Turning Bank Financial
Statements into Useful
Ratios & Trends
November 2014
Presented by: Timothy P. Harrington, CPA
T.E.A.M. Resources
7049 Tanque Verde Road, PMB 136
Tucson, AZ 85715
800-788-9542 e-mail: tharrington@forTeamResources.com
Disclaimer
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Sponsors
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Alabama Bankers Association
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Arkansas Community Bankers
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California Independent Bankers
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Independent Bankers of Colorado
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Florida Bankers Association
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Community Bankers Association of Georgia
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Directed by
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About Timothy Harrington, CPA
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26 years Financial Institution experience
34 years business/consulting experience
Consulted on over 1,000 projects
Speaker at over 1,000 events
Faculty of 3 National Financial Schools
4
SAMPLE BANK
12/31/2012
12/31/2013
Cash and Due from Banks
Fed Funds Sold
Deposits at Financial Institutions
Other Cash & Cash Equivalents
Cash and Cash Equivalents
Trading Account Securities
Available for Sale Securities
Held to Maturity Securities
Other Securities
Total Cash & Securities
223,532
2,994
315,053
2,208
543,787
3,747
2,625,229
4,541
40,376
3,217,680
178,685
109
611,224
405
790,423
5,958
1,790,978
5,563
37,618
2,630,540
Gross Loans Held for Investment
Loan Loss Reserve
Loans Held for Sale, before Reserves
Total Net Loans
7,176,433
(103,666)
320,132
7,392,899
7,728,166
(95,085)
104,664
7,737,745
Balance Sheet
Balance
Sheet
Assets (000)
Assets
Earning
Assets
Real Estate Owned and Held for Investment
Goodwill
Intangible Assets other than Goodwill
Total Intangible Assets
Loan Servicing Rights
Fixed Assets
Interest Receivable
Prepaid Expense
Bank-owned Life Insurance
Other Assets
Total Other Assets
TOTAL ASSETS
28,724
25,000
668,172
17,159
685,331
764,305
12,378
776,683
27,428
162,667
26,998
12,307
93,831
147,080
442,883
11,795,443
47,765
177,680
23,720
610
96,938
119,431
417,769
11,636,112
5
SAMPLE BANK
Balance
Sheet
Liabilities and
Equity (Capital)
12/31/2012
12/31/2013
$2,529,590
$3,794,855
$3,054,830
$9,379,275
$3,396,328
$3,773,799
$1,946,594
$9,117,660
$390,680
$196,066
$586,746
$476,376
$189,173
$665,549
$105,383
$10,071,404
$125,477
$9,908,686
Balance Sheet
Liabilities and Equity (000)
Liabilities (000)
Transaction Deposits
MMDA and Sacings Deposits
Time Deposits
Total Deposits
FHLB Borrowings
Total Subordinated Debt
Total Debt
Total Other Liabilities
Total Liabilities
Equity ($000)
Total Preferred Equity
Common Stock
Surplus
Undivided Profits
Total Shareholder Equity
Net Unrealized Gain
Total Equity
TOTAL LIABILITIES AND EQUITY
$0
$0
$1,073,616
$406,514
$219,839
$1,699,963
$24,346
$1,724,309
$11,795,713
$1,073,616
$406,514
$317,412
$1,797,542
($70,116)
$1,727,426
$11,636,112
6
SAMPLE BANK
12/31/2012
12/31/2013
Interest Income
$
456,085
$
442,846
Interest Expense
Net Interest Income
$
$
(48,849)
407,236
$
$
(37,881)
404,965
Provision for Loan Losses
$
(29,201)
$
(10,716)
Compensation & Benefits
Occupancy & Equipment
Marketing and Promotion Expense
Professional Fees
Tech & Communications Expense
Amrt of Intang & Goodwill Impair
Foreclosure & Repo
Other Expense
Total Noninterest Expense
$ 200,946
$
