Analyzing Bank Performance: Using the UBPR · Balance Sheet Assets = Liabilities + Equity Balance...
Transcript of Analyzing Bank Performance: Using the UBPR · Balance Sheet Assets = Liabilities + Equity Balance...
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ANALYZING BANK
PERFORMANCE:
USING THE UBPR
Chapter 2
Bank Management, 6th edition. Timothy W. Koch and S. Scott MacDonald Copyright © 2006 by South-Western, a division of Thomson Learning
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Balance Sheet
Assets = Liabilities + Equity
Balance sheet figures are calculated at
a particular point in time and thus
represent stock values.
2
Bank Assets
Cash and due from banks Vault cash, deposits held at the Fed and other
financial institutions, and cash items in the process of collection.
Investment Securities Securities held to earn interest and help meet
liquidity needs.
Loans The major asset, generate the greatest amount
of income, exhibit the highest default risk and are relatively illiquid.
Other assets Bank premises and equipment, interest
receivable, prepaid expenses, other real estate owned, and customers' liability to the bank
http://www2.fdic.gov/ubpr/UbprReport/SearchEngine/Default.asp
3
Balance Sheet (assets): PNC and Community National Bank
Dec-03 % of Dec-04 % of Dec-03 % of Dec-04 % of
BALANCE SHEET % Cha 1,000 Total % Cha 1,000 Total % Cha 1,000 Total % Cha 1,000 Total
ASSETS
Loans:
Real estate loans 1.2% 15,639,089 25.2% 32.4% 20,701,904 28.0% 4.0% 75,324 39.1% 12.9% 85,050 40.5%
Commercial loans -8.4% 11,879,285 19.2% 23.8% 14,707,458 19.9% -5.8% 34,288 17.8% 12.9% 38,716 18.4%
Individual loans -4.4% 2,501,847 4.0% 52.6% 3,816,861 5.2% 26.7% 8,454 4.4% -5.2% 8,011 3.8%
Agricultural loans 9.2% 984 0.0% 57.0% 1,545 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Other LN&LS in domestic off. -20.5% 3,022,795 4.9% -0.8% 2,999,113 4.1% 13.0% 26 0.0% 284.6% 100 0.0%
LN&LS in foreign off. 15.6% 1,190,025 1.9% 2.8% 1,222,904 1.7% 0.0% 0 0.0% 0.0% 0 0.0%
Gross Loans & Leases -4.6% 34,234,025 55.2% 26.9% 43,449,785 58.9% 2.2% 118,092 61.3% 11.7% 131,877 62.8%
Less: Unearned Income 8.0% 44,867 0.1% 0.2% 44,949 0.1% 0.0% 0 0.0% 0.0% 0 0.0%
Memo: Total loans -4.6% 34,189,158 55.1% 27.0% 43,404,836 58.8% 2.2% 118,092 61.3% 11.7% 131,877 62.8%
Loan & Lease loss Allowance -5.8% 606,886 1.0% -3.8% 583,915 0.8% 6.7% 1,258 0.7% 28.5% 1,617 0.8%
Net Loans & Leases -4.5% 33,582,272 54.1% 27.5% 42,820,921 58.0% 2.2% 116,834 60.6% 11.5% 130,260 62.0%
Investments:
U.S. Treasury & Agency securities 90.6% 5,574,108 9.0% 15.9% 6,460,936 8.8% 73.9% 34,937 18.1% 24.8% 43,591 20.7%
Municipal securities -46.9% 7,719 0.0% 1606.0% 131,685 0.2% -0.5% 613 0.3% -0.5% 610 0.3%
Foreign debt securities -100.0% 0 0.0% 0% 0 0.0% 0.0% 0 0.0% 0% 0 0.0%
All other securities 1.1% 8,804,028 14.2% 3.0% 9,064,146 12.3% #N/A 2,104 1.1% -2.2% 2,057 1.0%
Interest bearing bank balances 16.4% 259,318 0.4% 51.8% 393,713 0.5% #N/A 4,428 2.3% -57.5% 1,881 0.9%
Fed funds sold & resales -54.6% 1,106,733 1.8% 56.2% 1,728,372 2.3% 175.0% 7,000 3.6% -21.4% 5,500 2.6%
Trading account assets -9.1% 935,042 1.5% 78.3% 1,667,330 2.3% 0.0% 0 0.0% 0.0% 0 0.0%
Total Investments 8.7% 16,686,948 26.9% 16.5% 19,446,182 26.3% 111.1% 49,082 25.5% 9.3% 53,639 25.5%
Total Earning Assets -0.5% 50,269,220 81.1% 23.9% 62,267,103 84.4% 20.6% 165,916 86.1% 10.8% 183,899 87.5%
Nonint Cash & Due from banks -6.9% 2,926,330 4.7% 8.5% 3,174,493 4.3% -16.6% 13,083 6.8% -10.7% 11,682 5.6%
Premises, fixed assets & capital leases24.4% 1,039,603 1.7% 2.5% 1,066,028 1.4% 12.2% 5,642 2.9% 2.2% 5,768 2.7%
Other real estate owned 21.8% 14,208 0.0% 0.7% 14,301 0.0% -84.3% 325 0.2% -100.0% 0 0.0%
Investment in unconsolidated subs. 252.4% 17,386 0.0% -12.4% 15,223 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Acceptances and other assets 51.8% 7,754,149 12.5% -6.2% 7,272,017 9.9% 259.8% 7,761 4.0% 13.2% 8,783 4.2%
Total Assets 4.0% 62,020,896 100.0% 19.0% 73,809,165 100.0% 18.6% 192,727 100.0% 9.0% 210,132 100.0%
Average Assets During Quarter 6.8% 62,719,462 101.1% 17.0% 73,391,052 99.4% 17.5% 191,480 99.4% 9.4% 209,525 99.7%
PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK
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Adjustments to total loans …three adjustments are made to obtain a
net loan figure.
1. Leases are included in gross loans.
2. Unearned income is deducted from gross interest received.
3. Gross loans are reduced by the dollar magnitude of a bank's loan-loss reserve, which exists in recognition that some loans will not be repaid.
5
Provisions for loan losses
Provisions for loan losses
Reserve for Loan Losses
Recoveries
Charge offs
6
Bank investments and FASB 115
Following FASB 115 a bank, at purchase, must
designate the objective behind buying investment
securities as either:
Held-to-maturity securities are recorded on the
balance sheet at amortized cost.
Trading account securities are actively bought and
sold, so the bank marks the securities to market
(reports them at current market value) on the balance
sheet and reports all gains and losses on the income
statement.
