Department of Economics

Managing Financial
Intermediaries
Text: Chapters 15 17, 22
Rose: Chapters 4 & 5

Goal for the day

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

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Management objectives
Maximize shareholder wealth
Profitability
Liquidity
Solvency

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Managements Challenges

Size of bank, trade area, product mix

Portfolio of assets and liabilities
Efficiency in operations
Non-interest activities
Pricing of assets and services
Acquisition of loanable funds
Risk management
Interest rate
Default
Credit
Tax management
Human resources
Others?
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Understanding bank management

through financial statements

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Basic financial statements

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

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Report of condition
Financial Outputs
(assets, funds)

Financial Inputs (liabilities,

equity)

Loans and leases

Deposits from public

Investment in securities

Non-public borrowings

Cash and deposits elsewhere

Equity from stockholders

Facilities and other assets

Total

Total

Assets = Liabilities + Equity

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Report of income
Financial Outputs
(revenues)

Financial Inputs
(costs)

Loan income

Deposit interest costs

Security income

Costs of non-deposit borrowings

Income from other deposits

Overhead expenses

Income from fees and services

Taxes

Total

Total

Net Income after Taxes = Total Revenues Total Costs

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TTYN

ASSESS THE FINANCIAL CONDITION

AND PERFORMANCE OF FIRST
NATIONAL BANK OF WAVERLY, IOWA
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Measuring bank performance using

DuPont analysis

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DuPont analysis for banks

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

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If the equity multiplier is 10.5

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

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More DuPont analysis

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

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FNB Waverly example

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

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Risk management measures

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

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

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

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Questions?

Department of Economics