55,081
$
5,064
$
10,724
$
11,573
$
4,816
$
12,655
$
56,455
$ (357,314)
$ 209,991
$
62,067
$
6,062
$
10,114
$
11,974
$
4,781
$
1,248
$
49,588
$ (355,825)
Other Income
Trading Account Income
Service Charges on Deposits
Gain on Sale of Loans
Bank-owned Life Insurance Revenue
Insurance Revenue
Investment Banking & Brokerage
Other Noninterest Income
Total Noninterest Income
Realized Gain on Securities
Nonrecurring Revenue
Nonrecurring Expense
$
6,137
$
28,299
$
91,945
$
2,708
$
739
$
12,967
$ (13,334)
$ 129,461
$
3,868
$
3,500
$
(2,338)
$
7,737
$
30,952
$
65,644
$
3,053
$
1,000
$
14,736
$
(3,690)
$ 119,432
$
209
$
1,800
$
(8,836)
Total Other Income
$
134,491
$
112,605
Net Income before Taxes
Provision for Taxes
Effective Tax Rate (%)
$
$
155,212
(53,321)
34.35%
$
$
151,029
(52,668)
34.87%
$ 101,891
$
(682)
$ 101,209
$
$
$
98,361
(788)
97,573
Income Statement (000)
Income
Statement
Revenues and
Expenses
40
6 Net Income
37 Other Changes to Net Income
43 Net Income Avail to Common
5
12
7
Balance Sheet
Income Statement
ASSETS
LIABILITIES & CAPITAL
EARNING ASSETS
MISCELLANEOUS
LIABILITIES
REVENUE
Cash
Loan Interest Income
Loans
Less Allowance for Loan and
Lease Losses
Investment Interest Income
Fees and Other Non-Interest
DEPOSITS
Income
EXPENSES
Investments
Occupancy
Personnel
Provision for Loan Losses
Held -to-Maturity
Available-for-Sale
Trading
Less allowance for unrealized
Gains or Losses in Invest's
BORROWED
FUNDS
COST OF FUNDS
Interest Expense
EQUITY CAPITAL
Interest Paid in Deposits
Interest Paid on Borrowed Funds
NON-EARNING ASSETS
Perpetual Preferred Stock
Common Stock (at par)
Building, Equipment, etc.
Other Assets
Surplus (in excess of par)
Unidivided Profits
NET INCOME or LOSS
8
Balance Sheet
Income Statement
ASSETS
LIABILITIES & CAPITAL
EARNING ASSETS
MISCELLANEOUS
LIABILITIES
REVENUE
Cash
Loan Interest Income
Loans
Earns
Less Allowance for Loan and
Lease Losses
Have
Owe
Investment Interest Income
Fees and Other Non-Interest
DEPOSITS
Income
EXPENSES
Pays
Investments
Occupancy
Personnel
Provision for Loan Losses
Held -to-Maturity
Available-for-Sale
Trading
Less allowance for unrealized
Gains or Losses in Invest's
BORROWED
FUNDS
COST OF FUNDS
Interest Expense
EQUITY CAPITAL
NON-EARNING ASSETS
Own
Interest Paid in Deposits
Interest Paid on Borrowed Funds
Perpetual Preferred Stock
Common Stock (at par)
Building, Equipment, etc.
Other Assets
Surplus (in excess of par)
Unidivided Profits
NET INCOME or LOSS
9
Balance Sheet
Income Statement
ASSETS
LIABILITIES & CAPITAL
EARNING ASSETS
MISCELLANEOUS
LIABILITIES
REVENUE
Cash
Loan Interest Income
Loans
Less Allowance for Loan and
Lease Losses
Investment Interest Income
Fees and Other Non-Interest
DEPOSITS
Income
EXPENSES
Investments
Occupancy
Personnel
Provision for Loan Losses
Held -to-Maturity
Available-for-Sale
Trading
Less allowance for unrealized
Gains or Losses in Invest's
BORROWED
FUNDS
COST OF FUNDS
Interest Expense
EQUITY CAPITAL
Interest Paid in Deposits
Interest Paid on Borrowed Funds
NON-EARNING ASSETS
Perpetual Preferred Stock
Common Stock (at par)
Building, Equipment, etc.
Other Assets
Surplus (in excess of par)
Unidivided Profits
NET INCOME or LOSS
10
ROA and Spread Analysis
(aka: Net Interest Margin Analysis)
Measures: Profitability and how it was attained
Formula: Each of the key balances on the Income Statement
is divided by Average Assets (for simplicity, we will use
Total Assets in our example instead of Average Assets)
The Spread Analysis is a ratio of key balances on the Income
Statement compared to the bank’s Average Total Assets.
