterest? income and loan

revenues7 @ll this occurred in the !ace o! !alling mar#et interest rates, which

"%B-E 6?9$alculation Return on %ssets >R/%@

Gross

interestincome Totalassets

(ntereste)pense Totalassets

1=3et

interestmargin

Total assets

U

3oninterest income Total assets

3onintereste6penses Totalassets rovision !orloan losses Totalassets

1= reta6net operatingincome Totalassets

(ncome ta)es Total assetsS

2= ncome

&e!ore e6traordinar'

items Total assets U

E6traordinar' net

gains Total assets

3= 3et income Total assets >or(+@?


19/69

1d ncome !rom holding assets

2d $uppl' cost o! !unds !or holding assets

3d (eturn earned &ecause the lending institution;s credit*ualit' is &etter than its customers; credit *ualit'

4d ncome !rom handling customer transactions

5d Cost o! operations

6d 'ccrual e)pense

7d (eturnonassets&e!oreta6es

8d The!inancial!irm;sshare o!the costo!governmentservices

9d 3et income

!rom recurringsources o! revenue

10d3onrecurringsources o! income or loss

11dEarnings le!tover !or thestoc#holdersa!ter all costsare met

S"oth income and ta6es applica&le to income need to &e ad5usted !or

an' ta6:e6empt earnings received7 +ne can restate such income on

a !ull' ta6:e*uivalent &asis &' multipl'ing the amount o! ta6:e6empt

income &' the e6pression 1 >1 t? where t is the ! irm;s ta6 &rac#et

rate7


20/69




"heir rinci#al

$om#etitors

Chapter / Measuring and Evaluating the Performance of Banks and Their Principal ompetitors );

"%B-E 6?*$om#onents o! Return on %ssets >R/%@ !or %ll FI$Insured e#ositor(

Institutions >)9?9CC@

$ource ederal eposit

nsurance Corporation7

Income Statement ItemsTotal interest incomeTotal assets

Total interest e6penseTotal assets

3et interest income

Total assets rovision !or loan and

lease lossesTotal assets

U Total noninterest incomeTotal assets

Total noninterest e6pense

Total assets

M reta6 net operating incomeHTotal assets

U $ecurities gains>losses?

Total assets 070/ 071K 071J @pplica&le income ta6es

Total assets 07/ 07/L 07/

M ncome &e!ore e6traordinar'itemsTotal assets 17K1 17KL 17K0

U E6traordinar' gains >net?

Total assets 0700SS 0700SS 0700SS 3et incomeTotal assets 17K1 17K8 17K0

*otes# igures ma' not adde6actl' to totals due torounding and the e6clusiono! e6traordinar' items7S200J!igures are !or !irst hal! o!'ear onl'7SS)ess than 0700J percent7

lowered &an#ing;s ratio o! grossinterest income to total assets andreduced its net inter:est margin7 Thedecline in &an#s; net interestearnings was more than made up !or,how:ever, &' dramatic increases intheir !ee income and improved loan*ualit' as re!lected in somewhatsmaller loan:loss e6penses7 "' 200Kthe industr';s (+@, averaging 17K8per:cent, represented the &iggestaverage rate o! return on &an# assets

since the C &egan its operationsin 1PK7


21/69


22/69

hat aBreakdo8n o!ro!ita0ilit(Measures $an"ell 7sClearl', &rea#ing down

pro!ita&ilit' measures into

their respective

components tells us much

a&out the causes o!

earnings di!!iculties and

suggests where

management needs to

loo# !or


23/69


24/69

Measuring Risk in Banking

and Financial Services*

%isk to the manager o! a !inancial institution

or to a regulator supervising a !inancial

institu:tion means the perceived uncertaint'

associated with a particular event7 or

e6ample, will the customer renew his or her

loan= (+E? and return onassets >(+@?7

The higher the standard deviation or

variance o! the a&ove measures, the

greater the overall ris#7 (is# can &e

&ro#en down into a num&er o!

components and even re!erencedusing di!!erent terms as illustrated &'

the di!!erent ris# matrices used

currentl' &' .7$7 !ed:eral regulator'

agencies and summari-ed &elow7

Risk Matrices 7sed 0( Selected 7.S.Regulator( %gencies

Federal Reserve S(stem $om#troller o! the $urrenc(

Credit Credit

)i*uidit' )i*uidit'

Mar#et+perational

)egal

(eputation

KThis

sectionis&ased,in part,oneter$7(ose;sarticlein theanadianBankerVKW andis usedwithpermission7


25/69




"heir rinci#al

$om#etitors

nsights and ssues

H/ "/E%R5I5= B%5'S =E" "H%" %the allowance !or loan losses? through annual charges against current income>the provision !or loan losses?7

@nother popular and long:standing credit ris# measure is

X The ratio o! total loans to total deposits7

@s this ratio grows, e6aminers representing the regulator' communit' ma'&ecome more concerned &ecause loans are usuall' among the ris#iest o! allassets !or depositor' institu:tions, and, there!ore, deposits must &e care!ull'protected7 @ rise in &ad loans or declining mar#et values o! otherwise good loansrelative to the amount o! deposits creates greater depositor ris#7

Liquidity Risk

inancial:service managers are also concerned a&out the danger o! not having su!!icient

cash and &orrowing capacit' to meet customer withdrawals, loan demand, and other cash

needs7 aced with liDuidit( riska !inancial institution ma' &e !orced to &orrow emergenc'

!unds at e6cessive cost to cover its immediate cash needs, reducing its earnings7 %er' !ew

!inancial !irms ever actuall' run out o! cash &ecause o! the ease with which li*uid !unds

can &e &orrowed !rom other institutions7 n !act, so rare is such an event that when a small

Montana &an# in the earl' 1P80s had to re!use to cash chec#s !or a !ew hours due to a

tem:porar' 4cash:out, there was a !ederal investigation o! the incidentY

$omewhat more common is a shortage o! li*uidit' due to une6pectedl' heav'

deposit withdrawals, which !orces a depositor' institution to &orrow !unds at an

elevated interest rate, higher than the interest rates other institutions are pa'ing !or

similar &orrowings7 or e6ample, signi!icant decline in its li*uidit' position o!ten !orcesa &an# to pa' higher inter:est rates to attract negotia&le mone' mar#et Cs, which

are sold in million:dollar units and there!ore are largel' unprotected &' deposit

insurance7 +ne use!ul measure o! li*uid:it' ris# e6posure is the ratio o!

1urchased !unds >including Eurodollars, !ederal !unds, securit' (s, large

Cs, and commercial paper? to total assets7

Heavier use o! purchased !unds increases the chances o! a li*uidit' crunch in theevent deposit withdrawals rise or loan *ualit' declines7 +ther indicators o!e6posure to li*uidit' ris# include the ratios o!