Available-for-sale, all other investment securities, are
recorded at market value on the balance sheet with a
corresponding change to stockholders’ equity as
unrealized gains and losses on securities holdings;
no income statement impact . 7
Average assets, capital and loan loss data: PNC and Community NB
Enter analysts name here Dec-03 % of Dec-04 % of Dec-03 % of Dec-04 % of
SUPPLEMENTAL DATA Pg # % Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total
Average Assets 1 2.36% 60,890,137 14.30% 69,596,163 11.59% 176,531 13.45% 200,271
Domestic Banking offices 3 0.59% 684 7.75% 737 0.00% 5 20.00% 6
Foreign Branches 3 0.00% 8 0.00% 8 0.00% 0 0.00% 0
Number of equivalent employees 3 -1.72% 15,147 3.49% 15,675 -3.02% 64 9.85% 71
SUMMARY OF RISK BASED CAPITAL
Net Tier One 11A -0.49% 5,134,748 9.9% -0.90% 5,088,306 8.4% 14.19% 14,005 10.7% 9.09% 15,278 10.3%
Net Eligible Tier Two 11A -9.20% 1,566,924 3.0% 28.12% 2,007,618 3.3% 6.70% 1,258 1.0% 28.54% 1,617 1.1%
Tier Three 11A 36.19% (12,269) 0.0% 408.06% (62,334) -0.1% 0.00% 0 0.0% 0.00% 0 0.0%
Deductions 11A -2.73% 6,689,403 12.9% 5.15% 7,033,591 11.5% 13.53% 15,263 11.7% 10.69% 16,895 11.4%
Total-risk-based-capital 11A -2.73% 13,378,806 25.8% 5.15% 14,067,181 23.1% 13.53% 30,526 23.4% 10.69% 33,790 22.7%
Total Risk-Weighted Assets 11A -1.95% 51,908,044 100.0% 17.32% 60,897,630 100.0% 12.72% 130,506 100.0% 14.03% 148,814 100.0%
SUMMARY OF LOAN LOSS ACCOUNT
Balance at beginning of period 7 6.92% 644,475 1.8% -5.83% 606,886 1.5% 38.87% 1,179 1.0% 6.70% 1,258 1.0%
Gross Credit Losses 7 2.40% 255,377 0.7% -36.75% 161,537 0.4% 277.91% 616 0.5% -57.79% 260 0.2%
Memo: Loans HFS Writedown 7 14.01% 26,060 0.1% -67.16% 8,558 0.0% 0.00% 0 0.0% 0.00% 0 0.0%
Recoveries 7 11.29% 47,453 0.1% 5.05% 49,849 0.1% -15.38% 11 0.0% 72.73% 19 0.0%
Net Credit Losses 7 0.56% 207,924 0.6% -46.28% 111,688 0.3% 303.33% 605 0.5% -60.17% 241 0.2%
Provisions for Credit Losses 7 -39.11% 176,612 0.5% -70.81% 51,553 0.1% 42.50% 684 0.6% -12.28% 600 0.5%
Other Adjustments 7 -84.91% (6,277) 0.0% -692.07% 37,164 0.1% 0.00% 0 0.0% 0.00% 0 0.0%
Balance at end of period 7 -5.83% 606,886 1.7% -3.79% 583,915 1.5% 6.70% 1,258 1.1% 28.54% 1,617 1.3%
Average Total Loans & Leases 7 -8.74% 35,193,158 100.0% 13.55% 39,960,849 100.0% 5.43% 114,953 100.0% 7.38% 123,431 100.0%
NON-CURRENT LN&LS
90 days and over past due 8 -53.71% 72,963 0.2% -20.54% 57,979 0.1% -38.05% 184 0.2% -100.00% 0 0.0%
Total Nonaccrual Ln&LS 8 -21.98% 270,782 0.8% -47.60% 141,887 0.4% -42.61% 229 0.2% -9.17% 208 0.2%
Total Non-current LN&LS 8 -31.89% 343,745 1.0% -41.86% 199,866 0.5% -40.66% 413 0.4% -49.64% 208 0.2%
Ln&Ls 30-89 Days Past Due 8 -49.74% 126,455 0.4% -25.05% 94,779 0.2% -68.98% 844 0.7% 167.89% 2,261 1.8%
Restructured LN&LS 90+ Days P/D 8 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Restructured LN&LS Nonaccrual 8 -65.1% 424 0.0% -100.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Current Restructured LN&LS 8 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
All other real estate owned 8 21.8% 14,208 0.0% 0.7% 14,301 0.0% -84.3% 325 0.3% -100.0% 0 0.0%
PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK
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Bank liabilities
Demand deposits
Transactions accounts that pay no interest
Negotiable orders of withdrawal (NOWs) and automatic transfers from savings (ATS) accounts
Pay interest set by each bank without federal restrictions
Money market deposit accounts (MMDAs)
Pay market rates, but a customer is limited to no more than six checks or automatic transfers each month
Savings and time deposits represent the bulk of interest-bearing liabilities at banks. 9
Bank liabilities (continued)
Two general time deposits categories exist: Time deposits in excess of $100,000, labeled
jumbo certificates of deposit (CDs).
Small CDs, considered core deposits which tend to be stable deposits that are typically not withdrawn over short periods of time.
Deposits held in foreign offices Balances issued by a bank subsidiary
located outside the U.S.
Purchased liabilities, (rate-sensitive borrowings): Federal Funds purchased
Repos
Other borrowings less than one year
10
Core versus volatile funds
Core deposits are stable deposits that are not highly
interest rate-sensitive.
More sensitive to the fees charged, services rendered,
and location of the bank.
Includes: demand deposits, NOW accounts, MMDAs, and
small time deposits.
Large, or volatile, borrowings are liabilities that are
highly rate-sensitive.
Normally issued in uninsured denominations
Ability to borrow is asset quality sensitive
Includes: large CDs (over 100,000), deposits in foreign
offices, federal funds purchased, repurchase
agreements, and other borrowings with maturities less
than one year.*
*The UBPR also includes brokered deposits less than $100,000 and
maturing within one year in the definition of net non-core liabilities. 11
Balance Sheet (liabilities): PNC and Community National Bank
Dec-03 % of Dec-04 % of Dec-03 % of Dec-04 % of
BALANCE SHEET % Cha 1,000 Total % Cha 1,000 Total % Cha 1,000 Total % Cha 1,000 Total
LIABILITIES
Demand deposits 2.6% 7,070,434 11.4% 20.1% 8,488,607 11.5% 12.6% 72,500 37.6% 12.4% 81,514 38.8%
All NOW & ATS Accounts 9.9% 1,529,861 2.5% 8.9% 1,666,003 2.3% 15.5% 12,478 6.5% 39.7% 17,437 8.3%
Money market deposit accounts 6.8% 24,502,371 39.5% 8.8% 26,665,024 36.1% 56.7% 46,458 24.1% 5.3% 48,908 23.3%
Other savings deposits 5.0% 2,055,659 3.3% 35.4% 2,782,931 3.8% 7.3% 7,812 4.1% 26.7% 9,896 4.7%
Time deposits under $100M -15.9% 6,242,628 10.1% 13.1% 7,063,499 9.6% 4.0% 24,469 12.7% -14.4% 20,949 10.0%
Core Deposits 2.0% 41,400,953 66.8% 12.7% 46,666,064 63.2% 20.7% 163,717 84.9% 9.2% 178,704 85.0%
Time deposits of $100M or more -17.6% 1,775,943 2.9% 80.5% 3,205,331 4.3% 4.9% 13,572 7.0% 8.4% 14,714 7.0%
Deposits held in foreign offices 71.5% 2,371,548 3.8% 26.3% 2,994,623 4.1% 0.0% 0 0.0% 0.0% 0 0.0%
Total deposits 3.2% 45,548,444 73.4% 16.1% 52,866,018 71.6% 19.3% 177,289 92.0% 9.1% 193,418 92.0%
Fed funds purchased & resale 25.2% 499,232 0.8% 221.8% 1,606,647 2.2% 0.0% 1,000 0.5% 0.0% 1,000 0.5%
FHLB borrowings < 1 Yr 898.2% 1,000,000 1.6% -100.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Other borrowings inc mat < 1 yr 99.4% 2,264,921 3.7% 34.5% 3,046,632 4.1% 0.0% 0 0.0% 0.0% 0 0.0%
Memo: S.T. non core funding 73.5% 7,111,124 11.5% 25.7% 8,936,809 12.1% 0.1% 7,901 4.1% 28.7% 10,169 4.8%
Memo: S.T. Volatile liabilities 36.2% 6,911,644 11.1% 57.0% 10,853,233 14.7% 4.5% 14,572 7.6% 7.8% 15,714 7.5%
FHLB borrowings > 1 Yr -90.0% 115,406 0.2% -23.3% 88,508 0.1% 0.0% 0 0.0% 0.0% 0 0.0%
Other borrowings inc mat > 1 yr -2.9% 1,765,851 2.8% 105.2% 3,624,223 4.9% 0.0% 0 0.0% 0.0% 0 0.0%
Acceptances & other liabilities -0.1% 3,864,388 6.2% 18.7% 4,585,994 6.2% -11.0% 395 0.2% 31.6% 520 0.2%
Total Liabilities before Sub. Notes 4.6% 55,058,242 88.8% 19.5% 65,818,022 89.2% 19.1% 178,684 92.7% 9.1% 194,938 92.8%
Sub. Notes & Debentures 16.2% 1,340,133 2.2% 41.4% 1,895,482 2.6% 0.0% 0 0.0% 0.0% 0 0.0%
Total Liabilities 4.9% 56,398,375 90.9% 20.1% 67,713,504 91.7% 19.1% 178,684 92.7% 9.1% 194,938 92.8%
All common and preferred capital -4.1% 5,622,521 9.1% 8.4% 6,095,661 8.3% 12.0% 14,043 7.3% 8.2% 15,194 7.2%
Total Liabilities & Capital 4.0% 62,020,896 100.0% 19.0% 73,809,165 100.0% 18.6% 192,727 100.0% 9.0% 210,132 100.0%
Memoranda:
Officer, Shareholder Loans (#) 0.0% 2 0.0% 50.0% 3 0.0% -50.0% 1 0.0% 0.0% 1 0.0%
Officer, Shareholder Loans ($) -19.4% 14,211 0.0% 58.0% 22,449 0.0% 31.7% 1,852 1.0% 22.2% 2,263 1.1%
Non-investment ORE 21.8% 14,208 0.0% 0.7% 14,301 0.0% -84.3% 325 0.2% -100.0% 0 0.0%
Loans Held for Sale -10.2% 1,378,603 2.2% 20.9% 1,667,154 2.3% 0.0% 0 0.0% 0.0% 0 0.0%
Held-to Maturity Securities #N/A 2,114 0.0% -100.0% 0 0.0% 36.7% 4,073 2.1% -56.2% 1,785 0.8%
Available-for-Sale-Securities 23.4% 14,383,741 23.2% 8.9% 15,656,767 21.2% 89.4% 33,581 17.4% 32.4% 44,473 21.2%
Total Securities 23.4% 14,385,855 23.2% 8.8% 15,656,767 21.2% 81.8% 37,654 19.5% 22.9% 46,258 22.0%
All Brokered Deposits 14.2% 1,533,123 2.5% 49.3% 2,289,151 3.1% 0.0% 0 0.0% 0.0% 0 0.0%
PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK
12
Stockholders equity
Subordinated notes and debentures:
Notes and bonds with maturities in excess
of one year.
