Expense Ratio and Asset Utilization n Net IncomeAverage Total Assets n ROA AU

Expense Ratio and Asset Utilization n Net Income/Average Total Assets n ROA = AU – ER – TAX 4545 aTA Taxes aTA EXP aTA TR aTA NI ROA - - = =

Return on Equity Model n Expense Ratio and Asset Utilization n Expense Ratio (ER) n Total Operating Expense/Average Total Assets § EXP/aTA 4646 aTA PLL aTA OE aTA IE aTA EXP ER + + = =

Return on Equity Model n Expense Ratio and Asset Utilization n Expense Ratio (ER) n IE can change due to changes in: § Volume § Different levels of liabilities versus equity § Composition § Different mix of liabilities § Rates 4747 aTA PLL aTA OE aTA IE aTA EXP ER + + = =

Return on Equity Model n Expense Ratio (ER) n Non-Interest Expense n OE can change due to changes in: § Personnel Expenses § Occupancy Expenses § Technology Expenses § Other Overhead Expenses 4848 aTA PLL aTA OE aTA IE aTA EXP ER + + = =

Return on Equity Model n Income: Asset Utilization Components n Total Revenue n Includes: § Interest Income (II) § Non-Interest Income (OI) § Realized Security Gains or Losses (SG) 4949 Obj109

Return on Equity Model n Income: Asset Utilization Components n II can change due to changes in: n Volume § Different levels of earning assets to total assets § Earnings Base (EB) = Average Earning Assets/aTA n Composition § Different mix of earning assets n Rates 5050 aTA SG aTA OI aTA II aTA TR A + + = = U

Return on Equity Model n Income: Asset Utilization Components n Non-Interest Income (OI) n OI can change due to changes in: § Fees § Trust Activities § Service Charges § Other Non-Interest Income 5151 Obj111

Return on Equity Model n Aggregate Profitability Measures n Net Interest Margin (NIM) n Net Interest Income/Average Earning Assets n Spread n Interest Income/Average Earning Assets - Interest Expense/Average Interest-Bearing Liabilities 5252

Return on Equity Model n Aggregate Profitability Measures n Burden n (Non-Interest Expense – Non-Interest Income)/Average Earning Assets § Lower numbers are better n Efficiency Ratio n Non-Interest Expense/(Net Interest Income + Non-Interest Income) § Lower numbers are better 5353

5454

Managing Risks and Returns n Risk Management n Credit Risk n Liquidity Risk n Market Risk n Operational Risk n Reputation Risk n Legal Risk 5555

Maximizing the Market Value of Bank Equity n Effective Management of: n Assets n Liabilities n Off-Balance Sheet Activities n Interest Rate Margin n Credit risk n Liquidity n Non-Interest Expense n Taxes 5656

Maximizing the Market Value of Bank Equity n CAMELS Ratings n Capital Adequacy n Asset Quality n Management Quality n Earnings n Liquidity n Sensitivity to Market Risk 5757

Maximizing the Market Value of Bank Equity n CAMELS Ratings n Ratings from 1 (best) to 5 (worst) n 1 & 2 § Sound banks n 3 § Some underlying problems n 4 & 5 § Problem banks 5858