This allows a comparison between periods and between
financial institutions based on their asset size.
Since banks earn most of their revenue from their major,
earning assets (Loans and Investments) and one of their
highest expenses is often from their major liability
(Deposits), measuring the effect of the Income Statement
against the size of the Assets makes sense. This is a
standard banking measure.
11
Profitability
How we earn profit
How we measure it
Spread Analysis:
Simply dividing the Income Statement
amounts by Average Assets
12
Which bank is doing better?
Why we use comparable ratios
Interest income
Cost of funds
Net Interest
Operating costs (Burden)
Provision for loan losses
Net loss before other income
NII – Non-interest income
Tax Expense
Net Profit or Loss
10 Bil bank 100 Mil bank
$ 496,000,000 4,630,000
(175,000,000) (640,000)
321,000,000 3,990,000
(329,000,000) (3,320,000)
(111,000,000) (440,000)
(120,000,000) 230,000
136,000,000
780,000
(2,000,000) (320,000)
$ 14,000,000
690,000
13
Total Equity
$ 500,000,000 $10,000,000
Which bank is doing better?
Spread with ROA (ROAA)
As a % of Average Assets
Yield:
Interest income
Less:
Cost of funds
Net Interest Margin (NIM-Spread)
Less:
Non-Interest Exp (Burden)
Less:
Provision for loan losses
Net loss before other income
Plus:
NII-Non-interest income
Less:
Tax Expense
Equals: Return on Assets (ROA)
Equity Ratio
$10 Bil
3.96%
(0.75% )
3.21%
(3.29%)
(1.11%)
(1.20%)
1.36%
(0.02%)
0.14%
$100 Mil
4.63%
(0.64%)
3.99%
(3.32%)
(0.44%)
0.23%
0.78%
(0.32%)
0.69%
14
5.00%
10.00%
The ‘Banking’ Business
Banks make money 2 ways:
• Interest Income
• Non-Interest Income (Other Income)
Banks spend money 4 ways:
• Cost of Funds, Deposits and Borrowings
• Non-Interest Expenses (cost of people, buildings,
and systems)
• Provision for Loan Losses (cost of building the
Allowance for Loan Losses)
• Taxes
15
Spread
Commercial Banks $1 Bil to $100 Mil
As a % of Average Assets
6/30/14
12/31/97
Yield: Interest income
Less: Cost of funds
Net Interest Margin
Less: Non-interest expense
Less: Provision for loan losses
Net loss before other income
Plus: Non-interest income
Less: Taxes
Equals: Net Profit or Loss (ROA)
4.21%
(0.48%)
3.73%
(3.05%)
(0.12%)
0.56%
0.66%
(0.23%)
0.99%
8.39
(3.70)
4.69
(3.56)
(0.29)
0.84
1.13
(0.64)
1.33
16
Source: FDIC
17
Net Interest Margin: All US Banks
18
Source: FDIC
19
ROA: All US Banks
20
21
Let’s Calculate Spread
SAMPLE BANK
12/31/2012
12/31/2013
Cash and Due from Banks
Fed Funds Sold
Deposits at Financial Institutions
Other Cash & Cash Equivalents
Cash and Cash Equivalents
Trading Account Securities
Available for Sale Securities
Held to Maturity Securities
Other Securities
Total Cash & Securities
223,532
2,994
315,053
2,208
543,787
3,747
2,625,229
4,541
40,376
3,217,680
178,685
109
611,224
405
790,423
5,958
1,790,978
5,563
37,618
2,630,540
Gross Loans Held for Investment
Loan Loss Reserve
Loans Held for Sale, before Reserves
Total Net Loans
7,176,433
(103,666)
320,132
7,392,899
7,728,166
(95,085)
104,664
7,737,745
Balance Sheet
Comparative Balance
Sheets (2 years)
We will use this to
prepare a Spread
Analysis for SAMPLE
BANK.