Stockholders' equity
Ownership interest in the bank.
Common and preferred stock are listed at par
Surplus account represents the amount of
proceeds received by the bank in excess of
par when it issued the stock.
Retained earnings equals accumulated net
income not paid out as cash dividends 13
The income statement
Interest income (II)
Interest expense (IE) Interest income less interest expense equals
net interest income (NII)
Loan-loss provisions (PL) represent management's estimate of potential
lost revenue from bad loans
Noninterest income (OI)
Noninterest expense (OE) noninterest expense usually exceeds
noninterest income such that the difference is labeled the bank's burden
Securities gains or losses (SG)
Taxes 15
Income statement (interest): PNC and Community National Bank
Dec-03 % of Dec-04 % of
Income Statement % Cha $ 1,000 Total % Cha $ 1,000 Total
Interest Income:
Interest and fees on loans -17.5% 1,730,575 37.5% 8.3% 1,875,058 38.4%
Income from lease financing -20.6% 189,910 4.1% -30.1% 132,839 2.7%
Memo: Fully taxable -17.7% 1,905,782 41.3% 4.6% 1,993,668 40.8%
Tax-exempt -25.7% 14,703 0.3% -3.2% 14,229 0.3%
Estimated tax benefit -27.7% 7,347 0.2% -22.3% 5,711 0.1%
Income on Loans & Leases (TE) -17.8% 1,927,832 41.7% 4.4% 2,013,608 41.2%
Other security inc. (data prior to 12/31/00) 0.0% 0 0.0% 0.0% 0 0.0%
U.S. Treasury & Agency securities 48.2% 34,418 0.7% 221.4% 110,614 2.3%
Mortgage Backed Securities -0.7% 366,877 7.9% -8.1% 337,110 6.9%
Estimated tax benefit 1.0% 504 0.0% 565.1% 3,352 0.1%
All other securities income -15.4% 117,866 2.6% -31.2% 81,129 1.7%
Memo: Tax-Exempt Securities Income 3.7% 1,008 0.0% 728.4% 8,350 0.2%
Investment Interest Income (TE) -2.4% 519,665 11.2% 2.4% 532,205 10.9%
Interest on due from banks 43.8% 4,835 0.1% -24.8% 3,638 0.1%
Interest on Fed funds sold & resales -32.4% 18,682 0.4% 57.9% 29,503 0.6%
Trading account income 216.9% 805 0.0% 2455.9% 20,575 0.4%
Other interest income 127.2% 39,447 0.9% -47.2% 20,847 0.4%
Total interest income (TE) -14.2% 2,511,266 54.4% 4.3% 2,620,376 53.6%
Interest Expense:
Int on Deposits held in foreign offices -14.7% 17,335 0.4% 144.0% 42,290 0.9%
Interest on CD's over $100M -29.5% 67,714 1.5% 6.4% 72,032 1.5%
Interest on All Other Deposits: -30.5% 369,702 8.0% 1.8% 376,244 7.7%
All NOW & ATS Accounts 0.0% 0 0.0% 0.0% 0 0.0%
Money market deposit accounts 0.0% 0 0.0% 0.0% 0 0.0%
Other savings deposits 0.0% 0 0.0% 0.0% 0 0.0%
Time deposits under $100M 0.0% 0 0.0% 0.0% 0 0.0%
Total interest exp. on deposits -29.8% 454,751 9.8% 7.9% 490,566 10.0%
Interest on Fed funds purchased & resale 2.2% 13,260 0.3% 204.9% 40,432 0.8%
Interest on Trad Liab & Oth Borrowings -59.0% 26,001 0.6% 429.4% 137,637 2.8%
Interest on mortgages & leases 0.0% 0 0.0% 0.0% 0 0.0%
Interest on Sub. Notes & Debentures -17.9% 55,449 1.2% 52.1% 84,340 1.7%
Total interest expense -30.6% 549,461 11.9% 37.0% 752,975 15.4%
Net interest income (TE) -8.1% 1,961,805 42.5% -4.8% 1,867,401 38.2%
PNC BANK, NATIONAL ASSOCIATION
Dec-03 % of Dec-04 % of
% Cha $ 1,000 Total % Cha $ 1,000 Total
0.0% 7,923 73.6% 7.5% 8,521 72.1%
0.0% 0 0.0% 0.0% 0 0.0%
0.0% 7,923 73.6% 7.5% 8,521 72.1%
0.0% 0 0.0% 0.0% 0 0.0%
0.0% 0 0.0% 0.0% 0 0.0%
0.0% 7,923 73.6% 7.5% 8,521 72.1%
0.0% 0 0.0% 0.0% 0 0.0%
-6.2% 427 4.0% 28.3% 548 4.6%
-12.6% 368 3.4% 62.8% 599 5.1%
23.5% 21 0.2% 81.0% 38 0.3%
28.1% 41 0.4% 80.5% 74 0.6%
28.1% 41 0.4% 80.5% 74 0.6%
-7.4% 857 8.0% 46.9% 1,259 10.7%
164.3% 37 0.3% 21.6% 45 0.4%
-7.0% 133 1.2% -23.3% 102 0.9%
0.0% 0 0.0% 0.0% 0 0.0%
0.0% 15 0.1% 13.3% 17 0.1%
-0.6% 8,965 83.3% 10.9% 9,944 84.1%
0.0% 0 0.0% 0.0% 0 0.0%
-19.2% 375 3.5% 6.4% 399 3.4%
-20.5% 1,060 9.8% 3.6% 1,098 9.3%
0.0% 0 0.0% 0.0% 0 0.0%
0.0% 0 0.0% 0.0% 0 0.0%
0.0% 0 0.0% 0.0% 0 0.0%
0.0% 0 0.0% 0.0% 0 0.0%
-20.2% 1,435 13.3% 4.3% 1,497 12.7%
-52.2% 11 0.1% 90.9% 21 0.2%
0.0% 0 0.0% 0.0% 0 0.0%
0.0% 0 0.0% 0.0% 0 0.0%
0.0% 0 0.0% 0.0% 0 0.0%
-20.6% 1,446 13.4% 5.0% 1,518 12.8%
4.5% 7,519 69.8% 12.1% 8,426 71.3%
COMMUNITY NATIONAL BANK
16
Income statement (noninterest): PNC and Community National Bank
Dec-03 % of Dec-04 % of
Income Statement % Cha $ 1,000 Total % Cha $ 1,000 Total
Noninterest Income:
Fiduciary Activities -5.4% 291,582 6.3% 1.6% 296,226 6.1%
Deposit service charges 4.8% 422,100 9.1% 2.1% 431,169 8.8%
Trading rev, venture cap., securitize inc. 61.8% 88,985 1.9% -24.4% 67,267 1.4%
Investment banking, advisory inc. 3.5% 562,482 12.2% 32.7% 746,475 15.3%
Insurance commissions & fees -74.8% (660) 0.0% -1896% 11,856 0.2%
Net servicing fees -7.9% 35,245 0.8% 45.3% 51,212 1.0%
Loan & lease net gains (losses) -13.4% 134,969 2.9% -3.0% 130,953 2.7%
Other net gains (losses) -39.1% 10,036 0.2% -88.8% 1,124 0.0%
Other noninterest income 10.5% 474,040 10.3% 1.3% 479,982 9.8%
Total noninterest income 3.7% 2,018,779 43.7% 9.8% 2,216,264 45.4%
Adjusted Operating Income (TE) -2.5% 3,980,584 86.2% 2.6% 4,083,665 83.6%
Non-Interest Expenses:
Personnel expense 5.7% 1,112,208 24.1% 27.8% 1,421,341 29.1%
Occupancy expense 11.8% 352,506 7.6% -0.6% 350,550 7.2%
Goodwill impairment 0.0% 0 0.0% 0.0% 0 0.0%
Other Intangible Amortization -4.6% 4,006 0.1% 186.5% 11,476 0.2%
Other Oper Exp (Incl intangibles) 10.9% 956,533 20.7% 3.9% 994,122 20.3%
Total Noninterest Expenses 8.6% 2,425,253 52.5% 14.5% 2,777,489 56.8%
Provision: Loan & Lease Losses -39.1% 176,612 3.8% -70.8% 51,553 1.1%
Pretax Operating Income (TE) -11.5% 1,378,719 29.8% -9.0% 1,254,623 25.7%
