Ch 03 Bank Performance Flashcards
Commercial Banking: THE MANAGEMENT OF RISK, Third Edition, BENTON E. GUP
Earning assets:
Loans, investment securities, and short-term investments that generate interest and yield related fee income.
Federal funds sold/purchased:
Excess balances of depository institutions, which are loaned to each other, generally on an overnight basis.
Interest-bearing liabilities:
Deposits and borrowed funds on which interest is paid.
Interest rate spread:
The difference between the average rate earned on earning assets on a taxable equivalent basis and the average rate paid for interest-bearing liabilities.
Interest-sensitive assets/liabilities:
Earning assets and interest bearing liabilities that can be repriced or will mature within specific time periods.
Interest sensitivity gap:
A measure of the exposure of a bank to changes in market rates of interest, its vulnerability to such changes, and the associated effect on net interest income.
Liquidity:
The ability of an entity to meet its cash flow requirements. For a bank it is measured by the ability to convert assets into cash quickly with minimal exposure to interest rate risk, by the size and stability of the core funding base, and by additional borrowing capacity within the money markets.
Net charge-offs:
The amount of loans written off as uncollectible less recoveries of loans previously written off.
Net interest margin:
Net taxable equivalent interest income divided by average interest-earning assets. It is a measure of how effectively a corporation utilizes its earning assets in relation to the interest cost of funding.
Noninterest income:
Fee income from on-balance sheet and off-balance sheet activities, where the latter include loan and security guarantees and derivative securities services.
Nonperforming assets:
Loans on which interest income is not being accrued, restructured loans on which interest rates or terms of repayment have been materially revised, and real properties acquired through foreclosure.
Provision for loan losses:
The period charges against earnings required to maintain the allowance for loan losses at a level considered by management to be adequate to absorb estimated losses inherent in the loan portfolio.
Reserve for loan losses:
A valuation allowance offset against total loans, which represents the amount considered by management to be adequate to absorb unexpected losses inherent in the loan portfolio.
Return on average assets (ROA):
A measure that indicates how effectively an entity uses its total resources. It is calculated by dividing annual net income by average assets.
Return on equity (ROE):
A measure of how productively an entity?s equity has been employed. It is calculated by dividing annual net income by total equity.
Taxable equivalent income:
Income that has been adjusted by increasing tax exempt income to a level that is comparable to taxable income before taxes are applied.
Three Aspects of Internal Performance
Bank planning, technology and personnel development.
External Performance
External performance is reflected in the banks ability to cope with customers, competitors, regulators and the public. Evidenced by market share/earnings, technology, regulatory compliance and public confidence.
Two main financial statements?
Balance Sheet (report of condition) and Income Statement (report of income)
What are the key Profit Ratios?
ROA (return on assets), ROE (return on equity), NIM (net interest margin)
What are the key Risk Ratios?
Capitization, Asset Quality (Provision for Loan Losses, Loan Ratio), Operating Efficiency, Liquidity, Tax Rate %, Interest Sensitivity (Dollar Gap Ratio) and Risk Adjusted Return on Capital (RAROC)
asset utilization
This financial ratio represents the ability of management to employ assets effectively to generate revenues. It is calculated as operating revenue to total assets.
charge-offs
A loan is charged off, which means that it is removed from the balance sheet, when it is no longer of sufficient value to be considered creditworthy.
dollar gap ratio
This ratio measures the sensitivity of a bank?s net interest margin to a change in interest rates. It is calculated as interest rate sensitive assets minus interest sensitive liabilities divided by total assets.
early warning systems
Computer-based models used to track or predict bank financial performance.
equity multiplier
The ratio of total assets to total equity, which is a measure of financial leverage.
EVA
Economic value added is an internal bank performance metric computed as adjusted earnings (or net income after taxes) minus the opportunity cost of capital (or the cost of equity times equity capital). EVA is useful in evaluating loans and other investments to determine if shareholder wealth would increase.
operating efficiency
Operating efficiency deals with the production of outputs, such as deposit and loan accounts and securities services, at a minimum cost per dollar (or account).
profit margin
This financial ratio provides information about the ability of management to control expenses, including taxes, given a particular level of operating income. It is calculated as net income to operating revenue.
RAROC
The Risk-Adjusted Return on Capital allocates equity capital depending on risk of loss, calculates a required rate of return on equity, and then uses this information in pricing loans to make sure that they are profitably to the bank. It is generally employed for the purpose of internal performance evaluations.
report of condition
Balance Sheet
report of income
Income Statement
temporary investments ratio
This ratio is a measure of bank liquidity and is calculated by adding federal funds sold plus securities with maturities of one year or less plus cash due from banks divided by total assets.
volatile liability dependency
This ratio is a measure of bank liquidity and is calculated by subtracting temporary investments from volatile liabilities (i.e., brokered deposits, jumbo CDs, deposits in foreign offices, federal funds purchased, and other borrowings) and dividing by net loans and leases.