Assets (000)
Real Estate Owned and Held for Investment
Goodwill
Intangible Assets other than Goodwill
Total Intangible Assets
Loan Servicing Rights
Fixed Assets
Interest Receivable
Prepaid Expense
Bank-owned Life Insurance
Other Assets
Total Other Assets
TOTAL ASSETS
28,724
25,000
668,172
17,159
685,331
764,305
12,378
776,683
27,428
162,667
26,998
12,307
93,831
147,080
442,883
11,795,443
47,765
177,680
23,720
610
96,938
119,431
417,769
11,636,112
22
Spread Analysis or
Net Interest Margin
1. Calculate Average Assets
Total Assets Beginning of Year + Total Assets End of
Period / 2
$11,795,443 + $11,636,112 / 2 = $11,715,778
There are other ways to calculate Average Assets, but this is a simple,
common way of doing so
23
Income Statement for 12/31/13 Only
We will use this to prepare a Spread
Analysis for SAMPLE BANK.
Income and expenses must be
ANNUALIZED.
This ratio works when the Income
Statement is for 12 months. If the Income
Statement is for less than 12 months, you
must annualize the income.
e.g. To Annualize income, divide by the
month number (from September, divide by
9: ninth month) and multiply by 12
(months)
24
Spread Analysis or
Net Interest Margin
2. Yield on Assets (Yield)
Interest Income from loans and investments /
Average assets
$442,846 / $11,715,778 x 100
= 3.78%
3. Cost of Funds (COF)
Dividends paid / Average assets
$37,881 / $11,715,778 x 100
Subtract COF from Yield and you get
= 4. Net Interest Margin (NIM)
= 0.32%
= 3.46%
25
Spread Analysis or
Net Interest Margin
5. Non-Interest Expense Ratio
Total non-interest expenses (excluding Provision for
Loan & Lease Losses) / Average assets
$355,825 / $11,715,778
= 3.04%
6. Provision for Loan and Lease Losses Ratio
PLLL / Average assets
$10,716 / $11,715,778
= 0.09%
26
Spread Analysis or
Net Interest Margin
7. Non-Interest Income (NII) Ratio (OI-Other Income)
(Service Revenues, Fees, Commissions, etc.)
Total NII / Average assets
$112,605 / $11,715,778 x 100
= 0.96%
8. Tax Expense Ratio
Total Expense / Average assets
$52,668 / $11,715,778 x 100
= 0.45%
27
Spread Analysis or
Net Interest Margin
9. Return on Average Assets (ROA)
Net income / Average assets
$97,573 / $11,715,778 x 100
= 0.83%
(there will often be a 1 or 2 basis point difference between added ROA and
Calculated ROA)
This number is also the sum of the items above it
in the spread analysis: Yield – Cost of Funds +
Non-interest Income – Non-Interest Expenses –
Provision for Loan Losses = Return on Assets
28
Spread for Sample Bank
As a % of Average Assets
Sample Bank
Yield on Assets
3.78
Cost of Funds
(0.32)
Net Interest Margin (Spread)
3.46
Non-Interest Expense
(3.04)
Provision for loan losses
(0.09)
Non-Interest Income (Other Income)
0.96
Tax Expense
(0.45)
ROA: Net Profit or Loss
0.84
29
30
Capital is Important to:
•
Provides a cushion
–
•
Provides Stability
–
•
•
•
For unexpected losses
The company’s ‘keel’
Allows bank to take calculated risks
Allows bank to sustain growth in
assets
Ensures general public of safety and
soundness of institution
31
What is Capital?
Capital is not cash
• It is the accumulated earnings and losses
since the bank was established.
• Tells you what portion of your assets
belong to the owners, meaning the rest is
dedicated to your creditors
• Your ‘rainy day’ fund
• Your ‘hibernation’ fat
32
Balance Sheet
Income Statement
ASSETS
LIABILITIES & CAPITAL
EARNING ASSETS
MISCELLANEOUS
LIABILITIES
REVENUE
Cash
Loan Interest Income
Loans
Less Allowance for Loan and
Lease Losses
Investment Interest Income
Fees and Other Non-Interest
DEPOSITS
Income
EXPENSES
Investments
Occupancy
Personnel
Provision for Loan Losses
Held -to-Maturity
Available-for-Sale
Trading
Less allowance for unrealized
Gains or Losses in Invest's
BORROWED
FUNDS
COST OF FUNDS
Interest Expense
EQUITY CAPITAL
Interest Paid in Deposits
Interest Paid on Borrowed Funds
NON-EARNING ASSETS
Perpetual Preferred Stock
Common Stock (at par)
Building, Equipment, etc.