1Cash and due !rom &alances held at other depositor' institutions to total assets7

2Cash assets and government securities to total assets7Cash assets include vault cash held on the !inancial !irm;s premises, deposits held with

the central &an# in the region, deposits held with other depositor' institutions to com:

pensate them !or clearing chec#s and other inter&an# services, and cash items in the

process o! collection >mainl' uncollected chec#s?7 $tandard remedies !or reducing a !inan:

cial institution;s e6posure to li*uidit' ris# include increasing the proportion o! !unds com:

mitted to cash and readil' mar#eta&le assets, such as government securities, or using

longer:term lia&ilities to !und the institution;s operations7

Market Risk

n mar#et:oriented economies, where most o! the world;s leading !inancial institutions o!!er

their services toda', the mar#et values o! assets, lia&ilities, and net worth o! !inancial:

service providers are constantl' in a state o! !lu6 due to uncertainties concerning mar#et


28/69

rates or prices7 Market riskis composed o! &othprice riskand interest rate risk.




"heir rinci#al

$om#etitors


Price Risk

Especiall' sensitive to these mar#et:value movements are &ond port!olios andstoc#hold:ers; e*uit' >net worth?, which can dive suddenl' as mar#et prices moveagainst a !inan:cial !irm7 @mong the most important indicators o! price ris# in!inancial institutions; management are

1 The ratio o! &oo#:value assets to the estimated mar#et value o! those same assets7

2The ratio o! &oo#:value e*uit' capital to the mar#et value o! e*uit' capital7

3The mar#et value o! &onds and other !i6ed:income assets held relative to their

value as recorded on a !inancial institution;s &oo#s7

4The mar#et value o! common and pre!erred stoc# per share, re!lecting investorper:ceptions o! a !inancial institution;s ris# e6posure and earnings potential7

Interest Rate Risk

Movements in mar#et interest rates can also have potent e!!ects on the margin o!

revenues over costs !or &oth &an#s and their competitors7 or e6ample, rising interestrates can lower the margin o! pro!it i! the structure o! a !inancial institution;s assets

and lia&ilities is such that interest e6penses on &orrowed mone' increase more

rapidl' than interest rev:enues on loans and securit' investments7

The impact o! changing interest rates on a !inancial institution;s margin o! pro!itis called interest rate risk.@mong the most widel' used measures o! interest:rate ris# e6po:sure are these

1The ratio o! interest:sensitive assets to interest:sensitive lia&ilities wheninterest:sensi:tive assets e6ceed interest:sensitive lia&ilities in a particularmaturit' range, a !inancial !irm is vulnera&le to losses !rom !alling interestrates7 n contrast, when rate:sensitive lia&ilities e6ceed rate:sensitive assets,losses are li#el' to &e incurred i! mar#et interest rates rise7

2or a depositor' institution, the ratio o! uninsured deposits to total deposits,where uninsured deposits are usuall' government and corporate deposits thate6ceed the amount covered &' insurance and are usuall' so highl' sensitiveto changing interest rates that the' will &e withdrawn i! 'ields o!!ered &'competitors rise even slightl' higher7


29/69

@s technolog' has improved, computer hardware and so!tware s'stems have &ecome

essential to the dail' operations o! most !inancial !irms7 ! computer s'stems involve a

patchwor# o! old programs, re*uiring emplo'ee intervention to reconcile and create




"heir rinci#al

$om#etitors

)AC art Two Financial Statements and Financial Firm Performance

'e( 7R-sMan' o! the t'pes o! ris# discussed in this section have &een developed

and re!ined &' the "an# !or nternational $ettlements at 888.0is.org and

&' arelated entit', the "asel Committee on nternational Capital

$tandards, at 888.0is.org#u0l0c0s

)C;.htm, which ise6plored in detail in Chapter 1J7

reports,thenoperational ris#ma' &ehigh7


30/69

riskis the uncertaint' associ:ated with pu&lic opinion7

The ver' nature o! a !inancial !irm;s &usiness re*uires

maintain:ing the con!idence o! its customers and

creditors7

!trategic Risk

%ariations in earnings due to adverse &usiness

decisions, improper implementation o! deci:sions, or

lac# o! responsiveness to industr' changes are parts

o! what is called strategicrisk. This ris# categor' can&e characteri-ed as thehuman elementin ma#ing &ad

long:range management decisions that re!lect poor

timing, lac# o! !oresight, lac# o! persistence, and lac#

o! determination to &e success!ul7

Capital Risk

The impact o! all the ris#s e6amined a&ove cana!!ect a !inancial !irm;s long:run survival, o!ten

re!erredto as itsca#italrisk."ecausevaria&ilit' incapital

stems!romothert'pes o!ris# it iso!tennotconsidered

separatel' &' government regulator'agencies7 However, ris#s to the capitalthat underlies ever' !inancial !irmcaptures the all:important ris# o! insol:venc' or ultimate !ailure7

or e6ample, i! a &an# ta#es on ane6cessive num&er o! &ad loans or i! alarge portion o! its securit' port!oliodeclines in mar#et value, generating

serious capital losses when sold, thenits e*uit' capital account, which isdesigned to a&sor& such losses, ma'&e over:whelmed7 ! investors anddepositors &ecome aware o! thepro&lem and &egin to withdraw their!unds, regulators ma' have no choice&ut to declare the institution insolventand close its doors7


31/69




"heir rinci#al

$om#etitors

Chapter / Measuring and Evaluating the Performance of Banks and Their Principal ompetitors )A)

Filmtoidsuch as capital notes

and Cs issued &' depositor' institutions?

and the mar#et 'ields on government

securities o! the same maturit'7 @n increase

in that spread indicates that investors in the

mar#et e6:pect increased ris# o! loss !rom

purchasing and holding a !inancial

institution;s de&t7

2 The ratio o! stoc# price per share to

annual earnings per share7 This ratioo!ten !alls i! investors come to&elieve that a !inancial !irm isundercapitali-ed relative to the ris#sit has ta#en on7

3 The ratio o! e*uit' capital >net worth? to

total assets, where a decline in e*uit'

!unding relative to assets ma' indicate

increased ris# e6posure !or shareholders

and de&tholders7

4 The ratio o! purchased !unds to total

lia&ilities7 urchased !unds usuall'include unin:sured deposits and&orrowings in the mone' mar#et !rom&an#s, non&an# corporations, andgovernmental units that !all duewithin one 'ear7

5 The ratio o! e*uit' capital to ris#assets, re!lecting how well thecurrent level o! a !i:nancialinstitution;s capital covers potentiallosses !rom those assets most li#el'to de:cline in value7

