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Bank Financial Statement Analysis & Ratio Analysis

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Please also see a Guide to U.S. and International Bank Supervision and Regulation
and
U.S. and International Banking Operations.
FFIEC Uniform U.S. Bank Performance Report
FFIEC Call Reports and U.S. Thrift Financial Reports
Net Interest Margin for all U.S. Banks (Federal Reserve Bank of St. Louis)
U.S. Federal Reserve Bank - Charge-off and Delinquency Rates at U.S. Commercial Banks

Thus far in the United States during 2011, there have been 43 bank failures. In 2010, the United States had 157 bank
failures compared with 140 in 2009, 25 in 2008 and 3 for the entire year of 2007. The FDIC has 860 banks with assets
totaling $379.2 billion on its confidential list of troubled institutions as of September 30, 2010.
FDIC failed bank list: www.fdic.gov/bank/individual/failed/banklist.html
Committee of European Banking Supervisors (CEBS), 2010 EU-wide stress test exercise, July 23, 2010, Summary Report.
stress-test.c-ebs.org/results.htm

 In the United States, on September 29, 2009, the FDIC publicly proposed that insured banks prepay their estimated
quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012.
 The prepaid assessment for these periods was collected on December 30, 2009, along with each institution’s regular
quarterly risk-based deposit insurance assessment for the third quarter of 2009.
 The prepaid assessment rate for 2011 and 2012 is equal to that institution’s modified third quarter 2009 total base
assessment rate plus 3 basis points.
 Each institution would record the entire amount of its prepaid assessment as a prepaid expense (asset) as of December
30, 2009. As of December 31, 2009, and each quarter thereafter, each institution would record an expense (charge to
earnings) for its regular quarterly assessment for the quarter and an offsetting credit to the prepaid assessment until the
asset is exhausted. Once the asset is exhausted, the institution would record an accrued expense payable each quarter for
the assessment payment, which would be paid in arrears to the FDIC at the end of the following quarter. If the prepaid
assessment is not exhausted by December 30, 2014, any remaining amount would be returned to the depository
institution.
 The reason for the request stems from the belief by the FDIC that it has under-estimated the cost of receivership
administration of banks closed by their respective regulators and needs to replenish its available funds immediately.
www.fdic.gov/news/board/2009nov12no4.pdf

Balance Sheet Analysis

Assets
Current Assets / Liquid Assets
 Cash and cash due from Central Bank; cash on deposit in postal banking accounts; Due from Banks;
Interest-bearing deposits in other banks
 Cash held in trust: may be on the behalf of a third party or the result of a merger/acquisition and may have
restrictions encumbering its usage.
 Fed Funds Sold: Federal funds, or fed funds, are unsecured loans of reserve balances at Federal Reserve
Banks that depository institutions make to one another. Banks keep reserve balances at the Federal Reserve
Banks to meet their reserve requirements and to clear financial transactions. Transactions in the fed funds
market enable depository institutions with reserve balances in excess of reserve requirements to lend them, or
“sell” as it is called by market participants, to institutions with reserve deficiencies. Fed Funds are sold daily to
various financial institutions (commercial banks, thrift institutions, agencies and branches of foreign banks in
the United States, federal agencies, and government securities dealers) throughout the United States. The most
common duration or term for fed funds transaction is overnight, though longer-term deals are arranged. The
rate at which these transactions occur is called the fed funds rate.

Fed funds transactions can be initiated by either a funds lender or a funds borrower. An institution seeking to
lend fed funds identifies a borrower directly, through an existing banking relationship, or indirectly, through a
fed funds broker. The most commonly used method to transfer funds between depository institutions is for the
lending institution to authorize its district Federal Reserve Bank to debit its reserve account and to credit the
reserve account of the borrowing institution.

Most overnight loans are booked without a contract. The borrowing and lending institutions exchange verbal
agreements based on various considerations, particularly their experience in doing business together, and limit
the size of transactions to established credit lines in order to minimize the lender's exposure to default risk.

Overnight fed funds transactions under a continuing contract are renewed automatically until termination by
either the lender or the borrower. This type of agreement is used most frequently by correspondent banks that
borrow overnight fed funds from a respondent bank.

 Due From Banks: demand and time deposits with other banks (does not include loans to banks that may
be termed time deposits due from banks) and although there is a slight element of risk involved, it is still
considered cash.
 Negotiable Certificates of Deposit, which should be stated at the lower of cost or net realizable value.
 Marketable Securities: U.S. Treasury and other U.S. government agencies, States and political
subdivisions, exchange listed (publicly traded) securities such as corporate bonds equities, Asset-backed
securities Mortgage-backed securities. This account is also sometimes known as Securities Available-for-Sale
(amortized; price movements in these securities are dependent upon the movement in market interest rate).