Other Assets
Surplus (in excess of par)
Unidivided Profits
NET INCOME or LOSS
Common Capital Accounts
• Stock (at par value)
– Preferred
– Common
• Surplus (in excess of par)
• Undivided Profits … retained earnings
– Increases with Annual Net Profit
– Decreases with Annual Net Loss
• Net Unrealized Gains (Losses) on
Available-for-sale (AFS) Securities
34
Balance Shee
Income Statement
Balance Sheet
ASSETS
Cash
ASSETS
LIABILITIES & CAPITAL
Capital Ratios
REVENUE
Cash
M
MISCELLANEOUS
Loans
EARNING
ASSETS
Loan Interest
Income
Loans
Less Allowance for Loan and
Less Allowance for Loan and
EARNING ASSETS
LIABILITIES
Lease Losses
Lease Losses
Measures stability of the
bank and ability to sustain
growth
DEPOSITS
Investment Interest Income
Fees and Other Non-Interest
Income
EXPENSES
Investments
Held -to-Maturity
Available-for-Sale
LIABI
Core Capital = 10.77%
Trading
Less allowance for unrealized
Gains or Losses in Invest's
Investments
Held -to-Maturity
Occupancy
Available-for-Sale
Personnel
Trading
Provision
for Loan Losses
Total
Assets
Less allowance for unrealized
BORROWED
FUNDS
Gains or Losses in Invest's
COST OF FUNDS
Interest Expense
EQUITY CAPITAL
Interest Paid in Deposits
E
Interest Paid on Borrowed Funds
NON-EARNING ASSETS
Perpetual Preferred Stock
NON-EARNING ASSETS
Common S
Common Stock (at par)
Building, Equipment, etc.
Other Assets
Surplus (in excess of par)
Unidivided Profits
Perpetua
NETEquipment,
INCOME or LOSS
Building,
etc.
Other Assets
Surplus (
35
Unidivided
ASSETS
Balance Sheet
ASSETS
Cash
Cash
Income
Statement
LIABILITIES & CAPITAL
Capital Ratios
MISCELLANEOUS
EARNING ASSETS
LIABILITIES
EARNING ASSETS
LIABILI
MIS
L
REVENUE
Loans
Loan Interest Income
Less Allowance for Loan and
Loans
Lease Losses
Less Allowance for Loan and
Lease Losses
If Assets grow, and
Capital doesn’t grow
proportionately, the
Ratios will decline
Investment Interest Income
Fees and Other Non-Interest
DEPOSITS
Investments
EXPENSES
Held -to-Maturity
Investments
Held -to-Maturity
Available-for-Sale
Income
Woops! Now 8.60%
Trading
Less allowance for unrealized
Gains or Losses in Invest's
Available-for-Sale
Occupancy
Personnel
Trading
Less
allowance
unrealized
Provision
forforLoan
Losses
Gains or Losses in Invest's
BORROWED
FUNDS
B
COST OF FUNDS
Interest Expense
EQUITY CAPITAL
Total
Assets
Interest Paid in Deposits
EQU
Interest Paid on Borrowed Funds
NON-EARNING ASSETS
Perpetual Preferred Stock
NON-EARNING ASSETS
Common Stoc
Common Stock (at par)
Building, Equipment, etc.
Other Assets
Surplus (in excess of par)
Unidivided Profits
Perpetual P
Building,
Equipment,
NET
INCOME oretc.
LOSS
Other Assets
Surplus (in e
36 Pro
Unidivided
If Assets grow and capital doesn’t
keep up, the bank becomes unstable
37
If a Big Wind comes up…
Negative economic change
…Large Charge-offs…
Your sail boat could tip
Bank needs more
Capital
38
All US Banks Source: FDIC
39
How much capital
is enough?