Realized G/L Hld-to-Maturity Sec. 0.0% 0 0.0% 0.0% 0 0.0%
Realized G/L Avail-for-Sale Sec. 12.6% 89,786 1.9% -44.5% 49,792 1.0%
Pretax Net Operating Income (TE) -10.4% 1,468,505 31.8% -11.2% 1,304,415 26.7%
Applicable Income Taxes -13.4% 490,376 10.6% -22.1% 381,926 7.8%
Current Tax Equivalent Adjustment -26.4% 7,851 0.2% 15.4% 9,063 0.2%
Other Tax Equivalent Adjustments 0.0% 0 0.0% 0.0% 0 0.0%
Applicable Income Taxes (TE) -13.6% 498,227 10.8% -21.5% 390,989 8.0%
Net Operating Income -8.6% 970,278 21.0% -5.9% 913,426 18.7%
Net Extraordinary Items 0.0% 0 0.0% 0.0% 0 0.0%
Net Income -8.6% 970,278 21.0% -5.9% 913,426 18.7%
Cash Dividends Declared 87.5% 750,000 16.2% 6.7% 800,000 16.4%
Retained Earnings -66.7% 220,278 4.8% -48.5% 113,426 2.3%
Memo: Net International Income 0.0% 0 0.0% 0.0% 0 0.0%
Memo: Total operating income -6.7% 4,619,831 100.0% 5.8% 4,886,432 100.0%
Memo: Net operating income -2.5% 3,980,584 86.2% 2.6% 4,083,665 83.6%
PNC BANK, NATIONAL ASSOCIATION
Dec-03 % of Dec-04 % of
% Cha $ 1,000 Total % Cha $ 1,000 Total
0.0% 0 0.0% 0.0% 0 0.0%
16.7% 1,070 9.9% 30.5% 1,396 11.8%
0.0% 0 0.0% 0.0% 0 0.0%
0.0% 0 0.0% 0.0% 0 0.0%
-66.7% 1 0.0% 100.0% 2 0.0%
0.0% 0 0.0% 0.0% 0 0.0%
-100.0% 0 0.0% 0.0% 0 0.0%
-1012.5% (73) -0.7% -75.3% (18) -0.2%
-31.9% 590 5.5% -15.8% 497 4.2%
-16.6% 1,588 14.7% 18.2% 1,877 15.9%
0.1% 9,107 84.6% 13.1% 10,303 87.2%
-2.4% 4,202 39.0% 3.2% 4,335 36.7%
4.5% 1,256 11.7% 2.2% 1,284 10.9%
0.0% 0 0.0% 0.0% 0 0.0%
0.0% 11 0.1% 0.0% 11 0.1%
-2.8% 2,064 19.2% 3.3% 2,133 18.0%
-1.4% 7,533 70.0% 3.1% 7,763 65.7%
42.5% 684 6.4% -12.3% 600 5.1%
-8.9% 890 8.3% 118.0% 1,940 16.4%
0.0% 0 0.0% 0.0% 0 0.0%
110.8% 215 2.0% -100.0% 0 0.0%
2.4% 1,105 10.3% 75.6% 1,940 16.4%
-2.2% 355 3.3% 80.6% 641 5.4%
23.5% 21 0.2% 81.0% 38 0.3%
0.0% 0 0.0% 0.0% 0 0.0%
-1.1% 376 3.5% 80.6% 679 5.7%
4.3% 729 6.8% 73.0% 1,261 10.7%
0.0% 0 0.0% 0.0% 0 0.0%
4.3% 729 6.8% 73.0% 1,261 10.7%
-100.0% 0 0.0% 0.0% 0 0.0%
58.8% 729 6.8% 73.0% 1,261 10.7%
0.0% 0 0.0% 0.0% 0 0.0%
-2.3% 10,768 100.0% 9.8% 11,821 100.0%
0.1% 9,107 84.6% 13.1% 10,303 87.2%
COMMUNITY NATIONAL BANK
17
Interest income …the sum of interest and loan fees earned
on all of a bank's assets.
Interest income includes interest from:
1. Loans and leases
2. Deposits held at other institutions,
3. Investment securities
Taxable and municipal securities
4. Trading account securities
18
Noninterest income …has increased significantly and consists of fees & other revenues for services
Fiduciary activities
Deposit service charges
Trading revenue, venture cap., securitize inc.
Investment banking, advisory inc.
Insurance commissions & fees
Net servicing fees
Loan & lease net gains (losses)
Other net gains (losses)
Other noninterest income 19
Noninterest expense …composed primarily of:
Personnel expense:
Salaries and fringe benefits paid to
bank employees
Occupancy expense :
Rent and depreciation on equipment
and premises, and
Other operating expenses:
Utilities
Deposit insurance premiums 20
Noninterest expense
Expenses and loan losses directly
affect the balance sheet.
The greater the size of loan portfolio,
the greater is operating overhead and
PLL.
Consumer loans are usually smaller
and hence more costly (non-interest)
per dollar of loans.
21
Return on equity (ROE = NI / TE) … the basic measure of stockholders’ returns
ROE is composed of two parts:
Return on Assets (ROA = NI / TA),
represents the returns to the assets the
bank has invested in
Equity Multiplier (EM = TA / TE),
the degree of financial leverage
employed by the bank
22
Return on assets (ROA = NI / TA) …can be decomposed into two parts:
Asset Utilization (AU) → income generation
Expense Ratio (ER) → expense control
ROA = AU - ER
= (TR / TA) - (TE / TA)
Where:
TR = total revenue or total operating income
= Int. inc. + Non-int. inc. + SG and
TE = total expenses
= Int. exp. + Non-int. exp. + PLL + Taxes
23
ROA is driven by the bank’s ability to: …generate income (AU) and control expenses (ER)
Income generation (AU) can be found on
the UBPR (page 1) as:
TA
losses)( gainsSec
TA
Inc.int. Non.
TA
Inc.Int.AU
Expense Control (ER) can be found on the
UBPR (page 1) as:
TA
PLL
TA
.Exp.intNon
TA
.Exp.IntER *
Note, ER* does not include taxes. 24
INCOME
Return to the Bank
ROA = NI / TA
EXPENSES
Rate
Composition (mix)
Volume
Interest
Overhead
Prov. for LL
Taxes
Fees and Serv Charge
Trust
Other
Rate
Composition (mix)
Volume
Interest
Non Interest
Salaries and Benefits
Occupancy
Other
Bank Performance Model
Returns to
Shareholders
ROE = NI / TE
Degree of Leverage
EM =1 / (TE / TA) 25
Expense ratio (ER = Exp / TA) … the ability to control expenses.
Interest expense / TA
Cost per liability (avg. rate paid)
Int. exp. liab. (j) / $ amt. liab. (j)
Composition of liabilities
$ amt. of liab. (j) / TA
Volume of int. bearing debt and equity
Non-interest expense / TA
Salaries and employee benefits / TA
Occupancy expense / TA
Other operating expense / TA
Provisions for loan losses / TA
Taxes / TA 26
Asset utilization (AU = TR / TA): … the ability to generate income.
Interest Income / TA
Asset yields (avg. rate earned)
Interest income asset (i) / $ amount of asset (i)
Composition of assets (mix)
$ amount asset (i) / TA
Volume of Earning Assets
Earning assets / TA
Noninterest income / TA
Fees and Service Charges
Securities Gains (Losses)
Other income
27
Aggregate profitability measures
Net interest margin
NIM = NII / Earning Assets (EA)
Spread
Spread = (Int Inc / EA) (Int Exp / Int bear. Liab.)