During 2009, many banks in the United States have purchased mortgage-backed securities issued and
guaranteed by the Government National Mortgage Association (Ginnie Mae / GNMA), which are also backed by
the FHA, in order to improve the bank's balance sheet as they are seen as high quality compared to other
securities (due to the federal government guarantee) and also because they receive a zero risk weighting under
regulatory guidelines and improve the bank's capital ratios. However, it is some what manipulative of the
capital ratio as the replacing FNMA, FHLMC and private label securities with GNMA securities will quickly
improve the capital ratios even as loans in the bank's portfolio are deteriorating.

Loans less than one year

 Advances to customers
 Accounts receivable - trade

 Securities held under Reverse Repurchase Agreements: the financial institution "lent" out cash and
took securities at a discounted value as security, which are recorded as receivables.

Please also see A Guide to Repurchase Agreements

Loans or Receivables (of various maturities in excess of one year) will represent one of the main business
activities of the the bank and may account for the largest percentage of total assets. A loan is an extension of
credit resulting from direct negotiations between a lender and a borrower. Loans may be held until maturity,
may be sold in whole or a portion to third parties, and may also be obtained through purchase in whole or in
portion from third parties.
 What is in the portfolio? Corporate / commercial loans (secured / unsecured, fixed-term / revolving)?
Construction loans (this is one of the riskiest types of loan), Commercial lease financing, Mortgages (residential
or commercial), secured loans, loans to public authorities, consumer loans such as credit card, home equity and
personal loans; consumer lease financing?
 Collateralized loans mean that the grantor has in its possession (or a fiduciary, administrator, trustee)
readily marketable or highly liquid instruments (cash, CDs, stocks and bonds). Sufficient margin on
collateralized credits should also be provided (due to interest rate and market sensitivity).
 Secured loans are secured by assets that are not readily marketable and/or under the control of the
recipient of the loan (UCC filings on receivables, pledges of inventory, equipment, assignment of real estate
mortgages or rents, contracts). Pledge of inventory and real estate should be adequately insured and in the
name the Grantor.
 Loans secured by real estate are loans predicated upon a security interest in real property. A loan
predicated upon a security interest in real property is a loan secured wholly or substantially by a lien on real
property for which the lien is central to the extension of the credit
 Shown net of Allowance of Losses (the reserve set aside that represents an amount considered by
management to be adequate to cover estimated losses in the loan portfolio).

What is the difference between Loan Loss Reserve and Loan Loss Provision? The Reserve is the balance sheet
component that has already been established (to cover actual or anticipated deterioration of the loan assets).
The provision is the income statement component amount that is charged against earnings and will be added to
the Reserves (thus increasing the Reserve account).

 Due from parental holding company or related company (unsecured? rate?)

 What are maturities (mix should slant to the short-term).
 What is the performance of the portfolio? Delinquencies, charge-offs and provisioning? How quickly does the
bank classify a loan as over due / delinquent. and / or non-performing (30 days or 180 days)?
 If loan quality deteriorates, then the resultant for increased provisioning will result in lower earnings for the
year (or coming years if deterioration continues in a recession or high interest rate environment).
 Credit quality concerns are cyclical as banks over-lend to sectors experiencing growth and then that growth
stops (LDC/less developed countries, commercial real estate, consumer loan/credit card portfolio).

Legal lending limits:

The legal lending limit for national banks is set forth at 12 U.S.C. § 84. Specifically, 12 U.S.C. § 84(a) indicates
that loans to one borrower generally cannot exceed 15% of the bank’s capital and that lenders can make
additional loans to a borrower totaling up to 10% of the bank’s capital if those additional loans are fully secured
by “readily marketable collateral.” The legal lending limit also generally applies to Federal Deposit Insurance
Corporation-insured thrift institutions. See 12 U.S.C. § 1464(u). Respective state law applies legal lending limits
to state-regulated banks.

What does capitalized interest mean? It means that uncollected interest has been added to the principal
balance of the loan.
What happens when a loan goes bad? When a loan (or other investment) is deemed uncollectible, the financial
institution must remove it from the asset side of the balance sheet and from the Reserve for Loan Losses
Account or an appropriate expense account.

 Derivative Contracts for managing (positioning or hedging) exposure to market risk (including interest
rate risk and foreign exchange risk), cash flow risk, and other risks in operations and for trading. The
accounting and reporting standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities are set forth in FASB Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended. Statement No. 133 requires all derivatives to
be recognized at their fair value.