Project worst 3 years possible (this is what
ALM is all about)
Prompt Regulatory Action Rules
National or Peer Averages
Depends on how much risk your assets and
liabilities represent
Depends on level of growth
Depends on level of profitability
Depends on future plans
40
Capital Can Disappear Fast
Capital to Assets Ratio in a Recession
14.00
11.97
12.00
11.07
11.17
11.18
10.96
9.55
10.00
8.00
6.42
6.00
4.76
4.00
3.20
2.89
2.00
0.00
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
41
Prompt Corrective Action
Prompt Corrective Action
42
Prompt Corrective Action
Adequately capitalized institutions
Such institutions must receive a waiver from the FDIC to accept, renew or roll
over brokered deposits (banks sell these large-denomination deposits to
brokerages). A waiver is granted on a case-by-case basis, upon a finding that
acceptance of such deposits does not constitute an unsafe and unsound
practice.
If granted, an institution may not pay an effective yield that exceeds by more
than 75 basis points the effective yield paid on deposits of comparable size and
maturity.
Institutions that are undercapitalized to varying degrees must take additional
actions and have additional requirements:
43
Prompt Corrective Action
Undercapitalized institutions
-must file an acceptable capital restoration plan;
-cannot pay dividends or management fees;
-may not accept, renew or roll over any brokered deposit; and
-may not solicit any other deposits by offering an effective yield that exceeds
by more than 75 basis points the effective yield paid on deposits of
comparable size and maturity.
Significantly undercapitalized institutions
-are subject to the same actions as an undercapitalized bank;
-cannot pay bonuses to, or increase compensation of, senior executive officers
without prior regulator approval; and
-are subject to other restrictions and actions as noted in the Federal Deposit
Insurance Corporation Improvement Act (FDICIA).
44
Prompt Corrective Action
Critically undercapitalized institutions
-are subject to the same provisions as an undercapitalized bank and a significantly
undercapitalized bank; and
-cannot pay interest or principal on subordinated debt (without FDIC waiver) after 60
days of becoming critically undercapitalized.
In addition, within 90 days of the bank becoming critically undercapitalized the
chartering authority must:
-appoint a receiver; or
-take other such actions that the primary regulator, with the concurrence of the FDIC,
determines would better serve the purposes of prompt corrective action (and review
such determination every 90 days).
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Regulatory Capital
Leverage Capital
The minimum leverage ratio requirement consists only of Tier 1 (Core) Capital.
Tier 1 Capital or Core Capital is the sum of:
common stockholders' equity – the sum of common stock and related
surplus, undivided profits, disclosed capital reserves that represent a segregation
of undivided profits, and foreign currency translation adjustments, less net
unrealized losses on available-for-sale equity securities with readily determinable
fair values;
noncumulative perpetual preferred stock
minority interests in consolidated subsidiaries minus
all intangible assets other than …
See Handout on Capital
46
Regulatory Capital
Tier 1 Capital is calculated as follows:
+ Permanent shareholders’ equity
+ Undivided Profits (retained earnings)
Less: Goodwill
Tier 2 Capital is calculated as follows:
+ General provisions/general loan-loss reserves
+ Revaluation reserves
+ Hybrid (debt/equity) capital instruments
+ Subordinated term debt
Less: Investments in unconsolidated financial subsidiaries
Less: Investments in the capital of other financial institutions
Total Capital = Tier 1 Capital + Tier 2 Capital
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Regulatory Capital
Tier 1 Risk-Based Capital: Tier 1 Capital / Risk Weighted Assets
Tier 2 Risk-Based Capital: Tier 2 Capital / RWA
Total Risk-Based Capital: Tier 1 plus Tier 2 Capital / RWA
Leverage Ratio: Tier 1 Capital / Total Assets – goodwill, other disallowed
intangible assets and disallowed deferred tax assets
You have been provided a Regulatory Capital Estimation Tool as developed by
FDIC
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ROE – Return on Equity
