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Bank Financials 101 2014 “Needle Movers”

Bank Financials 101 2014 “Needle Movers”. Today’s Agenda. The “business” of banking – how Banks make money Financial statements How each area can impact financial results. What is the basic business of a Bank?. What are a Bank’s products:. What do Banks “Sell”? Assets? Loans

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Bank Financials 101 2014 “Needle Movers”

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  1. Bank Financials 101 2014 “Needle Movers”

  2. Today’s Agenda • The “business” of banking – how Banks make money • Financial statements • How each area can impact financial results.

  3. What is the basic business of a Bank?

  4. What are a Bank’s products: What do Banks “Sell”? • Assets? • Loans • Investments • Liabilities? • Checking accounts • Savings / NOW accounts • CDs, etc. • Wholesale Funds (brokered CDs, FHLB) • Both Assets & Liabilities?

  5. The basic business of a Bank: A Bank is a Financial Intermediary that buys and sellsmoney

  6. Basic Bank Income Statement: Revenues: Interest Income (loans & investments) Less: Interest Expense (deposits & borrowings) ________________________________ Net Interest Income (NII) Less: Provision for Loan Losses Plus: Other Income (Fees, etc.) Less: Operating Expense ___________________________ Net Income Before Taxes Less: Taxes ________________________________ Net Income ________________________________ ________________________________ Asset/Liability Management: Primary Focus

  7. A more detailed look at Net Interest Income (NII) NII comprises between 75% and 90% of total income for most community banks. NII is a function of: • Yield on assets (mix and rates) • Cost of funds (mix and rates) • Size of balance sheet (volume)

  8. 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%

  9. A bank’s goal is to Maximize NII (over both the short and long run) while managing levels of: • Liquidity • Interest Rate Risk • Capital Adequacy

  10. Liquidity Defined The ability of the Bank to raise money quickly at a reasonable cost and with minimal principal loss

  11. Why is liquidity important to a Bank? • Repay depositors • Make loans and investments • Money is our raw material!

  12. 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

  13. Concluding comments on liquidity A Bank’s success in obtaining liquidity and the role of wholesale funding will impact its: • Deposit pricing • Loan strategy • Investment strategy • Growth strategy • And, therefore, its earnings!

  14. 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

  15. 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

  16. 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.

  17. 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

  18. 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.

  19. Questions? Needle Movers

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