%isk assets consist mainl' o! loans and


32/69

securities and e6clude cash, plant and e*uipment, and

miscellaneous assets7 $ome authorities also e6clude

holdings o! short:term government securities !rom ris# assets

&ecause the mar#et values o! these securities tend to &e

sta&le and there is alwa's a read' resale mar#et !or them7

Concern in the regulator' communit' over the ris# e6posure

o!

depositor

'

institution

s has

resulted

in heav' pressure on their management to

increase capital7 @s we saw earlier in this

chapter, capital, at least in the &an#ing

industr', has moved signi!icantl' higher

relative to the industr';s assets and lia&ilities in

recent 'ears7

$once#t $heck

/1/7 To what di!!erent #inds o! ris# are

&an#s and their !inancial:service

competitors su&5ected toda'=

/1L7


33/69




"heir rinci#al

$om#etitors

)A9 art Two Financial Statements and Financial Firm Performance

'e( 7R-ser!ormance data on &an#ing;s closest competitorsDnon&an# depositor' institutionsDcan most easil' &e !ound atsuch


34/69

!unds7

@mong the #e' &an#per!orm

ance indicators thato!ten are e*uall'

applica&le to pri:vatel' owned, pro!it:

ma#in

g non&an# !inancial!irms are these

assets and e*uit' returns

than insured commercial

&an#s, &ut not &' much7 or

e6ample, !or all o! 200

commercial &an#s reported

an average (+@ o! 17K1

percent versus 171L percent

!or savings associations and

an average (+E o! 1K780

percent versus

rices

oncommonandpre!erred

stoc#(eturn onassets>(+@?3

e

t

i

n

t

e

r

e

s

t

m

ar

g

i

n

@

s

s

e

t

u

t

i

l

i

-

a

t

i

o

n

r

a

t

i

o

3onper!ormingassets to e*uit'capital ratio

"oo#:valueassets tomar#et:valueassets E*uit'capital toris#:e6posedassets

Earning

spershareo

!stoc#

(eturn one*uit'capital>(+E?3etoperatingmargin

E*uit'multiplier

Cash

accounts to

total assets

nterest:

sensitive

assets to

interest:

sensitive

lia&ilitiesnterest:rate

spread &etween'ields on the

!inancial !irm;s

de&t and mar#et

'ields on

government

securities

1078L percent !or

savings associations7a

measure o!

total sales?

and the si-e o!

li!e and

pension

reserves >their


35/69




"heir rinci#al

$om#etitors

Chapter / Measuring and Evaluating the Performance of Banks and Their Principal ompetitors )A*

chie! lia&ilities? relative to total assets7 nsurers also pa' close attention to ane!!icienc' measureDthe com&ined ratio o! claims paid out plus operatinge6penses relative to premi:ums earned !rom polic'holders7

@mong mutual !unds, #e' per!ormance mar#ers include the growth o! net sales

>i7e7, gross sales o! shares less share redemptions &' the pu&lic?, service !eesrelative to aver:age assets, and the rate o! return on !unds invested7 n contrast,

!inance and credit:card companies o!ten pa' close attention to the growth o! their

outstanding de&t and their gross receiva&les >a measure o! total loans e6tended to

customers?7 inall', among com:peting depositor' institutions, such as credit unionsand mutual savings associations, #e' per!ormance measures include total loans to

mem&ers relative to capital reserves >a measure o! ris#?, home mortgage loans to

total assets >a rapidl' growing credit ser:vice?, and the num&er o! actual mem&ers>customers? relative to potential mem&ers >customers?7

3o !inancial institution can sa!el' ignore its level o! per!ormance toda' relativeto its past per!ormance and relative to its competitors7 Even i! some !inancial:service institu:tions don;t seem to care a&out their per!ormance, &oth the pu&licand the regulator' com:munit' clearl' do7

/ The mpact o! $i-e on er!ormance

(+E? were o&tained

&' the ver' largest &an#s with more than I10 &illion in assets in 200J7

+n the other hand, middle:si-e and large &an#s with assets ranging !rom I100mil:lion to I10 &illion in total assets o!ten displa' the most !avora&le net operatingmargins and the &est operating e!!icienc' >o!ten with the lowest operating:e6pense:to:revenue ratio?7 $imilarl', the largest &an#s generall' report thehighest >least negative? nonin:terest margins &ecause the' charge !ees !or soman' o! their services7 $maller and medium:si-e &an#s !re*uentl' displa' largernet interest margins and, there!ore, greater spreads &etween interest revenueand interest costs &ecause most o! their deposits are small:denominationaccounts with lower average interest costs7 Moreover, a larger proportion o! smalland medium:si-e &an#s; loans tend to &e higher:interest consumer loans7

n terms o! &alance:sheet ratios, man' o! which re!lect the various #inds o! ris# e6po:

sure &an#s !ace, the smallest &an#s usuall' report higher ratios o! e*uit' capital to assets7

$ome &an# anal'sts argue that larger &an#s can get &' with lower capital:to:asset

cushions &ecause the' are more diversi!ied across man' di!!erent mar#ets and have more

ris#:hedg:ing tools at their disposal7 $maller &an#s appear to &e more li*uid, as re!lected

in their lower ratios o! net loans to deposits, &ecause loans are o!ten among a &an#;s least

li*uid assets7 The &iggest &an#s also appear to carr' greater credit ris# as revealed &'

their higher loan:loss >net charge:o!!s to total loans and leases? ratios7



36/69



"heir rinci#al

$om#etitors

)A+ art Two Financial Statements and Financial Firm Performance

"%B-E 6?+ Im#ortant er!ormance Indicators Related to the Si3e and -ocation o! FI$Insured Banks >9CC@

J

$ource ederal eposit nsurance Corporation7

%verage !or %verage !or Banks %rra(ed 0( "otal %ssets in the Si3e Range

%ll F,I$ %ll F,I$ 7nder K)CC K) Billion =reaterInsured Insured K)CC Million to K)C than K)C

Institutions Banks Million to K) Billion Billion Billion

(eturn on assets >(+@? 17K1Q 17KQ 170JQ 17KKQ 171Q 17KQ

(eturn on e*uit' >(+E? 127/8 1K712 878 1K71J 1K70P 1K72/3et operating income to assets 172L 17K2 170J 17K2 171 17K2

3et interest margin K7J1 K7JP 72K 72J K78P K72

3et noninterest margin 170J 1701 27/0 270P 17KJ 07L

E!!icienc' ratio JL7KJ JL7K/ /87L /17/L J/780 J/7J/Credit loss provision to net

charge:o!!s P27 P17K 18K70P 18782 11J7K 8J7L3et charge:o!!s to loans 07 07J0 071/ 0720 072/ 07/0)oss allowance to loans 172K 17K8 17K 17K2 17K1 170