Measures: Return to Investors
Formula: Net Income divided by Shareholder Equity
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Source: FDIC
50
ROE: All US Banks
51
/6
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9
Sources of Non-Interest Income
•
•
•
•
•
•
•
•
Deposit service charges
Fiduciary activities
Trading revenue
Investment, advisory and brokerage
Insurance commission fees and income
Servicing fees
Net gains (losses) on sales of loans
Other net gains of (losses)
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Spread
Commercial Banks $1 Bil to $100 Mil
As a % of Average Assets
Yield: Interest income
Less: Cost of funds
Net Interest Margin
Less: Non-interest expense
Less: Provision for loan losses
Net loss before other income
Plus: Non-interest income
Less: Taxes
Equals: Net Profit or Loss (ROA)
6/30/14
12/31/97
4.21%
(0.48%)
3.73%
(3.05%)
(0.12%)
(0.56%)
1.78%
0.23%
0.99%
8.39
(3.70)
4.69
(3.56)
(0.29)
0.84
1.13
(0.64)
1.33
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54
54 /6
9
Efficiency Ratio
Measures: Percentage of Controllable Income that is used
up by Operations OR “How much does it cost for you
to earn $1 in Net Revenue”
Formula: Operating Costs – Amortization of Intangible
Assets  [Interest Income – Cost of Funds + Non-interest
Income]
Industry Standard: Bank averages range between 55% and
70% depending on size and business model
How to Improve:
–
–
–
–
Increase Interest Income
Decrease Cost of Funds
Increase Non-interest Income
Decrease Operating Costs
Typically, the lower this ratio is, the better. This
means your cost per dollar earned is less
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SAMPLE BANK
Efficiency Ratio
Operating Expenses – Amort of Intang Asts
Interest Income - COF + Non-Interest Income
$355,825 - $4,781
($442,846 - $37,881 + $108,915)
$351,044 X 100
$513,880
= 68.31%
12/31/2013
Income Statement (000)
Interest Income
$ 442,846
Interest Expense
Net Interest Income
$ (37,881)
$ 404,965
Provision for Loan Losses
$
Compensation & Benefits
Occupancy & Equipment
Marketing and Promotion Expense
Professional Fees
Tech & Communications Expense
Amrt of Intang & Goodwill Impair
Foreclosure & Repo
Other Expense
Total Noninterest Expense
$ 209,991
$ 62,067
$
6,062
$
10,114
$ 11,974
$
4,781
$
1,248
$ 49,588
$ (355,825)
Other Income
Trading Account Income
Service Charges on Deposits
Gain on Sale of Loans
Bank-owned Life Insurance Revenue
Insurance Revenue
Investment Banking & Brokerage
Other Noninterest Income
Total Noninterest Income
Realized Gain on Securities
Nonrecurring Revenue
Nonrecurring Expense
$
7,737
$ 30,952
$ 65,644
$
3,053
$
1,000
$ 14,736
$
(3,690)
$ 119,432
$
209
$
1,800
$
(8,836)
Total Other Income
Net Income before Taxes
Provision for Taxes
Effective Tax Rate (%)
40
6 Net Income
37 Other Changes to Net Income
43 Net Income Avail to Common
5
$
(10,716)
108,915
$ 151,029
$ (52,668)
34.87%
$
$
$
98,361
(788)
97,573
57
Non-Performing Loans Ratio
Measures: Quality of Loan Portfolio based on what
percentage is currently late by 90 days or more
Formula: Dollar Amount of Delinquent Loans (90+days) 
Total Loans
Industry Standard: Somewhere in the 0.50% to 1.50%
range, depending on strategy. Banks that take more
credit risk will have higher ratios.
58
Net Charge-offs
Measures: Quality of Loan Portfolio based on the
percentage of loans removed from the books (so far this
year) as non-performing.
Formula: [Charge offs – Recoveries]  Average Loans
(Charge-offs and Recoveries must be annualized)
Industry Standard: Somewhere in the 0.25% to 0.75%
range, depending on strategy.
59
Non-Performing Loans and
Charge-offs
$100 mil to $1 Bil Asset Category
Normal
6/30/14
Delinquency
Charge-offs
0.75%
0.40%
1.59%
0.21%
Combined
1.15%
1.80%
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61
Loan to Assets Ratio
Measures: Percentage of Assets funded by Deposits
Formula: Total Loans  Total Assets
Industry Standard: 50% to 65%
Generally, the higher the ratio the better. However, ratios getting too high
can create liquidity problems.
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Thank You!
Timothy Harrington, CPA
T.E.A.M. Resources
7049 East Tanque Verde, PMB 136
Tucson, AZ 85715
(800) 788-9542
tharrington@forTeamResources.com
www.forTeamResources.com
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