URL: www.usbrn.com
How are Banking Ratios Compiled ?
Financial institutions such as banks, financial service companies, insurance companies, securities firms and credit unions have very different ways of reporting financial information. This guide gives you the most pertinent information to analyze a financial service company's financial statements.
I. Income Statements
Return on Average Assets ( Net Operating Income/ Total Assets )
USBR calculates Return on Assets (ROA) by dividing net operating income by total assets.
Return on Equity ( Net Income/Stockholder Equity )
Return on Equity is determined by dividing net income (minus preferred dividends) by average common stockholders equity to get the return on equity.
Rate Paid on Funds ( RPF )
The Rate Paid on Funds is determined by dividing total interest expense by total earning assets. The formula is as follows:
Total Interest Expense / Total Earning Assets
This indicates what percentage or rate of interest is paid from assets.
Net Interest Margin
Net interest margin is computed by dividing net interest income by total earning assets.
= Net Interest income/ Earning Assets
Provision for Loan Losses
This important figure is a reserve account to cover unexpected defaults on loans by borrowers. These are generally referred to as nonperforming loans.
Reserve as a percentage of loans: ( Reserve/ Total loans )
Chargeoffs as percentage of loans: (Charge-offs/ Total Loans )
The higher the nonperforming loan and charge-off percentages, the higher the provision for loan losses should probably be. Consequently, this would reduce net income and earnings per share.
Long term debt to Total Liabilities and Equity
This figure is determined as follows:
= Long Term Debt / Total Liabilities plus Equity
The higher this figure, the more difficult it would be for a bank to borrow more funds.
Loans to Total Assets.
The higher this ratio indicates a bank is loaned up and its liquidity is low.
Tier I
This figure is determined as follows:
Stockholder Equity/ Risk-Adjusted Assets. Banks must maintain a ratio which is within the guidlines set by the FDIC guidelines.
Total Capital
Total Capital includes Tier I and the reserve for loan losses ( up to 1.25 % of Risk Adjuste Capital) plus subordinated notes (to 50 percent of Tier I capital). This figure is also set by FDIC guidelines.
The following is a sample financial
statement from :
| Income Statement -Bank | |||||
$ (Millions) |
2002 | 2001 | 2000 | ||
| Total Interest Income | 95 | ||||
| Total Interest Expense | 20 | ||||
| Net Interest Income | -9 | ||||
| Provision for Loan Losses | |||||
| Non Interest Income | 8 | ||||
| NonInterest Expense | 3 | ||||
| Pretax Income | 18 | ||||
| Income Taxes | -6 | ||||
| Net Operating Income | 12 | ||||
| Reserve for Loan Losses | |||||
| Balance, Beginning of Year |
16
|
||||
| Provision for Loan Losses |
3
|
||||
| Net Charge-Offs |
-7
|
||||
| Recoveries |
3
|
||||
| Balance, at end of year |
-7
|
||||
| Non performing Loans |
55
|
||||
| Balance Sheet | |||||
| Assets | |||||
| Cash |
6
|
||||
| Temporary Investments |
22
|
||||
| Investment Securities |
65
|
||||
| Loans |
750
|
||||
| Reserve for Loan Losses |
-15
|
||||
| Building and equipment |
120
|
||||
| Total Assets |
1,200
|
||||
| Liabilities | |||||
| Deposits |
885
|
||||
| Short Term Borrowings |
245
|
||||
| Long Term Debts |
33
|
||||
| Total Liabilites |
1,030
|
||||
| Stockholders Equity |
60
|
||||
| Total Liabilites & Equity |
1,200
|
||||
| Financial
Ratios | Insurance Ratios |