managing financial intermediaries

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  • 8/4/2019 Managing Financial Intermediaries

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    Department of Economics

    Managing FinancialIntermediariesText: Chapters 15 17, 22Rose: Chapters 4 & 5

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    Department of Economics

    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 yourbank 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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    ASSESS THE FINANCIAL CONDITIONAND PERFORMANCE OF FIRSTNATIONAL BANK OF WAVERLY, IOWA

    TTYN

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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

    EM = leverage, funding sources for bankFNB Waverly example

    ROA = 0.8%, EM = $258.9/$24.7 = 10.5

    ROE = 0.8% x 10.5 = 8.4%

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    Department of Economics

    If the equity multiplier is 10.5

    Can you translate that into a more familiarmeasure of leverage say the D/A ratio?

    D/A = 90.5

    What does this leverage position tell us aboutbank management?

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    More DuPont analysis

    PM = NIAT/Total operating income PM = profit margin

    Effectiveness of expense management andservice pricing

    Total operating income = interest income +

    non-interest incomeAU = Total operating income/Assets

    AU = asset utilization

    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 = $2.1Assets = $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

    Non-performing loans to total loans Net charge offs to total loans

    Liquidity risk Insufficient liquidity reserves, need to borrow at

    higher rates

    Loan to deposit ratio

    Purchased funds to total assets

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    Risk management measures

    Interest rate risk

    Rate sensitive assets to rate sensitive liabilities

    GAP analysis

    Market risk

    Financial market volatility impact on assetvalues

    Ratio of fixed rate loans and securities to

    floating rate

    Duration analysis

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    Risk management measures

    Earnings risk

    Impact of earnings volatility on banks value

    Historical variability in ROA and ROE

    Solvency or default risk

    Risk of banks survival Equity to total assets

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    Questions?