3oncurrent assets plus other realestate owned to assets 078 07J0 07L2 07J/ 07J 07P3et loans and leases to deposits P27L 8L72P L721 8K722 P2701 8L7L/

E*uit' capital to assets 107K8 1072K 1178L 1071K 1078L 10710

Nield on earning assets J7J0 J7J2 J78P /70J J7L0 J70Cost o! !unding earning assets 17PP 17P 17// 1780 1782 17PP

3oninterest income to earning

assets 27J 27/P 1702 17/ 271J K702

*otes# ata !or all .7$7 commercial &an#ing and savings institutions whose deposits areC insured7Sigures shown are !or the !irst 2 *uarters o! 200J and are annuali-ed7

Si3e, -ocation, and Regulator( Bias in %nal(3ing the

er!ormance o! Banks and $om#eting Financial Institutions

@s we saw in the preceding section, the sieo! a !inancial institution >o!ten measured &'

its assets, deposits, or e*uit' capital? can have a highl' signi!icant impact on pro!ita&ilit'

and other per!ormance measures7 or e6ample, when we compare the per!ormance o!

one !inancial !irm with another, it is &est to compare institutions o! similar si-e7 +ne reason

is that similar:si-e !inancial !irms tend to o!!er the same or similar services, so 'ou can &e

a &it more con!ident that 'our per!ormance comparisons have some validit'7

To conduct even more valid per!ormance comparisons, we should also compare !inan:

cial !irms serving the same or similar mar#et areas7 er!ormance is usuall' greatl' in!lu:

enced &' whether a !inancial:service provider operates in a ma5or !inancial center, smaller

cit', or rural area7 The &est per!ormance comparison o! all is to choose institutions o! sim:

ilar si-e serving the samemar#et area7 .n!ortunatel', in some smaller communities it ma'&e di!!icult, i! not impossi&le, to !ind another !inancial !irm compara&le in si-e7 The !inan:

cial anal'st will then usuall' loo# !or another communit' with a similar:si-e !inancial insti:

tution, pre!era&l' a communit' with compara&le &usinesses and households &ecause the

character o! a !inancial !irm;s customer &ase signi!icantl' impacts how it per!orms7

inall', where possi&le, it;s a good idea to compare !inancial institutions su&5ect to similar

regulations and regulator' agencies7 or e6ample, in the &an#ing communit' each regulator

has a somewhat di!!erent set o! rules &an#s must !ollow, and these government:imposed rules

can have a pro!ound impact on per!ormance7 This is wh' comparison o! !inancial !irms in

di!!erent countries is o!ten so di!!icult and must &e done with great caution7

Even in the .nited $tates, with so man' di!!erent regulator' agencies, anal'sts o!ten stress

the importance o! comparing mem&er &an#s o! the ederal (eserve $'stem against other

mem&er &an#s o! the ederal (eserve $'stem7 $imilarl', the per!ormance o! national


37/69




"heir rinci#al

$om#etitors

nsights and ssues$REI" R%"I5=S B< "H/MS/5S B%5'%"$H, I5$.

+ne o! the most widel' respected private institutions that rates the

credit *ualit' o! !inancial institutions is Thomson;s "an#de&t and pre!erred stoc#?, assessing the li#elihood that the

institutions issuing these o&ligations ma' not &e a&le to pa'7

"an#


38/69

a

n

k

e

r

!o

r

m

a

n

c

e

L

"

h

e

7

B

R

Compared to other!inancial institutions,

more in!ormation is

availa&le a&out&an#s than an' other

t'pe o! !inancial !irm7

Through thecooperative e!!ort o!

!our !ederal &an#ing

agenciesDtheederal (eserve

$'stem, the ederal

eposit nsurance

Corporation, the+!!ice o! Thri!t

$upervision, and the

+!!ice o! theComptroller o! the

Currenc'Dthe .ni:

!orm "an#er!ormance (eport

>."(? provides #e'

in!ormation !or !inancial anal'sts7

The 7BR, which is

sent *uarterl' to all

!ederall' supervised&an#s, reports each

&an#;s assets,

lia&ilities,capital,

revenues

, ande6penses

7$upple

mentar'

items in

the ."(

include

&rea#dow

ns o! loan

and lease

commitme

nts,

anal'sis o!

pro&lem

loans and

loan

losses,

and a

pro!ile o!each

&an#;s

e6posure

to ris# and

its sources

o! capital7

"an#ers

can also

o&tain

peer

group

reports$

which

allow them

to com:

pare their

&an# with

other

institutions

o!

compara&l

e si-e9

average

reports$

whichprovide

mean ratio

values !or

each peer

group9 and

state

reports$

which

permit

compariso

ns

&etween

an

individual

&an# and

the

com&ined

!inancial

statement

s o! all

&an#s in a

givenstate7 @n

important

added

!eature is

that a

&an#er

can

ac*uire

the ."(

report !or

an'


39/69




"heir rinci#al

$om#etitors

)A6 art Two Financial Statements and Financial Firm Performance

"%B-E 6? "he %ssets Section !rom the Balance Sheet !or 5ational $it( Bank

$ource .ni!orm "an# er!ormance (eports >888.!!iec.gov@ 7

ercentageItems >dollar amounts in thousands@ )9*)9CC+ )9*)9CC* K $hange $hange

@ssets

17 (eal estate loans I2,/2J,88 I21,20P,P/ IK,1/,K88 1/711Q

27 Commercial loans P,2L1,P0L 8,/L2,81L JPP,0P0 /7P1

K7 ndividual loans L,8J1,J L,P12,J2/ /0,P82 07LL

7 @gricultural loans 2J,K1L /,K/P 18,P8 2PL7J0

J7 +ther loans and leases in domestic o!!ices 212,112 2L/,K8L /,2LJ 2K72/

/7 )oans and leases in !oreign o!!ices 2L2,1L 2K,/8P KL,L28 1/708

;. =ross loans and leases +9,9,)A) *A,*)9,9A+ *,+6,A; )C.*C

87 )ess .nearned ncome 2L,1K0 2J,LK8 1,KP2 J71P7 )ess )oan and lease loss allowance J1,K18 JP2,KP L8,0L/ 1K718

)C. 5et loans and leases +),;);,;** *;,6+,)9 +,C9*,A) )C.6;

117 .7$7 Treasur' and agenc' securities 1,08L,K/K 1,K2,2L2 2K/,P0P 1L78P

127 Municipal securities 8/,20 20,2PK //,12L K2J78/

1K7 oreign de&t securities 8J L8 L 87PL

17 @ll other securities P8,1K 1,2K2,JK/ 28,KPK 2071J

1J7 nterest:&earing &an# &alances 2,811,L1 12,KL2 2,LPP,K/P 22/2/7/J

1/7 ederal !unds sold and resale agreements 1,10K,0/L /K,L/0 /KP,K0L 1KL78J

1L7 Trading account assets 1PK,P8L 210,PK2 1/,PJ 870K

)A. "otal investments 6,966,AC6 *,96+,9+* *,CC9,6* ).A

). "otal earning assets +;,A+,* +C,A,* ;,C96,)++ );.)

