Bank Performance and Ratio AnalysisRatio AnalysisCorporate vs. Fin’l InstitutionAreas of ConcentrationMain ModelMain Model: StandardsReturn on AssetsLeverage/Credit RiskSlide 9Credit RiskLiquidityCAMELS RatingsBank Performance and Bank Performance and Ratio AnalysisRatio AnalysisRatio AnalysisRatio AnalysisG&K: Chp. 3 (Skip RAROC & EVA)G&K: Chp. 3 (Skip RAROC & EVA)OverheadsOverheadshttp://www2.fdic.gov/ubpr/http://www2.fdic.gov/ubpr/–““View Reports”View Reports”–““Uniform Bank Performance Reports”Uniform Bank Performance Reports”–Enter Bank NameEnter Bank Namewww.ffiec.govwww.ffiec.gov–Handbooks & CatalogsHandbooks & Catalogs–UBPR HandbookUBPR HandbookUBPR basis of CAMEL RatingsUBPR basis of CAMEL RatingsCorporate vs. Fin’l InstitutionCorporate vs. Fin’l InstitutionCorporateCorporate–LiquidityLiquidity–Asset UtilizationAsset Utilization–LeverageLeverage–ProfitabilityProfitabilityConcentration on Concentration on use of assets to use of assets to provide return and provide return and continuationcontinuationBanksBanks–ProfitabilityProfitability–Capital/RisksCapital/Risks–LiquidityLiquidityConcentration on Concentration on risks to provide risks to provide return, stability and return, stability and continuationcontinuationAreas of ConcentrationAreas of ConcentrationCredit RiskCredit Risk Loans and Secs quality & type Loans and Secs quality & typeLiquidity RiskLiquidity Risk S/T to L/T composition of S/T to L/T composition of Assets and LiabsAssets and LiabsMarket RiskMarket Risk Int Rate sensitivity of Assets Int Rate sensitivity of Assets & Liabs (GAP)& Liabs (GAP)Operating RiskOperating Risk Employee usage and Employee usage and efficiency (A/#Emps, efficiency (A/#Emps, EmpExp/#Emps) EmpExp/#Emps)Legal RiskLegal Risk Lawsuits, Contract Exposure, Lawsuits, Contract Exposure, negative publicitynegative publicityCapital/Solvency RiskCapital/Solvency Risk Eq Capital used and Eq Capital used and avail vs. Risk categories of usage avail vs. Risk categories of usageMain ModelMain ModelROE (return on equity)ROE (return on equity)DuPont: NI/S * S/A * A/EqDuPont: NI/S * S/A * A/EqPM * ATO * LevPM * ATO * LevROA * LevROA * LevBanks: Banks: NI / (Inc Before Tax, Sec G/L) *NI / (Inc Before Tax, Sec G/L) *(Inc Before Tax, Sec G/L) / Tot Optg Rev *(Inc Before Tax, Sec G/L) / Tot Optg Rev *Tot Optg Rev / A *Tot Optg Rev / A * A / EqA / EqTax Eff * Exp Eff * Asset Eff * Fund’g EffTax Eff * Exp Eff * Asset Eff * Fund’g EffMain Model: StandardsMain Model: StandardsCorporate: ROE = ROA * LevCorporate: ROE = ROA * Lev10-20% = 5-10% * 210-20% = 5-10% * 2Banks:Banks:10-20% = .7 – 1.4% * 1410-20% = .7 – 1.4% * 14Tax Eff * Exp Eff * Asset Eff * Fund’g EffTax Eff * Exp Eff * Asset Eff * Fund’g Eff10-20% = 10-20% = 80% * 20% * 9% * 14 BIG ($750B)80% * 20% * 9% * 14 BIG ($750B) 70% * 18% * 7% * 14 Small ($500m)70% * 18% * 7% * 14 Small ($500m)Return on AssetsReturn on AssetsROA = NI / AROA = NI / ANI = NII + NNonII - Other Things (OT)NI = NII + NNonII - Other Things (OT)ROA =ROA = NII / A + NNonII / A – OT / ANII / A + NNonII / A – OT / A Spread + Burden - OTSpread + Burden - OT4%4% + -2.25% - 0.75% (Roughly) + -2.25% - 0.75% (Roughly)Spread = Better credit than customersSpread = Better credit than customersBurden = Return from providing Svcs.Burden = Return from providing Svcs.Leverage/Credit RiskLeverage/Credit RiskAsset QualityAsset QualityLoan Quality/QuantityLoan Quality/QuantityCredit RiskCredit RiskMarket (Interest-Rate) RiskMarket (Interest-Rate) Risk (Later in Gap Analysis)(Later in Gap Analysis)Leverage/Credit RiskLeverage/Credit RiskAsset QualityAsset Quality–Provision for Loan Losses / Loans (<.2%)Provision for Loan Losses / Loans (<.2%)–Non-Accruals / Loans (< 1%)Non-Accruals / Loans (< 1%)–Charge-Offs / Loans (Hopefully < ProvLL)Charge-Offs / Loans (Hopefully < ProvLL)Loan RatiosLoan Ratios–Loans / AssetsLoans / Assets(60-80%)(60-80%)–Loans / Deposits Loans / Deposits (70% Small,(70% Small, 100+% Big) 100+% Big)Credit RiskCredit RiskCapital Note Rate vs. Gov’t Sec YldCapital Note Rate vs. Gov’t Sec Yld–Should be of same maturityShould be of same maturity–Time Series trend, widening Time Series trend, widening  More risk More riskLiquidityLiquidityTemporary Investments:Temporary Investments:FF sold+Secs<1yr+DueFrom / AFF sold+Secs<1yr+DueFrom / AVolatile Liability Dependency: Volatile Liability Dependency: –1) JumboCDs -TempInvmts / Loans1) JumboCDs -TempInvmts / Loans–2) Jumbos+FFPurch / Assets2) Jumbos+FFPurch / Assets–3) Jumbos+FFPurch / Total Liabs 3) Jumbos+FFPurch / Total Liabs (% of funding)(% of funding)CAMELS RatingsCAMELS RatingsCC - - Capital AdequacyCapital AdequacyAA - - Asset QualityAsset QualityMM - - Mgmt Quality, Mgmt & BofD ability Mgmt Quality, Mgmt & BofD ability and systems (policies & procedures) and systems (policies & procedures)EE - - Earnings, not just quantity, but Earnings, not just quantity, but quality, sustainabilityquality, sustainabilityLL - - LiquidityLiquiditySS - - Sensitivity to market fluctuations, IntSensitivity to market fluctuations, Int rates, FX, Commod prices (thru loans)rates, FX, Commod prices (thru