Bank Financials 101

2014

“Needle Movers”

Today’s Agenda

1. The “business” of banking – how Banks make money

2. Financial statements

3. How each area can impact financial results.

What is the basic business

of a Bank?

What are a Bank’s products:

What do Banks “Sell”?• Assets?

LoansInvestments

• Liabilities?Checking accountsSavings / NOW accountsCDs, etc.Wholesale Funds (brokered CDs, FHLB)

• Both Assets & Liabilities?

The basic business of a Bank:

A Bank is a

Financial Intermediary

that buys and sells money

Basic Bank Income Statement:

Revenues: Interest Income (loans & investments)Less: Interest Expense (deposits & borrowings)

________________________________Net Interest Income (NII)

Less: Provision for Loan LossesPlus: Other Income (Fees, etc.)Less: Operating Expense

___________________________Net Income Before Taxes

Less: Taxes________________________________Net Income________________________________________________________________

Asset/LiabilityManagement:Primary Focus

A more detailed look at Net Interest Income (NII)

NII comprises between 75% and 90% oftotal income for most community banks.

NII is a function of:

• Yield on assets (mix and rates)

• Cost of funds (mix and rates)

• Size of balance sheet (volume)

Net Interest Calculations

• Net interest spread calculation– Average yield on earnings Assets 4.46%

– Average cost of funds on liabilities (1.67)%

– Net interest spread 2.79%

• Net interest margin calculation– Net interest income $15,856,555

– Average earning asset $528,605,076

– Net interest margin = 3.05%

A bank’s goal is to Maximize NII (overboth the short and long run) whilemanaging levels of:

Liquidity

Interest Rate Risk

Capital Adequacy

Liquidity Defined

The ability of the Bank to raise

money quickly at a reasonable cost

and with minimal principal loss

Why is liquidity important to a Bank?

• Repay depositors

• Make loans and investments

• Money is our raw material!

Where does a Bank get its“raw material”?

• Core deposits• “Non-core” deposits• Wholesale sources of funds:

– FHLB– Brokered CD’s– National Market CD’s– Repurchase Agreements– CDARS

Concluding comments on liquidity

A Bank’s success in obtaining liquidity and therole of wholesale funding will impactwill impact its:

• Deposit pricing

• Loan strategy

• Investment strategy

• Growth strategy

• And, therefore, its earningsits earnings!

What types of “non-interest income” do Banks generate?

• Fees on deposit relationships (service charges & NSF charges) and other services (safe deposit, etc.)

• Fees on trust & investment relationships (Wealth Management)

• Gains on the sale of loans• “Other” non-interest income (International Fees,

BOLI, Visa Check Card Fees and ATM Fees, etc.)

• Mortgage loan and related fees

What types of “non-interest expense” do Banks incur?

• Salaries and benefits• Occupancy costs & FFE costs• Professional and data processing fees• Insurance & regulatory• Loan / Lease• Postage and telephone• Advertising and marketing• Stationery and supplies• Bank service charges

Loan pricing example:15 year fixed rate Mortgage-$250,000

Interest collected (life of the loan)Loan rate 5.00%Interest collected $105,856

Loan rate 4.85%Interest collected $102,350

Loan rate 4.50%Interest collected $94,246

10 similar loans 15bps higher generates an extra $35,000 of interest income for the Bank.

HELOC $50,000 balanceassuming no rate change

• Interest collected (each year)

Loan rate 6.00%

Interest collected $3,000

Loan rate 5.00%

Interest collected $2,500

Loan rate 4.00%

Interest collected $2,000

Deposit pricing example:$500,000 Money Market

Interest Paid (per year)Deposit rate 0.55% Interest paid $2,750

Deposit rate 0.45% Interest paid $2,250

Deposit rate 0.25% Interest paid $1,250

We want to price deposits at or below rates we can get wholesale funding for.

Needle Movers

Questions?