Earnings base
EB = EA / TA
Burden / TA
(Noninterest Exp. - Noninterest Income) / TA
Efficiency ratio
Non int. Exp. / (Net int. Inc. + Non-int. Inc.)
28
Financial ratios …PNC and Community National Bank
UBPR for PNC
RISK RATIOS Pg # CALC BANK PG 1 CALC BANK PG 1 CALC BANK PG 4 CALC BANK PG 4
ROE: Net Income / Average total equity 11 16.90% 16.56% 14.41% 15.59% 15.26% 14.55% 5.48% 5.56% 11.56% 8.63% 8.67% 11.72%
ROA: Net Income / aTA 1 1.59% 1.59% 1.28% 1.31% 1.31% 1.31% 0.41% 0.41% 1.07% 0.63% 0.63% 1.09%
AU: Total Revenue / aTA 1 calc 7.59% 7.59% 6.45% 7.02% 7.02% 6.21% 6.10% 6.10% 6.50% 5.90% 5.91% 6.23%
ER: Total expenses (less Taxes) / aTA 1 calc 5.18% 5.17% 4.51% 5.15% 5.14% 4.23% 5.47% 5.48% 5.01% 4.93% 4.94% 4.73%
EM: aTA / Avg, Total Equity 6 calc 10.59x 10.48x 11.20x 11.59x 11.47x 10.65x 13.37x 13.76x 10.85x 13.78x 13.97x 10.67x
EB: Earning Assets / aTA 6 82.86% 82.60% 89.84% 82.85% 82.92% 90.08% 85.43% 86.74% 91.45% 86.83% 86.98% 91.76%
NIM: Net interest margin (te) 1 3.89% 3.82% 3.51% 3.32% 3.18% 3.52% 4.95% 4.80% 4.33% 4.82% 4.74% 4.36%
Spread (te) 3 calc 3.74% 3.62% 3.36% 3.15% 3.02% 3.37% 4.39% 4.25% 3.97% 4.30% 4.25% 4.04%
Efficiency Ratio 3 60.93% 60.86% 57.73% 68.01% 67.97% 57.92% 82.72% 82.75% 66.06% 75.35% 75.34% 65.99%
Burden / aTA 1 calc 0.67% 0.66% 1.12% 0.81% 0.81% 1.16% 3.37% 3.37% 2.33% 2.94% 2.94% 2.39%
Non Interest Income / Noninterest exp. 1 calc 83.24% 83.42% 62.03% 79.79% 79.70% 59.86% 21.08% 21.08% 29.18% 24.18% 24.23% 26.23%
EXPENSES:
ER*: Expense ratio (Expense components) 5.18% 5.17% 4.51% 5.15% 5.14% 4.23% 5.47% 5.48% 5.01% 4.93% 4.94% 4.73%0.00% 0.00% 0.00% 0.00%
Total Interest expense / aTA 1 0.90% 0.90% 1.29% 1.08% 1.08% 1.20% 0.82% 0.82% 1.50% 0.76% 0.76% 1.31%
Memo: Interest expense / Avg. Earn assets1 1.09% 1.07% 1.41% 1.34% 1.28% 1.31% 0.95% 0.92% 1.61% 0.87% 0.85% 1.41%
Noninterest Expenses / aTA 1 3.98% 3.98% 2.95% 3.99% 3.99% 2.89% 4.27% 4.27% 3.29% 3.88% 3.88% 3.24%
Personnel expense 3 1.83% 1.83% 1.37% 2.04% 2.04% 1.38% 2.38% 2.38% 1.79% 2.16% 2.16% 1.78%
Occupancy expense 3 0.58% 0.58% 0.38% 0.50% 0.50% 0.36% 0.71% 0.71% 0.48% 0.64% 0.64% 0.47%
Other Oper Exp (Incl intangibles) 3 1.57% 1.58% 1.13% 1.43% 1.44% 1.08% 1.17% 1.18% 1.00% 1.07% 1.07% 0.98%
Provision: Loan & Lease Losses / aTA 1 0.29% 0.29% 0.27% 0.07% 0.07% 0.14% 0.39% 0.39% 0.22% 0.30% 0.30% 0.18%
Income Taxes / aTA #N/A 0.82% 0.83% 0.66% 0.56% 0.57% 0.67% 0.21% 0.21% 0.42% 0.34% 0.34% 0.41%
INCOME:
AU: Asset Utilization (Income components): 7.59% 7.59% 6.45% 7.02% 7.02% 6.21% 6.10% 6.10% 6.50% 5.90% 5.91% 6.23%
Interest income / aTA 1 4.12% 4.12% 4.57% 3.77% 3.77% 4.46% 5.08% 5.08% 5.52% 4.97% 4.97% 5.37%
Memo: Avg, yield on earning assets 1 4.98% 4.89% 4.98% 4.66% 4.46% 4.88% 5.91% 5.73% 5.95% 5.69% 5.59% 5.78%
Noninterest income / aTA 1 3.32% 3.32% 1.83% 3.18% 3.18% 1.73% 0.90% 0.90% 0.96% 0.94% 0.94% 0.85%
Realized security gains (losses) / aTA 1 0.15% 0.15% 0.05% 0.07% 0.07% 0.02% 0.12% 0.12% 0.02% 0.00% 0.00% 0.01%
PNC BANK, NATIONAL ASSOCIATION
Dec-03 Dec-04 Dec-03
COMMUNITY NATIONAL BANK
Dec-04
29
Interest expense …composition, rate and volume effects for PNC and Community National Bank
RISK RATIOS Pg # CALC BANK PG 1 CALC BANK PG 1 CALC BANK PG 4 CALC BANK PG 4
Interest Expense: Composition, Rate and Volume Effects
Rate: Avg, interest cost of interest bearing liabilities3 1.24% 1.27% 1.62% 1.50% 1.44% 1.51% 1.51% 1.48% 1.98% 1.39% 1.34% 1.74%
Memo: Interest expense / Earning assets 1 1.09% 1.07% 1.41% 1.34% 1.28% 1.31% 0.95% 0.92% 1.61% 0.87% 0.85% 1.41%
Volume: All Interest bearing debt (avg.) / aTA 1 72.73% 70.78% 80.81% 73.70% 74.97% 80.65% 53.76% 55.17% 75.51% 54.29% 56.69% 74.88%
Mix and Cost of Individual Liabilities:*
Total deposits (avg.) / aTA: 6 73.72% 73.84% 67.79% 72.45% 72.30% 68.32% 91.72% 91.94% 85.07% 92.02% 91.96% 84.46%
Cost (rate): Int bearing Total deposits 3 1.20% 1.22% 1.39% 1.18% 1.14% 1.25% 1.52% 1.49% 1.90% 1.38% 1.33% 1.66%
Core deposits (avg.) / aTA 6 67.41% 68.16% 53.90% 64.84% 64.29% 54.64% 84.26% 84.50% 72.07% 85.00% 84.90% 71.52%
All other deposits (avg.) / aTA 6-calc 55.93% 55.41% 42.13% 53.38% 53.19% 43.03% 45.73% 45.52% 54.88% 46.77% 47.73% 53.88%
Trans (NOW&ATS) Accts (avg.) / aTA 6 2.40% 2.23% 1.81% 2.35% 2.15% 1.92% 6.55% 6.58% 10.37% 7.43% 7.02% 10.60%
Cost (rate): Trans (NOW&ATS) Acts 3 #N/A 0.90% 0.60% #N/A 0.86% 0.62% #N/A 0.29% 0.63% #N/A 0.28% 0.59%
MMDA's and other sav. Accts (avg) / aTA 6-calc 42.29% 42.15% 30.73% 41.23% 41.28% 32.75% 25.67% 25.71% 22.70% 28.07% 29.57% 22.85%
Cost (rate): Other savs deposits* 3 #N/A 0.57% 0.70% #N/A 0.60% 0.69% #N/A 0.90% 1.08% #N/A 0.98% 1.00%
Time deposits under $100M (avg.) / aTA 6 11.24% 11.03% 9.59% 9.80% 9.76% 8.36% 13.51% 13.23% 21.81% 11.27% 11.14% 20.43%
Cost (rate): All oth time dep. (CD<100M)3 #N/A 3.12% 2.41% #N/A 2.78% 2.03% #N/A 2.51% 2.80% #N/A 2.01% 2.43%
Volatile (S.T non core) liab (avg.) / aTA 10 9.85% 11.47% 23.24% 13.08% 12.11% 23.42% 8.03% 4.10% 11.90% 7.52% 4.84% 12.21%
Large CDs (inc. brokered) (avg.) / aTA 6 3.23% 3.14% 9.02% 3.67% 3.76% 8.99% 7.46% 7.44% 12.41% 7.02% 7.06% 12.39%
Cost (rate): CD's over $100M 3 3.44% 3.66% 2.38% 2.89% 2.81% 2.17% 2.83% 2.79% 2.72% 2.82% 2.78% 2.40%
Fed funds purchased & resale (avg.)/ aTA 6 0.74% 0.99% 8.16% 1.55% 3.18% 8.00% 0.56% 0.55% 1.05% 0.50% 0.55% 1.07%
Cost (rate): Fed funds pur & resale 3 2.95% 1.10% 1.15% 3.84% 1.37% 1.41% 1.10% 1.10% 0.82% 2.10% 1.75% 0.98%
Memo: All brokered deposits (avg.) / aTA 6 2.36% 2.19% 2.29% 2.81% 3.00% 2.81% 0.00% 0.00% 0.51% 0.00% 0.11% 0.84%
All common and preferred capital (avg.) / aTA 6 9.44% 9.54% 8.93% 8.63% 8.72% 9.39% 7.48% 7.27% 9.22% 7.26% 7.16% 9.37%
PNC BANK, NATIONAL ASSOCIATION
Dec-03 Dec-04 Dec-03
COMMUNITY NATIONAL BANK
Dec-04
30
Interest income …composition, rate and volume effects for PNC and Community National Bank
RISK RATIOS Pg # CALC BANK PG 1 CALC BANK PG 1 CALC BANK PG 4 CALC BANK PG 4
Interest Income: Composition, Rate and Volume Effects
Rate: Avg, yield on aTA
Memo: Avg. yield on earn. assets (rate) 1 4.98% 4.89% 4.98% 4.66% 4.46% 4.88% 5.91% 5.73% 5.95% 5.69% 5.59% 5.78%