207 3oninterest:&earing cash and deposits due !romother &an#s 1,LP2,L/K 1,//,L0J 1/,0J8 878L

217 remises, !i6ed assets, capital leases JJ8,0J8 J11,J1P /,JKP P710

227 +ther real estate owned J,/K /,P02 1,2JP 1872

2K7 nvestments in unconsolidated su&sidiaries 0 0 027 @cceptances and +ther assets 2,/KK,P1K K,1J2,J01 J18,J88 1/7J

9. "otal assets K9,;+,)6 K+6,9;6,C99 K6,6A,A+ )+.+AMemoranda

2/7 3oninvestment other real estate owned J,/K /,P02 1,2JP 1872

2L7 )oans held !or sale 2K,LK1 LP,8PP L2/,1/8 P/78

287 Held:to:maturit' securities 0 0 0

2P7 @vaila&le:!or:sale securities 2,1J8,011 2,JLL,1LP 1P,1/8 1/72/

other !ederall' supervised &an#, thus ena&ling comparison o! &an#s in the samemar#et area su&5ect to the same environmental conditions7

To get a &etter picture o! the t'pe o! in!ormation in the ."(, we present an e6ample &ased

on the 200 and 200K ."(s o! the lead &an# !or 3ational Cit' Corporation, 3ational Cit' "an#

>3C"?7 n Chapter J, we e6amined the aggregate num&ers !or all the &an#s in this holding

compan', using data !ound at the C;s


40/69

&usiness recession o! 2001, the ederal (eserve &egan to




"heir rinci#al

$om#etitors

Chapter / Measuring and Evaluating the Performance of Banks and Their Principal ompetitors )A;

slowl' increase interest rates in 2007 n a period characteri-ed &' low, &ut volatile interest

rates, investors and lenders tal#ed a&out whether a real estate &u&&le was a&out to &urstY

Ta&les /J through /P, ta#en !rom ."( reports !or 200 and 200K, are used to

assess the per!ormance o! 3C"7 Ta&les /J and // indicate the principal assets,

lia&ilities, and capital items held &' this &an# and show how these items and their

components have increased or decreased in volume since the same time a 'ear earlier7 n

terms o! growth, 3C";s assets increased &' more than I/7/ &illion !or an annual growth

rate close to 17J percent >Ta&le /J, line 2J?7 ! we e6amine the asset items having the

largest dollar increases, we !ind that net loans and leases >item 10? increased &' I702

&illion >107/L per:cent? and total investments >item 18? increased &' IK &illion >P17P8

percent?7 The sources o! !unds supporting this growth included a IK721 &illion rise >1K701

percent? in total deposits >Ta&le //, item P? and a dramatic I788 &illion increase >1/P7LK

percent? in other &orrowings with maturities greater than one 'ear >item 1?7

Ta&le /J indicates that 3C" !ocuses on traditional &an#ing services with I17L

&il:lion in net loans and leases >item 10?7 n 200 3C" increased its real estate loans

>item 1? &' 1/711 percent or IK7 &illion, while the &alances in most other loancategories >items 2J? increased or decreased &' smaller dollar amounts7 Essentiall',

3C" provided what customers wantedD!inancing !or housing at a time when prices

in the stoc# mar#et were declining and securities >i7e7, government and private &onds?were o!!ering histori:call' low returns7 The increased proportion o! real estate loans

would most li#el' increase the average maturit' o! the &an#;s loan port!olio and also

increase its interest:rate ris# e6posure, a concept introduced earlier in this chapterand discussed in detail in art Three o! this &oo#7

3C";s deposit growth and its growth in nondeposit lia&ilities more than covered the

growth in its loan port!olio7 n Ta&le // we see that deposits in !oreign o!!ices >item 8?increased signi!icantl', up more than JK percent, while core deposits >item /? increased a

mere 278L percent7 Core deposits are the sum o! items 1J in Ta&le //, representing sta:

&le !unds that are less li#el' to &e removed !rom the &an#7 Core deposits also tend to &e

"%B-E 6?6 "he -ia0ilities and $a#ital Section !rom the Balance Sheet !or 5ational $it( Bank


ercentageItems >dollar amounts in thousands@ )9*)9CC+ )9*)9CC* K $hange $hange

)ia&ilities and Capital

17 emand deposits IK,8LK,88P I,K8,22 IL,KKJ 107P1Q

27 @ll 3+< and @T$ accounts 2L0,2JK 18P,KK 80,820 27//

K7 Mone' mar#et deposit accounts P,08L,L/ 8,21P,L/8 8/L,PL8 107J/7 +ther savings deposits ,/11,JP2 ,/J2,21P 0,/2L 078L

J7 Time deposits under I100,000 2,LPL,8PJ 2,/JJ,K 12,JJ1 J7KL

6. $ore de#osits 9C,6+),*; 9C,C6+,AA ;6,*A; 9.A;

L7 Time deposits o! I100,000 or more 1,PK,J2L 1,1P,L/ L8,L/K /872J

87 eposits in !oreign o!!ices J,KK,2P1 K,P0,/LK 1,8J2,/18 JK70L

. "otal de#osits 9;,),)* 9+,;C,+9 *,9)*,;6A )*.C)

107 ederal !unds purchased and (E+s 2,820,/LJ ,1KP,K88 1,K18,L1K K178/

117 H) &orrowing with maturities less than 1 'ear 2J,00/ 22 2,P8 111KJ/K7/

127 H) &orrowing with maturities greater than 1 'ear 1,281,L0P 1,122,L01 1JP,008 171/

1K7 +ther &orrowings with maturities less than 1 'ear /,2L,J12 /,888,KPJ /1K,88K 87P1

17 +ther &orrowings with maturities greater than 1 'ear L,L/1,2JP 2,881,2JL ,880,002 1/P7KL

