Communicator
Archives: November 2001
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Communicator
Archives: November 2001 |
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What the Board Needs to Know about Growth and Earnings Our culture tends to equate growth with increased earnings and on many levels it does. However, in the banking industry, nothing is a simple as it seems and growth can actually do more harm than good if not managed effectively. Growth can mean managing additional resources, new lines of business, new technology and information systems. This can be costly and strain current resources. Senior management and Directors need to analyze the effect of current or proposed growth on the bank's asset quality, earnings, liquidity and risk exposure. Growth in the balance sheet is typically stated as a year-to-year change in account balance expressed as a percentage. Historical patterns of growth can be identified in key areas such as loans, securities, assets, volatile liabilities, core deposits and borrowings. Peer analysis is helpful in determining if a bank's growth is in line with banks of similar size. A/L Benchmarks offers an additional measurement of balanced growth- Growth Rate Balance Measure. This measurement is the difference between the highest and the lowest of growth rates in the following four categories: loans, assets, deposits and equity. The smaller the measure, the more balanced the growth. Warning signs in growth:
As we stated earlier, growth should result in increased earnings. A bank with good earnings can remain competitive and reward its shareholders through dividends. Senior management and directors need to be aware of the level, trend and quality of earnings. Increased earnings may carry with it increased credit risk, forcing a bank not only to increase its level of reserves but perhaps cover even larger charge-offs. Increased earnings may perhaps be from a one-time event such as an extraordinary gain on securities, a favorable tax position or a non-interest income item. Ultimately, a bank's objective is to maximize returns while minimizing risk. Earnings are typically measured by the following ratios:
Warnings signs in earnings:
The ultimate balancing act in the banking industry is maximizing profits while minimizing the risk associated with doing business. |
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| Regulatory Focus | |||||||||
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ICBA Weekly News November
21, 2001
"Higher Ceiling Considered for Bank Deposit Coverage" |
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| Benchmark Briefs | |||||||||
| One of the primary data sources for A/L Benchmarks is the bank's call report of FRY-9. Thus it is imperative that we are aware of any changes to the call report, either in the most recent or prior quarters. Please contact Susan Regan at 888-657-6680 if your bank has made any such changes AFTER sending your call report to ORA. | |||||||||
| Ask the Expert by Dr. Ronald L. Olson, Chairman ORA | |||||||||
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Q.
In the current falling rate environment, many of my securities
are being called. Where do they fall for GAP reporting purposes,
by maturity date or call date? A. The A/L Benchmarks model has the ability to "call" securities during a shock analysis when provided with an investment download of your securities. A/L Benchmarks also has the intelligence to "call whenever appropriate" for GAP reporting purposes. Example: You are holding a fixed rate callable security currently yielding 8%. We are certain that in light of current market rates, this will be called and will be slotted for GAP reporting purposed under call date. Another security in the portfolio might be at current market rates and the likelihood of call is less clear. That security would be slotted at original maturity date. The bottom line is that none of us has a crystal ball. However, we can make rational assumptions based on the current market. |
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| Welcome Aboard | |||||||||
| The staff of Olson Research is pleased to welcome these institutions aboard: | |||||||||
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The staff of Olson Research extends their deepest sympathies to the families and friends of the victims of the September 11th terrorist attacks. |
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