Volume: Earn assets (avg.) / aTA 6 82.86% 82.60% 89.84% 82.85% 82.92% 90.08% 85.43% 86.74% 91.45% 86.83% 86.98% 91.76%
Non earning assets (avg.) / aTA 6-calc 17.14% 17.39% 9.75% 17.15% 17.07% 9.64% 14.57% 13.27% 8.25% 13.17% 13.03% 7.93%
Mix and Yield on Individual Assets:*
Total Loans (Gross loans - unearn inc.) (avg.) / aTA6 57.55% 57.17% 57.69% 57.13% 57.25% 58.22% 65.76% 64.10% 66.45% 62.05% 61.33% 67.80%
Yield (rate): Total Loans & Leases (te) 3 5.48% 5.48% 5.66% 5.04% 5.04% 5.47% 6.89% 6.89% 6.91% 6.90% 6.90% 6.58%
Total Investments (avg.) / aTA: 6-calc 26.33% 26.46% 26.43% 26.60% 26.52% 26.50% 20.36% 23.28% 21.82% 25.50% 26.35% 20.98%
Total investment securities (avg.) / aTA 6-calc 21.41% 21.90% 22.56% 22.12% 22.03% 23.03% 16.43% 14.97% 17.89% 20.83% 20.78% 17.81%
Yield (rate): Total invest secs. (TE) 3 3.99% 3.81% 4.18% 3.54% 3.51% 3.98% 2.94% 3.32% 4.08% 3.00% 2.92% 3.91%
Yield (rate): Total invest secs. (Book) 3 3.99% 3.81% 4.00% 3.52% 3.48% 3.84% 2.86% 3.24% 3.75% 2.91% 2.83% 3.61%
Trading account assets (avg.) / aTA 6 1.61% 1.63% 0.39% 1.92% 2.09% 0.34% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
PNC BANK, NATIONAL ASSOCIATION
Dec-03 Dec-04 Dec-03
COMMUNITY NATIONAL BANK
Dec-04
31
Fundamental risks :
Credit risk
Liquidity risk
Market risk
Operational risk
Capital or solvency risk
Legal risk
Reputational risk 32
Credit risk …the potential variation in net income and
market value of equity resulting from
nonpayment or delayed payment on loans
and securities
Three Question need to be addressed:
1. What has been the loss experience?
2. What amount of losses do we expect?
3. How prepared is the bank?
33
Credit ratios to consider
What has been the loss experience?
Net loss to average total LN&LS
Gross losses to average total LN&LS
Recoveries to avg. total LN&LS
Recoveries to prior period losses
Net losses by type of LN&LS
What amount of losses do we expect?
Non-current LN&LS to total loans
Total Past/Due LN&LS - including nonaccrual
Non-current & restruc LN&LS / Gross LN&LS
Current - Non-current & restruc/ Gr LN&LS
Past due loans by loan type 34
Credit ratios to consider (continued)
How prepared are we?
Provision for loan loss to: average
assets and average total LN&LS
LN&LS Allowance to: net losses and
total LN&LS
Earnings coverage of net loss
35
Credit risk ratios :
PNC and Community National
RISK RATIOS Pg # CALC BANK PG 1 CALC BANK PG 1 CALC BANK PG 4 CALC BANK PG 4
Credit Risk
Gross loss / Avg. tot LN&LS 7 0.73% 0.73% 0.53% 0.40% 0.40% 0.36% 0.54% 0.54% 0.26% 0.21% 0.21% 0.20%
Net loss / Avg. tot LN&LS 7 0.59% 0.59% 0.41% 0.28% 0.28% 0.25% 0.53% 0.53% 0.21% 0.20% 0.20% 0.16%
Recoveries / Avg. tot LN&LS 7 0.13% 0.13% 0.12% 0.12% 0.12% 0.11% 0.01% 0.01% 0.06% 0.02% 0.02% 0.05%
Recoveries to prior credit loss 7 19.0% 19.03% 22.26% 19.5% 19.52% 23.76% 6.7% 6.75% 29.21% 3.1% 3.08% 24.53%0.00% #NA 0.00% #NA 0.00% #NA 0.00% #NA
90 days past due / EOP LN&LS 8A 0.21% 0.21% 0.13% 0.13% 0.13% 0.10% 0.16% 0.16% 0.13% 0.00% 0.00% 0.10%
total Nonaccrual LN&LS / EOP LN&LS 8A 0.79% 0.79% 0.66% 0.33% 0.33% 0.46% 0.19% 0.19% 0.47% 0.16% 0.16% 0.41%
total Noncurrent / EOP LN&LS 8A 1.00% 1.00% 0.83% 0.46% 0.46% 0.59% 0.35% 0.35% 0.66% 0.16% 0.16% 0.55% #NA #NA #NA #NA
LN&LS Allowance to total LN&LS 7 1.77% 1.78% 1.44% 1.34% 1.35% 1.27% 1.07% 1.07% 1.25% 1.23% 1.23% 1.20%
LN&LS Allowance / Net losses 7 2.9x 2.92x 4.18x 5.2x 5.23x 7.51x 2.1x 2.08x 11.89x 6.7x 6.71x 14.52x
LN&LS Allowance / total nonaccural LN&LS7 1.77x 2.24x 2.73x 2.92x 4.12x 3.73x 3.05x 5.49x 4.35x 7.77x 7.77x 5.63x
Earn Coverage of net losses 7 7.44x 7.44x 10.92x 11.61x 11.61x 19.94x 2.57x 2.57x 23.89x 10.38x 10.38x 30.80x
Net Loan and lease growth rate 1 -4.55% -4.55% 10.14% 27.51% 27.51% 17.96% 2.16% 2.16% 11.61% 11.49% 11.49% 14.24%0.00% 0.00% 0.00% 0.00%
PNC BANK, NATIONAL ASSOCIATION
Dec-03 Dec-04 Dec-03
COMMUNITY NATIONAL BANK
Dec-04
36
Liquidity risk …the variation in net income and market value of equity caused by a bank's difficulty in obtaining cash at a reasonable cost from either the sale of assets or new borrowings Banks can acquire liquidity in two distinct
ways:
1. By liquidation of assets
Composition of loans & investments
Maturity of loans & investments
Percent of loans and investments pledged
as collateral
2. By borrowing
Core deposits
Volatile deposits
Asset quality & stockholders’ equity 37
Liquidity risk ratios :
PNC and Community National
RISK RATIOS Pg # CALC BANK PG 1 CALC BANK PG 1 CALC BANK PG 4 CALC BANK PG 40.00% 0.00% 0.00% 0.00%
Liquidity Risk
%Total (EOP) Assets (except where noted)
Total equity 11 9.07% 9.07% 8.95% 8.26% 8.26% 9.74% 7.29% 7.29% 9.28% 7.23% 7.23% 9.42%
Core deposits 10 67.41% 66.75% 53.75% 64.84% 63.23% 54.19% 84.26% 84.95% 71.85% 85.00% 85.04% 71.10%
S.T Non-core funding 10 #N/A 11.47% 23.24% #N/A 12.11% 23.42% #N/A 4.10% 11.90% #N/A 4.84% 12.21%
Net loans & leases / Total Deposits 10 73.73% 73.73% 87.72% 81.00% 81.00% 88.28% 65.90% 65.90% 78.94% 67.35% 67.35% 81.42%
Net loans & leases / Core Deposits 10 81.11% 81.11% 115.16% 91.76% 91.76% 116.10% 71.36% 71.36% 93.85% 72.89% 72.89% 97.58%
Avg. Available for sale securities / aTA 6 21.41% 21.90% 21.11% 22.12% 22.03% 21.00% 14.44% 13.39% 15.88% 19.38% 19.04% 15.80%
Short-term investments 10 #N/A 2.73% 6.25% #N/A 3.02% 5.23% #N/A 5.99% 5.41% #N/A 5.72% 5.26%
Pledged securities 10 #N/A 46.50% 49.08% #N/A 51.76% 54.78% #N/A 29.25% 40.34% #N/A 28.49% 41.20%0.00% 0.00% 0.00% 0.00%
PNC BANK, NATIONAL ASSOCIATION
Dec-03 Dec-04 Dec-03
COMMUNITY NATIONAL BANK
Dec-04
38
Market risk …the risk to a financial institution’s
condition resulting from adverse movements
in market rates or prices
Market risk arises from changes in:
Interest rates
Foreign exchange rates
Equity, commodity and security prices
39
Interest rate risk …the potential variability in a bank's net
interest income and market value of equity
due to changes in the level of market
interest rates
Example: $10,000 Car loan
4 year fixed-rate car loan at 8.5% 1 year CD at 4.5% Spread 4.0%
But for How long?