1J7 @cceptances and other lia&ilities 1,LJ,2 2,201,K/ L2/,102 K27P8

)6. "otal lia0ilities >including mortgages@ +;,;;;,A +),*A,*+ ,A*,C6+ )*.9

1L7 $u&ordinated notes and de&entures 1,1K,/0/ 1,K,J8J 20,PLP 17/

187 @ll common and pre!erred capital K,L8K,L12 2,P02,P0K 880,80P K07K


41/69

). "otal lia0ilities and ca#ital 9,;+,)6 +6,9;6,C99 6,6A,A+ )+.+A




"heir rinci#al

$om#etitors

)AA art Two Financial Statements and Financial Firm Performance

among the least e6pensive sources o! !unds7 +verall, total deposits >item P? increased &'

1K701 percent or IK72 &illion7 @s interest rates &egan to rise, 3C" increased its &orrowings

with maturities greater than one 'ear >item 1? which soared upward &' nearl' IJ &illion7

@s mar#et interest rates increased the growth in core deposits su&sided and 3C" appar:

entl' wor#ed to loc# in longer:term nondeposit &orrowings7

3C" reported su&stantial growth in securit' investments, driven &' a sharp advance

>1KL78J percent? in ederal !unds sold and resale agreements >Ta&le /J, item 1/? and a

ver' large gain in interest:&earing &an# &alances >item 1J?7 3C" apparentl' increased the

li*uidit' o! its investment port!olio &' changing its composition while nearl' dou&ling the

overall si-e o! that port!olio7 )i*uidit' choices on the asset side o! the &alance sheet

teamed up with increases in long:term nondeposit &orrowings as sources o! &an# !unds to

help this large &an#ing !irm get read' !or rising mar#et interest rates7

Ta&le /L shows the composition o! assets and lia&ilities held &' 3C", using averages

across the !our *uarters o! the 'ear, and presents analogous in!ormation !or a peer group

o! &an#s7 Thepeer groupused !or 3C" consists o! all national &an#s with average assets

in e6cess o! IK &illion, including the largest 1L0 &an#s in 200 and &iggest 1/K &an#s in

200K7 The changes in assets and lia&ilities that we discussed in Ta&les /J and // are

&ased on 'ear:end num&ers whereas the percentages in Ta&le /L represent averages

that tend to reduce the e!!ects o! seasonalit' and window dressing7 rom this point on, our

dis:cussion will !ocus on averagedata !or 3C" and its peers7

or 3C" we see relativel' small changes in asset composition in Ta&le /L7 3et loans

and leases as a percentage o! average assets >line ? increased !rom L871 percent at the

end o! 200K to 817K percent as 200 endedDa K7L percent increase in net loans and

leases relative to average assets7 However, in &oth 'ears larger percentages o! assets

were accounted !or &' loans at 3C" than was true !or its peer group who reported ratios

o! net loans and leases to average assets o! onl' J87L percent in 200K and J87P1 percent

in 2007 "ecause loans o!ten represent the highest:'ielding assets a &an# can hold,

3C";s higher loan:asset ratio would &e e6pected to produce relativel' higher earnings

than the average earnings !or the peer group7

3C" has slightl' decreased its holdings o! li*uid assets >short:term securities and cash

assets?7 ! we sum the percentages !or items J, /, L, P, and 11 in Ta&le /L, we !ind that

interest:&earing li*uid assets and cash assets accounted !or 1K72J percent o! assets in

200K and 117/1 percent o! assets in 2007 n contrast, the peer group has a&out twice the

por:tion o! li*uid assets relative to total assets7 n 200K and 200, li*uid assets accounted

!or 28711 percent and 2L71L percent o! assets at peer institutions7 Could 3C";s

management &e accepting greater li*uidit' ris# >i7e7, the possi&ilit' o! a cash:out? than is

warranted= "an#s, li#e other !irms, want to have enough li*uid assets to meet their needswithout oppressing pro!ita&ilit' with e6cessive !unds invested in relativel' low:'ielding

instru:ments7 Their needs !or !unds are usuall' derived !rom their customers; needs !or

!unds where the customer draws down loan commitments >o!!:&alance:sheet items that

&ecome on:&alance:sheet assets? or withdraws deposits7

+n the sources o! !unds side, we note !rom Ta&le /L that 3C" holds a signi!icantl'

smaller proportion o! core deposits >item 22? than the peer group o! &an#s7 Core deposits,

as reported in the ."(, include demand deposits, negotia&le order o! withdrawal >3+


42/69

lower proportion o! core deposits does not necessaril' indicate e6cessive !unding costs7




"heir rinci#al

$om#etitors

Chapter / Measuring and Evaluating the Performance of Banks and Their Principal ompetitors )A

"%B-E 6?; ercentage $om#osition o! %ssets and -ia0ilities !or 5ational $it( Bank and Itseer =rou#>all !igures are #ercentages o! average total assets@


5$B eer 5$B eer )9*)C+ )9*)C+ )9*)C* )9*)C*

@ssets ercentage o! average assets

17 Total loans 827J0Q J8722Q LP7/JQ JL7/8Q

27 )ease !inancing receiva&les 0701 170K 0702 171P

K7 )ess )oan and lease loss allowance 171L 0780 172/ 078/

+. 5et loans and leases A).*+ A.) ;A.+) A.+;

J7 nterest:&earing &an# &alances 1718 07L/ 070K 078L

/7 ederal !unds sold and resale agreements 178J 27KL 271P 27/1

L7 Trading account assets 07JK 07K 07/K 07KP

87 Held:to:maturit' securities 0700 2701 0700S

17JP7 @vaila&le:!or:sale securities 7/2 21702 /7JJ 21711

)C. "otal earning assets A.9 C.CA A;.A) A.A+

117 3oninterest:&earing cash and deposits due !rom other &an#s K7K 27/8 K78J K71K

