Commercial Banking Income Statement Management PDF

Commercial Module 3 Banking Income Statement Management  The income statement shows all major categories of revenue, expenses and net profit for the period in review. As we have discussed in the balance sheet discussion , the balance sheet and...

Commercial Module 3 Banking Income Statement Management  The income statement shows all major categories of revenue, expenses and net profit for the period in review. As we have discussed in the balance sheet discussion , the balance sheet and income statement is integrally related. Interest income/revenue is the primary revenue driver for commercial Income banks and the largest component of this is from loans. Interest and fee income on loans are included in this category. ( There are some loan fees such as syndication fees and swap fees that are in other income Statement categories or noninterest income. ) The next largest component of interest income is generally investment income. Manageme Interest expense is the interest the bank pays on deposits to customers but can also include borrowings the bank incurs on its own account. Interest expense is generally the largest expense for a bank nt Interest income/revenue- interest expense= Net Interest Income/revenue There are some loan fees and expenses that are actually amortized over the life of the loan but included in net interest income. Expense examples include loan origination costs, documentation costs, appraisals etc. if paid by the bank are amortized. Net interest margin =Net Interest Income (Tax Equivalent)/average interest-earning assets x 100. Also referred to as NIM  Income Stateme nt As can be seen here, the primary driver of interest income is interest income from loans while the next largest component is from investments Interest expense is the interest banks pay on deposits. It can also include Interest on debt of the bank’s borrowings. Interest expense is the largest expense for most banks Interest income-interest expense is net interest income.  Interest Rate Spread= The difference between the average rate earned on earning assets (tax equivalent) and the average rate paid on deposits. Tax Equivalent income comes into play if Income bank loans or invests in securities that are tax exempt meaning the earnings to the Statement bank are exempt from federal income taxes. The rate of these loans are much Manageme lower than the going rate. If a bank would charge 4% traditionally but the loan is to a nt tax qualified entity and purpose qualified, with a 28% corporate tax rate, the bank would charge 2.88%. (72% of 4%) Therefore, a bank will convert income to a taxable equivalent income in order to adequately calculate true margins and returns  Non-interest income (other operating revenue) are other types of income generally from off balance sheet opportunities or fee income. Noninterest income is a very important component of a bank’s overall profitability especially in the last few years when there is more pressure on traditional margins and Income spreads. Examples of types of fee income would include certain types of fees on loans, service charges Statement on depository products and other products and services such as commercial card, wealth management, swaps, foreign exchange etc. Manageme Non-interest expense (Other operating Expense) expense would be salaries, benefits, nt donations and other basics like utility and occupancy expense etc. Net Income – Net expense in the above categories is also referred to as Net revenue Before Taxes This category is an important measurement of bank performance before factoring into provision expense or taxes.  As we have discussed, a big driver to a bank is the credit quality. If the credit quality is deteriorating and the bank needs to increase its Allowance for Loan Loss reserve to cover any potential losses, then you will see an increase to the reserve which would be an expense for the bank otherwise referred to as provision expense. If you review earning reports, the addition or release of reserves Income is a primary driver of a bank’s overall performance. The pretax pre provision income – less loan loss (provision) expense and taxes would equal a bank’s net income. (Impact Statement from goodwill and other non-tax charges is in pre-tax pre- provision numbers. ) This will be discussed in greater detail when we discuss credit Manageme risk, but if a bank has loans that have deteriorated to the point that the repayment of the principal is at risk, the bank will place the loan on nonaccrual. Any future payments of interest and nt principal will apply to principal until the loan is either paid off, foreclosed, refinanced or it could return to accrual if performance improves. Therefore, it is not impacting the income statement and is a non-earning asset and is costly for banks to carry. In addition, if a bank forecloses on collateral both this asset is classified as other real estate owned or ORE. Both nonaccrual loans and other real estate owned assets are considered nonperforming assets.  Banks adopt policies and methodology as it relates to maintaining adequate reserves in its Allowance for Loan and Lease Losses. One fundamental change in methodology was in the adoption of the 2019 CECL Rule. In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised Income certain capital regulations to account for changes to credit loss accounting under U.S. GAAP. The 2019 CECL Rule included a transition option that allows banking Statement organizations to phase in, over a three-year period, the day-one adverse effects of adopting a new accounting standard related to the measurement of current expected Manageme credit losses (“CECL”) on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies nt issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under U.S. GAAP (as of January 2020) to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option).  