Funding GAP
GAP = $RSA - $RSL,
where $RSA = $ amount of assets expected to reprice in a give period of time.
In this example:
GAP1yr = $0 - $10,000 = - $10,000
This is a negative GAP.
40
Foreign exchange risk … the risk to a financial institution’s
condition resulting from adverse movements
in foreign exchange rates
Foreign exchange risk arises from changes in foreign exchange rates that affect the values of assets, liabilities, and off-balance sheet activities denominated in currencies different from the bank’s domestic (home) currency.
This risk is also often found in off-balance sheet loan commitments and guarantees denominated in foreign currencies; foreign currency translation risk 41
Equity and security price risk …change in market prices, interest rates and foreign exchange rates affect the market values of equities, fixed income securities, foreign currency holdings, and associated derivative and other off-balance sheet contracts. Large banks must conduct value-at-
risk analysis to assess the risk of loss
with their trading account portfolios.
42
Operational risk …measures the cost efficiency of the bank's activities; i.e., expense control or productivity; also measures whether the bank has the proper procedures and systems in place .
Typical ratios focus on:
total assets per employee
total personnel expense per employee
Non-interest expense ratio
There is no meaningful way to estimate the
likelihood of fraud or other contingencies
from published data.
A bank’s operating risk is closely related to
its operating policies and processes and
whether is has adequate controls. 43
Operational risk ratios:
PNC and Community National
RISK RATIOS Pg # CALC BANK PG 1 CALC BANK PG 1 CALC BANK PG 4 CALC BANK PG 40.00% 0.00% 0.00% 0.00%
Operational Risk
Total Assets / Number of employees 3 $4.09 4.02$ 5.17$ $4.71 4.44$ 6.09$ $3.00 2.75$ 2.95$ $2.98 2.84$ 3.08$
Personnel expense / number of employees 3 73.43x 72.06x 60.48x 90.68x 85.48x 65.26x 65.46x 60.03x 48.27x 61.47x 58.58x 50.10x
Efficiency ratio 3 60.93% 60.86% 57.73% 68.01% 67.97% 57.92% 82.72% 82.75% 66.06% 75.35% 75.34% 65.99%
PNC BANK, NATIONAL ASSOCIATION
Dec-03 Dec-04 Dec-03
COMMUNITY NATIONAL BANK
Dec-04
44
Capital risk … closely tied to asset quality and a bank's
overall risk profile
The more risk taken, the greater is the amount of capital required.
Appropriate risk measures include all the risk measures discussed earlier as well as ratios measuring the ratio of: Tier 1 capital and total risk based capital to
risk weighted assets
Equity capital to total assets
Dividend payout, and growth rate in tier 1 capital
45
Definitions of capital
Tier 1 capital is: Total common equity capital plus
noncumulative preferred stock, plus minority interest in unconsolidated subsidiaries, less ineligible intangibles.
Risk-weighted assets are: The total of risk-adjusted assets where the
risk weights are based on four risk classes of assets.
Importantly, a bank's dividend policy affects its capital risk by influencing retained earnings.
46
Capital risk ratios :
PNC and Community National
RISK RATIOS Pg # CALC BANK PG 1 CALC BANK PG 1 CALC BANK PG 4 CALC BANK PG 40.00% 0.00% 0.00% 0.00%
Capital Risk
Tier 1 Leverage Capital / Total Assets 11A 8.28% 8.37% 7.67% 6.89% 7.14% 7.71% 7.27% 7.31% 8.97% 7.27% 7.29% 9.11%
Tier 1 Capital / Risk-weighted assets 11A 9.91% 9.89% 11.13% 8.65% 8.36% 11.17% 10.73% 10.73% 12.64% 10.27% 10.27% 12.64%
Total RBC / Risk weighted Assets 11A 12.91% 12.89% 13.08% 11.95% 11.55% 12.98% 11.70% 11.70% 13.80% 11.35% 11.35% 13.76%
Equity Capital / Total Assets 11 9.07% 9.07% 8.95% 8.26% 8.26% 9.74% 7.29% 7.29% 9.28% 7.23% 7.23% 9.42%
Dividend Payout 11 77.30% 77.30% 57.26% 87.58% 87.58% 46.73% 0.00% 0.00% 30.77% 0.00% 0.00% 29.34%
Growth rate in total equity capital 11 -4.09% -4.09% 10.34% 8.42% 8.42% 20.28% 11.99% 11.99% 10.99% 8.20% 8.20% 11.32%
Equity growth less asset growth 11 -8.09% -8.09% 0.59% -10.59% -10.59% 4.55% -6.56% -6.56% 0.41% -0.83% -0.83% 0.28%0.00% 0.00% 0.00% 0.00%
PNC BANK, NATIONAL ASSOCIATION
Dec-03 Dec-04 Dec-03
COMMUNITY NATIONAL BANK
Dec-04
47
Legal risk …the potential that unenforceable contracts,
lawsuits, or adverse judgments can disrupt or
otherwise negatively affect the operations or
condition of the banking organization
Legal risk includes:
Compliance risks
Strategic risks
General liability issues
48
Reputational risk
Reputational risk is the potential that
negative publicity regarding an
institution’s business practices,
whether true or not, will cause a
decline in the customer base, costly
litigation, or revenue reductions.