127 remises, !i6ed assets, capital leases 170/ 170P 170K 1708

1K7 +ther real estate owned 0701 070J 0702 070J

17 @cceptances and other assets J7P8 J782 L72P J7P

). Su0total )C.+A .9 )9.) )C.)6

)6. "otal assets )CC.CC )CC.CC )CC.CC )CC.CC)ia&ilities

1L7 emand deposits 870J /7/J P728 /7JP

187 @ll 3+< and @T$ accounts 07K 17P1 072 1781

1P7 Mone' mar#et deposit accounts 1L7P1 27K 1P7K 22700

207 +ther savings deposits P7K8 872 P78K 87LK

217 Time deposits under I100,000 J7K0 87K/ /70 P7JP99. $ore de#osits +).C; +.6; +.9; *.*

2K7 Time deposits o! I100,000 or more 2780 87PP K7PJ P702

27 eposits in !oreign o!!ices P78/ 17P 7LJ 270

9. "otal de#osits *.;* 6A.* *.; 6;.A9

2/7 ederal !unds purchased and (E+s 8712 8700 1078K 871/

2L7 Total !ederal home loan &orrowings 27/2 7/K 27K 781

287 Total other &orrowings 217PL 27/ 1L7LL 278

9. Memo:Shortterm noncore !unding 99.+; 99.A+ 96.* 99.A

K07 @cceptances and other lia&ilities 70K 2710 J7/ 27/

*). "otal lia0ilities >including mortgages@ C.+6 A.A* C.*6 C.9+

K27 $u&ordinated notes and de&entures 27P0 07/2 K71 07L1

KK7 @ll common and pre!erred capital /7/ P7KP /7J0 87PK

*+. "otal lia0ilities and ca#ital . )CC.CC . )CC.CC

S igure is less than 070J percent7


43/69




"heir rinci#al

$om#etitors

)C art Two Financial Statements and Financial Firm Performance

"%B-E 6?A 5ational $it( Bank Income Statement >Revenues and E2#enses@


Items >dollar amounts in thousands@ )9*)9CC+ )9:*):9CC* ercentage $hange

17 nterest and !ees on loans I2,1L0,J2 I1,P2L,08 127/KQ27 ncome !rom lease !inancing 102 8/ 187/0

K7 Ta6:e6empt 2,0L1 1,PP8 K7/J

7 Estimated ta6 &ene!it PL/ P0P L7KL

. Income on loans and leases >ta2eDuivalent 0asis@ 9,);),69C ),9A,C; )9.6*

/7 ncome !rom .7$7 Treasur' and agenc' securities 2,KKK L,812 L071

L7 Mortgage:&ac#ed securities >M"$? income LK,KLP /P,222 /701

87 Estimated ta6 &ene!it 1K 11 18718

P7 ncome !rom all other securities KJ,P1P J0,1P/ 287

107 Ta6:e6empt securities income 2L 2J 8700

)). Investment income >ta2eDuivalent 0asis@ ))),6++ )9;,9+) ?)9.96

127 nterest on due !rom other &an#s ,P/8 PK P0L7L11K7 nterest on !ederal !unds sold and resales 1P,22J 1J,2KP 2/71/

17 Trading account income J,KPK 1,/88 21P7P

1J7 +ther interest income ,K10 ,KJ1 07P

)6. "otal interest income >ta2eDuivalent 0asis@ 9,*);,)6C 9,C;;,C) )).6

1L7 nterest on deposits in !oreign o!!ices 88,LK KK,P 1/J7K1

187 nterest on time deposits over I100,000 K/,021 K,28 1/7L1

1P7 nterest on all other deposits 1J/,J1 188,/J 1L702

207 nterest on !ederal !unds purchased A repurchase agreements /1,10 /,P2/ J78K

217 nterest on trading lia&ilities and other &orrowings 208,L2 1/2,8J1 28701

227 nterest on mortgages and leases !or other propert' A e*uipment 0 0 0700

2K7 nterest on su&ordinated notes and de&entures K,/2L 2J,01P K870

9+. "otal interest e2#ense A,++ )A,)+; )*.C)

9. 5et interest income >ta2eDuivalent 0asis@ ),;*),6)6 ),A,++ )).CA

2/7 3oninterest income 802,PPP L8K,KLK 27J1

9;. %d1usted o#erating income >ta2eDuivalent 0asis@ 9,*+,6) 9,*+9,*); A.9)

287 3oninterest e6pense 1,2K,L1/ 1,1/0,LKJ L71J

2P7 rovision )oan and lease losses 1L,1L 22,J/2 /J718

*C. reta2 o#erating income >ta2eDuivalent 0asis@ ),)+*,;9 ;,C9C C.6

K17 (eali-ed gainsHlosses on held:to:maturit' securities 0 0 0700K27 (eali-ed gainsHlosses on availa&le:!or:sale securities J,PP2 K,/KP /7//

**. reta2 net o#erating income >ta2eDuivalent 0asis@ ),)+,;++ ;69,6 C.;K7 @pplica&le income ta6es 21,80/ 208,81L 102700

KJ7 Current ta6 e*uivalent ad5ustments P8P P20 L7J0

K/7 +ther ta6:e*uivalent ad5ustments 0 0 0700

KL7 @pplica&le income ta6es >ta6:e*uivalent &asis? 22,LPJ 20P,LKL 1017J8

*A. 5et o#erating income ;96,+ 9,99 *).+;

KP7 3et e6traordinar' items 0 0 0700

+C. 5et income ;96,+ 9,99 *).+;

17 Cash dividends declared 1J0,000 K00,000 J0700

+9. Retained earnings >addition to@ ;6,+ 99,99 )9A.))

go up and e6penses to go down7 This ideal situation is similar to the !amous directive to

investors to 4"u' )ow and $ell HighDsimplistic in theor' &ut hard to appl', especiall'

when we are tal#ing a&out interest income and e6penses and &oth items are correlated

with mar#et interest rates7 >items 1 through 1J in Ta&le /8? increased and,

while the signs were mi6ed !or individual interest e6pense items >items 1L2K?, the over:

all e!!ect was an increase in 3C";s total interest e6penses >item 2?7



44/69


45/69

nterest income

!rom loans andnterest e6pense on

securit' investments &orrowed !unds

treated li#e partnerships !or !ederal ta6

purposes7

@verageassets

3et interest margin


46/69

"%B-E 6?Relative IncomeStatement and Margin

%nal(sis !or 5ational

$it( Bank and Its eer

=rou# >all !igures are

#ercentages o! average

total assets@

$ource .ni!orm "an#

er!ormance (eports

>888.!!iec.gov@ 7


47/69


48/69




"heir rinci#al

$om#etitors

)9 art Two Financial Statements and Financial Firm Performance

increased signi!icantl' while 3C";s net operating margin rose &' a whopping217LL per:cent, the peer group;s compara&le ratio increased &' onl' 27Kpercent7 "' this measure 3C" outshines its peer group o! &an#ing !irms7

However, 3C";s stoc#holders will pro&a&l' &e most concerned a&out the earnings

per share >E$? o! stoc# that the' hold7 3ational Cit' Corporation >the &an# holding

com:pan'? had /0J,PP/,120 shares outstanding in 200K and //,LP,/J0 shares o!

stoc# in 200 >according to its annual report su&mitted to the $EC and accessi&le

using the student version o! $A;s Mar#et nsights and the associated Edgar lin#?7

.sing this data we can calculate the E$ on a &an# &asis >using net income !rom

3C"?7 ts E$ changed as !ol:lows &etween 'ear:end 200K and 200

E$

3et income

Common e*uit' shares outst

1223

IL2/,PP,000

I1712 per share

IJJ2,P22,000

//,LP,/J0 /0J,PP/,120

The &an# e6perienced a signi!icant 5ump in stoc#holders; earnings per share7(emem:&er this calculation is &ased on the net income !or the lead &an# divided&' the num&er o! shares o! 3ational Cit' Corporation, the &an# holding compan'7Hence, caution in inter:preting these results is important7 Oeeping this in mind,management would certainl' li#e to see this trend continue7