Income Statement Pre-provision net revenue is net revenue before taxes after the provision expense or (benefit) Income Reconciliation of pre-provision net revenue: Statemen Three Months Ended t Jun. 30, 2023 Mar. 31, 2023 Dec. 31, 2022 Sep. 30, 2022 Jun. 30, 2022 Pre-provision net revenue is net revenue Net income before taxes $ 195,637 $ 208,401 $ 216,256 $ 196,272 $ 168,980 before taxes after the provision expense or Provision for expected credit losses 17,000 16,000 15,000 15,000 - (benefit) Net income (loss) attributable to non- controlling interests 328 128 (37) 81 12 Pre-provision net revenue $ 212,309 $ 224,273 $ 231,293 $ 211,191 $ 168,968 Income Statemen t Different Presentations for profitability and or PPNR reconciliation Income Statemen t Different Presentations for profitability and or PPNR reconciliation  In determining key performance ratings in relation to the bank’s profitability you will see ROE and ROA referred to most commonly. ROE is the rate of return on a bank’s Income total equity capital as a percentage. ROE= Net income/Total Equity Capital Statement ROA is the rate of return on a bank’s Manageme assets as a percentage and measures the ability of the bank to utilize nt resources of the bank to generate returns. It is generally a reflection of the effectiveness of bank management ROA=Net income/Total Assets x 100 Both of these are used to compare performance to peers.  Another ratio that you will hear mentioned is the efficiency ratio of the bank. This is a key management area that deals effectively and simply with the expenses as a percentage of revenue. The higher the number the less efficient and so in earnings calls, many times you will hear an analyst asking for guidance for this important ratio. Income In discussion of bank’s earnings, you will hear reference to earnings per common share for the quarter. This is simply how many dollars of net income have been Statement earned by each share of common stock during the certain time period. It will be referenced in terms of dollars (or cents) Because the number of shares can Manageme change during a given period you would normally use the weighted average shares outstanding. There is also reference to diluted shares for capital nt structure that are more complex in nature that include instruments that can be converted or can increase the number of common shares. Examples are convertible bonds, convertible preferred shares or stock options or warrants. Reporting basic EPS allows companies to more readily compare earnings while diluted EPS represents a smaller number (if applicable) because of the number of shares that could be converted is a higher denominator. Income Statemen t In calculating Net Revenue pre-provision, you would take net income before taxes and add back or subtract provision benefits to get a pre- provision net revenue number. This equals earnings prior to any impact or benefit from provision during the quarter.  Three Months Ended QUARTERLY EARNINGS Jun. 30, 2023 Mar. 31, 2023 Dec. 31, 2022 Sep. 30, 2022 Jun. 30, 2022 TREND - UNAUDITED BOK FINANCIAL Interest revenue $ 570,367 $ 516,729 $ 451,606 $ 363,150 $ 294,247 CORPORATION Interest expense 248,106 164,381 98,980 46,825 20,229 (in thousands, except ratio and Net interest revenue 322,261 352,348 352,626 316,325 274,018 Provision for credit losses 17,000 16,000 15,000 15,000 - per share data) Net interest revenue after provision for credit losses 305,261 336,348 337,626 301,325 274,018 Other operating revenue: Brokerage and trading revenue 65,006 52,396 63,008 61,006 44,043 Transaction card revenue 26,003 25,621 27,136 25,974 26,940 Income Fiduciary and asset management revenue Deposit service charges and fees Mortgage banking revenue 52,997 27,100 15,141 50,657 25,968 14,367 49,899 26,429 10,065 50,190 28,703 11,282 49,838 28,500 11,368 Statement Other revenue 14,250 16,970 17,034 15,479 12,684 Total fees and commissions 200,497 185,979 193,571 192,634 173,373 Other gains (losses), net 12,618 2,251 8,427 979 (7,639) Gain (loss) on derivatives, net (8,159) (1,344) 4,548 (17,009) (13,569) Loss on fair value option securities, net (2,158) (2,962) (2,568) (4,368) (2,221) Manageme Change in fair value of mortgage servicing rights Gain (loss) on available for sale securities, net 9,261 (3,010) (6,059) - (2,904) (3,988) 16,570 892 17,485 1,188 nt Total other operating revenue 209,049 177,865 197,086 189,698 168,617 Other operating expense: Personnel 190,652 182,145 186,419 170,348 154,923 Business promotion 7,640 8,569 7,470 6,127 6,325 Charitable contributions to BOKF Foundation 1,142 - 2,500 - - Professional fees and services 12,777 13,048 18,365 14,089 12,475 Net occupancy and equipment 30,105 28,459 29,227 29,296 27,489 Insurance 6,974 7,315 4,677 4,306 4,728 Data processing and communications 45,307 44,802 43,048 41,743 41,280 Printing, postage and supplies 3,728 3,893 3,890 4,349 3,929 Amortization of intangible assets 3,474 3,391 3,736 3,943 4,049 Mortgage banking costs 8,300 5,782 9,016 9,504 9,437 Other expense 8,574 8,408 10,108 11,046 9,020 Total other operating expense 318,673 305,812 318,456 294,751 273,655 Net income before taxes 195,637 208,401 216,256 196,272 168,980 Federal and state income taxes 44,001 45,905 47,864 39,681 36,122 Net income 151,636 162,496 168,392 156,591 132,858