49
Strategies for Maximizing
Shareholder Wealth
Asset Management
Composition and Volume
Liability Management
Composition and Volume
Management of off-balance sheet activities
Net interest margin management
Credit risk management
Liquidity management
Management of non-interest expense
Securities gains/losses management
Tax management 50
CAMELS
Capital Adequacy
Measures bank’s ability to maintain capital commensurate with the bank’s risk
Asset Quality
Reflects the amount of credit risk with the loan and investment portfolios
Management Quality
Reflects management’s ability to identify, measure, monitor, and control risks
51
CAMELS (continued)
Earnings
Reflects the quantity, trend, and quality
of earnings
Liquidity
Reflects the sources of liquidity and
funds management practices
Sensitivity to market risk
Reflects the degree to which changes
in market prices and rates adversely
affect earnings and capital 52
CAMELS Ratings
Regulators assign a rating of 1 (best)
to 5 (worst) in each of the six
categories and an overall composite
rating
1 or 2 indicates a fundamentally sound
bank
3 indicates that a bank shows some
underlying weakness that should be
corrected
4 or 5 indicates a problem bank 53
Average Performance Characteristics of
Banks by Business Concentration and Size
ROE and ROA (up to $10 billion in assets) increases with bank size
Employees per dollar of assets decreases with bank size
Larger banks have lower efficiency ratios than smaller banks
Smaller banks:
have proportionately more core deposits and fewer volatile liabilities than larger banks
have a proportionately larger earnings base than larger banks
have proportionately lower charge-offs than larger banks
54
Bank Performance Measure by Size
Assets Size < $100M
$100M -
$1B
$1B -
$10B > $10B
Trend
with Size
All
Commercial
Banks
Number of institutions reporting 3,655 3,530 360 85 7,630
% of unprofitable institutions 9.80 2.00 1.90 1.20 5.70
% of institutions with earn gains 59.30 70.70 71.90 68.20 then 65.30
Performance ratios (%)
Return on equity 8.46 12.88 13.48 14.24 generally 13.82
Return on assets 0.99 1.28 1.46 1.30 then 1.31
Pretax ROA 1.24 1.73 2.21 1.93 then 1.92
Equity capital ratio 11.52 10.00 10.90 9.95 10.10
Net interest margin 4.18 4.22 4.00 3.43 3.61
Yield on earning assets 5.65 5.73 5.39 4.83 5.02
Cost of funding earn assets 1.47 1.51 1.39 1.40 1.41
Earning assets to total assets 91.86 91.93 91.01 84.39 86.18
Efficiency ratio 69.54 62.22 55.54 57.42 57.96
Burden ratio 2.60 2.07 1.21 0.82 1.06
Noninterest inc to earn assets 1.03 1.54 2.46 2.93 2.66
Noninterest exp to earn assets 3.63 3.61 3.67 3.75 3.72
Net charge-offs to LN&LS 0.27 0.31 0.43 0.73 0.63
LN&LS loss provision to assets 0.22 0.26 0.34 0.34 0.33
55
Bank Risk Measures by Size
Assets Size < $100M
$100M -
$1B
$1B -
$10B > $10B
Trend
with Size
All
Commercial
Banks
Asset Quality
Net charge-offs to LN&LS 0.27 0.31 0.43 0.73 0.63
Loss allow to Noncurr LN&LS 151.5 196.2 206.0 168.0 then 174.6
LN&LS provision to net charge-offs 134.2 125.7 125.5 83.0 89.9
Loss allowance to LN&LS 1.44 1.39 1.47 1.53 1.50
Net LN&LS to deposits 72.67 82.11 92.82 86.68 then 86.38
Capital Ratios
Core capital (leverage) ratio 11.31 9.47 9.36 7.23 7.83
Tier 1 risk-based capital ratio 16.83 12.85 12.34 9.11 10.04
Total risk-based capital ratio 17.93 14.06 13.92 12.07 12.62
Structural Changes
New Charters 118 2 1 1 122
Banks absorbed by mergers 102 125 30 7 264
Failed banks 3 0 0 0 3
56
Performance Characteristics of Banks
by Business Concentration and Size
Wholesale Banks
Focus on loans for the largest commercial customers and purchase substantial funds from corporate and government depositors
Retail Banks
Focus on consumer, small business, mortgage, and agriculture loans and obtain deposits form individuals and small businesses
57
Profitability Measures of Banks by Business Concentration
Asset Concentration Groups
All
Institu Credit
Card
Inter -
national
Ag.
Lending
Comm-
ercial
Lending
Mort -
gage
Con –
summer
Lending
Other
spec. <
$1B
All
Other
<$1B
All
Other
> $1B
# of institutions reporting 8,975 34 5 1,730 4,424 990 132 465 1,120 75
Commercial banks 7,630 30 5 1,725 4,019 250 101 414 1,026 60
Savings institutions 1,345 4 0 5 405 740 31 51 94 15
Performance ratios (%)
Return on equity 13.28 22.16 10.35 11.45 13.48 11.61 16.81 10.03 10.18 13.69
Return on assets 1.29 4.01 0.76 1.23 1.30 1.18 1.66 1.66 1.10 1.35
Pretax ROA 1.90 6.21 1.09 1.51 1.89 1.81 2.56 2.43 1.41 1.98
Equity capital ratio 10.28 20.52 8.05 10.79 10.09 10.55 11.36 16.94 10.79 10.25
Net interest margin 3.53 9.05 2.50 4.07 3.86 3.05 4.71 3.20 3.86 3.27
Yield on earning assets 5.02 11.25 4.02 5.68 5.26 4.80 6.88 4.54 5.40 4.54
Cost of funding earn assets 1.49 2.20 1.52 1.61 1.40 1.75 2.17 1.33 1.53 1.27
Earning assets to total assets 87.13 82.95 81.47 91.91 90.18 92.17 90.73 88.93 92.11 84.36
Efficiency ratio 58.03 45.29 70.16 62.07 57.10 56.46 45.53 72.42 66.92 57.71
Burden 0.97 -2.15 0.75 2.08 1.40 1.07 0.78 0.34 2.01 0.84
Noninterest inc to earn assets 2.13 11.18 2.51 0.69 1.51 1.20 2.26 6.55 1.16 1.96
Noninterest exp to earn assets 3.10 9.03 3.26 2.77 2.91 2.27 3.04 6.89 3.17 2.80
LN&LS loss provision to assets 0.30 3.96 0.25 0.16 0.22 0.08 1.05 0.11 0.17 0.07
58
Risk Measures of Banks by Business Concentration
Asset Concentration Groups
All
Institu Credit
Card
Inter -
national
Ag.
Lending
Comm-
ercial
Lending
Mort -
gage
Con –
summer
Lending
Other
spec. <
$1B
All
Other
<$1B
All
Other
> $1B
Asset Quality
Net charge-offs to LN&LS 0.56 4.67 0.91 0.21 0.30 0.12 1.57 0.59 0.31 0.25
Loss allow to Noncurr LN&LS 167.8 215.8 135.3 156.7 206.3 97.1 259.4 168.4 155.3 156.3
LN&LS provs. to net charge-offs 90.6 108.8 63.1 118.3 105.2 100.2 85.5 67.3 99.4 52.0
Loss allowance to LN&LS 1.34 4.27 1.74 1.43 1.30 0.53 1.66 1.66 1.34 1.16
Net LN&LS to deposits 91.69 239.79 69.91 76.64 93.90 120.82 135.96 33.54 67.56 80.51
Capital Ratios
Core capital (leverage) ratio 8.12 16.64 6.05 10.37 8.29 9.10 8.82 15.17 10.38 7.20
Tier 1 risk-based capital ratio 10.76 14.59 8.38 14.71 10.14 15.36 13.07 34.70 17.32 9.45
Total risk-based capital ratio 13.19 17.34 12.03 15.82 12.18 16.86 14.62 35.95 18.55 12.12
Structural Changes
New Charters 128 0 0 5 35 4 1 77 5 1
Banks absorbed by mergers 322 1 2 24 210 26 13 6 20 20
Failed institutions 4 0 0 0 3 0 0 0 1 0
SOURCE: FDIC Quarterly Banking Profile, http://www.fdic.gov/, http://www2.fdic.gov/qbp.
59
Financial Statement Manipulation
Off-balance sheet activities
Enron and “Special-Purpose Vehicles”
Window dressing
Eliminate Fed borrowing prior to
financial statement reporting date
Increase asset size prior to year-end
Preferred stock
Meets capital requirements but causes
NIM, NI, ROE, and ROA to be
overstated 60
Financial Statement Manipulation
(continued)
Non-performing loans
Banks may lend borrower funds to
make payments on past due loans,
understating non-performance status
Allowance for loan losses
Management discretion and IRS
regulations may be in conflict
61
Securities gains and losses
Banks often classify all investment
securities as “available for sale,”
overstating any true “gains or losses”
Non-recurring sales of assets
This type of transaction is not part of
the bank’s daily activities and typically
cannot be repeated; thus it overstates
earnings
Financial Statement Manipulation (continued)
62
William Chittenden edited and updated the PowerPoint slides for this edition.
ANALYZING BANK
PERFORMANCE:
USING THE UBPR
Chapter 2
Bank Management, 6th edition. Timothy W. Koch and S. Scott MacDonald Copyright © 2006 by South-Western, a division of Thomson Learning
84