@s we move !urther down the income and e6pense statement in Ta&le /8 we see

that, while net interest income increased &' 11708 percent in 200, net income >item0? increased &' a remar#a&le K17L percentY This was due to a small 27J1 percent

increase in noninterest income >item 2/?, a /7// percent increase in reali-ed gainson availa&le:!or:sale securities >item K2?, and a /J718 percent decrease in theprovision !or loan and lease losses >item 2P?7 item K?

went !rom 172/ percent in 200K to 171L percent in 2007 Management appears to &e cashing in

on the low loan losses that were characteristic o! this time period7

How did 3C" do relative to its peer group with regard to income and e6penses=

Ta&le /P provides a glimpse o! an answer !or this *uestion7 3C" improved its

per!ormance in 2007 t outper!ormed its peer group on interest income >item 1? and

noninterest e6pense >item J? in &oth 200K and 2007 &utperformedmeans 3C";s

interest income was higher as a percentage o! its average assets and its noninterest

e6penses were lower as a percent:age o! its average assets than compara&le &an#s7

The lower noninterest e6pense indicates that management has succeeded in

controlling overhead costs relative to its peer group7 +verall, the successes regarding

interest income and noninterest e6penses illustrated in the upper portion o! Ta&le /P

led to &oth higher net operating income >item 10? and higher net income >item 1K?


49/69

relative to average total assets !or 3C" versus its peer group o! &an#s in 2007




"heir rinci#al

$om#etitors

Chapter / Measuring and Evaluating the Performance of Banks and Their Principal ompetitors )*

3C" loo#s good relative to its peers and the pro!ita&ilit' ratios are getting&etter7 (+@ increased &' 217LL percent7 /1? !or(+E


50/69

3et income Total operating revenue

(+ETotal operating revenue @verage assets

@vera ge assets

@veragee*uit' capital

3C";s (+E in 200L

(+E IIK,120,1JPL2/,PP

I

I

8,02J,K0/

K,120,1JP I

I8,02J,K0/

K,188,880

0

7

2

K

K

0

0

7

0

/

J

0

1

J7

0

/

0

7

2

2

8

0

o

r

2

2

780Q

3C";s(+Ein200K7L

(+E

I2,8/0,/

I,J,LP

II,J,LP

071PKK 070/

1J7K8 071P1 or

1P71Q@llowance !or loan losses 2J? Total lia&ilities

>.nearned income on loans J? E*uit' capitallant and e*uipment J0 Common stoc#

Total assets P80 $urplus

(etained earning

Total capitalTotal earning assets 8K0 nterest:&earing

ill in the missing items on the income and e6pense statement7 .singthese statements, calculate the !ollowing per!ormance measures

(+E @sset utili-ation


57/69

(+@

3et interest margin

e!!icienc'


58/69




"heir rinci#al

$om#etitors


3et noninterest margin E6pense control e!!icienc'

3et operating margin @sset management e!!icienc'

Earnings spread unds management e!!icienc'

3et pro!it margin +perating e!!icienc' ratio


59/69

4. How would a decline in total assets and e*uit' &' hal! >with (+@ still at0700L/? a!!ect the &an#;s (+E=

888.mhhe.com:rose;e

888.mhhe.com:rose;e


60/69


61/69


62/69

discuss how the &an#;s ris# e6posure appears to &e changing over time7


63/69

9C

C

artTwoFinancialStatementsan

dFinancialFirmPerfromance

Internet E2ercises1.

@msouth "an#

>888.amsouth.com

""AT >

$unTrust "an#s>888.suntrust.com

.sing the a&ovecompan' ."(s? provide detailed

!inancial per!or:mance data on all !ederall' supervised .7$7 &an#s7.sing the at 888.!!iec.gov?, see i! 'ou can deter:mine what happened tothe earnings and credit ris# e6posure o! 888.8achovia.com? and (+E?7 How do the (+Es compare across categories and

su&industries= @re there an' other per!ormance measures that could &e compared

across !inancial:service sectors=

2. Toda' &an#s, securities !irms, insurance companies, and !inancecredit:card

&usinesses are &attling !or man' o! the same customers and !or man' o! the same

sources o! capital to sup:port their growth and e6pansion7 @s a result there is #een

interest toda' in the compara:tive !inancial per!ormance o! !irms in these !our

competing industries7 .sing $A;s Mar#et nsight, Educational %ersion, see i! 'ou

can determine which o! these !inancial:service industries are outper!orming the

others in terms o! returns on e*uit' capital and ris# e6posure7 Nou ma' !ind it use!ul

to select certain !irms !rom the Mar#et nsight !ile to com:pare per!ormances across

these industries7 or e6ample, 'ou can compare the !inancial statements o! such

companies as Met)i!e nsurance nc7 >MET?, Capital +ne inancial Group >C+?,

Goldman $achs Group >G$?, and leet"oston inancial Corp7 >"?7


64/69


65/69

c e*uation and interpret the in!ormation !or 'our &an#7

5. (ows /K through /J call !or a &rea#down o! the net pro!it

margin, as illustrated &' E*uation >/18?7 E*uation V/20W in this chapter?7


66/69

888.mhhe.com:rose;e

888.mhhe.com:rose;e

RoseHudgins: Bank II. Financial Statements 6. Measuring and The McGrawHillManagement and Financial and Financial Firm Evaluating the Companies, 2008


"heir rinci#al

$om#etitors

9C9 art Two Financial Statements and Financial Firm Perfromance

Selected For an e)planation of measuring and evaluating risk in banking and financial services$ see the fol,

Re!erences lo"ing studies#

1.Gil&ert, (7 @lton, @ndrew 7 Me'er, and Mar# 7 %aughn7 4How Health' s

the "an#:ing $'stem= unneling inancial ata into ailure ro&a&ilit'7%egional Economist$ederal (eserve "an# o! $t7 )ouis, @pril 2001, pp7121K7

2.Oristad, Be!!re', and at onnell'7 4@n E6aminer;s %iew o! +perational(is#7 Bank*e"s$ Bul' K1, 2001, pp7 2J2L7

3. (ose, eter $7 4(is#DTa#ing the Temperature and inding a Cure7 The

anadianBanker$ 3ovem&erecem&er, 1P8L, pp7 J/K7

4.


67/69



Chap6 ALM,For Asiignmnt

Documents

Transcript of Chap6 ALM,For Asiignmnt