The accounting standard for fair value measurements that should be applied in accounting pronouncements
that require or permit fair value measurements is FASB Statement No. 157, “Fair Value Measurements” (FAS
157), which defines fair value and establishes a framework for measuring fair value. The definition of fair value
for an asset or liability is the price that would be received to sell the asset or paid to transfer the liability in an
orderly transaction between market participants (not a forced liquidation or distressed sale) in the asset’s or
liability’s principal (or most advantageous) market at the measurement date. The transaction is assumed to
occur based on an exit price notion versus an entry price.

 Mortgage Servicing Rights (MSRs): Many banks that originate primary residential mortgages and then
sell them into the secondary market retain the servicing rights of the mortgage. This means that for a fee the
bank collects the monthly payment from the mortgagee and passes on the principal and interest components of
the payment to the trust that owns the mortgage and then also makes the insurance and real estate tax
payments from the escrow account that is maintained.

Mortgage servicing rights represent a future stream of payments. The on-balance sheet carrying value of these
MSRs is still subject to a fair value test under FAS 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. The value of the MSRs are affected by the prepayment speed of the
underlying mortgages being serviced because if they pay off faster than had been assumed then there are
fewer mortgages to be serviced and a resultant lower income stream than had been anticipated. Thus, in a
declining interest rate environment where home owners are refinancing to a lower rate or selling and
purchasing a new home and the original MSR is rapidly losing mortgages from the original group to be serviced
the bank must now write down the value of the MSR portfolio. Conversely, in a rising interest rate environment
the MSRs tend to have a stable or increasing value as the maturity of the MSRs lenghten (as no one is
refinancing).

Federal Home Loan Bank capital stock

 Often a component of U.S. banks' balance sheets.

Fixed Assets
  Leasehold and freehold land and buildings (at historical cost or at revised market value at time of
statements, less depreciation and amortization).
 Tangible fixed assets: fixtures, equipment, motor vehicles (depreciated or amortized).

Investments
 Brady bonds (should not be carried at a value not exceeding their secondary market value).
 Investments in subsidiaries.

Other Assets
 Bank-Owned Life Insurance

Other real estate owned ("OREO")

 Foreclosed property held by the bank.

Intangibles and Goodwill

 Goodwil is generated when a bank purchases a operating company in excess of its book value. U.S. Banks
are required under GAAP accounting guidelines to perform goodwill impairment tests periodically.

Liabilities
Current Liabilities
 Due to customers (onsight or time deposits) / Deposits: Savings accounts, regular checking accounts, NOW
accounts, money market deposit accounts, CDs.
 Core Deposits consist of all interest-bearing and noninterest-bearing deposits, except certificates of
deposit over $100,000. They include checking interest deposits, money market deposit accounts, time and
other savings, plus demand deposits.

Core deposits represent the most significant source of funding for a bank and are comprised of noninterest-
bearing deposits, interest-bearing transaction accounts, non-brokered savings deposits and non-brokered
domestic time deposits under $100,000. The branch network is a bank's principal source of core deposits, which
generally carry lower interest rates than wholesale funds of comparable maturities.

It can be difficult for a bank to attract deposits in a mature market except by increasing savings rates.
However, that action can result in a reduction of the bank's net interest income. In addition, if the bank offers a
higher rate to new customer accounts then it can alienate existing customers (who may withdraw their depost
permanently or seek to open a new account in order to obtain the higher rate). Another problem with deposits
is that there tends to be a maturity mismatch with long-term assets.

Please also see A Guide to Consumer Banking Products: Deposits

 Brokered Deposits represent funds which the bank obtains, directly or indirectly, by or through any
deposit broker for deposit into one or more deposit accounts. Thus, brokered deposits include both those in
which the entire beneficial interest in a given bank deposit account or instrument is held by a single depositor
and those in which the deposit broker sells participations in a given bank deposit account or instrument to one
or more investors. Fully insured brokered deposits are brokered deposits that are issued in denominations of
$100,000 or less or that are issued in denominations greater than $100,000 and participated out by the deposit
broker in shares of $100,000 or less.
 Due to banks (on-sight or time deposits)
 Commercial Paper consists of short-term negotiable promissory notes issued in the United States, which
rollover every 30 to 270 days and are usually not collateralized.
 Short-term borrowings are usually from banks, securities dealers, the Federal Home Loan Bank, unsecured
federal funds borrowings, which generally mature daily.
 Fed Funds Purchased are short-term, unsecured borrowings.
 Advances from a Federal Home Loan Bank are fully collateralized by loans on the bank's asset-side of the
balance sheet.
 Dividend payable (preferred stock dividend in arrears)
 Derivative Contracts for managing (positioning or hedging) exposure to market risk (including interest
rate risk and foreign exchange risk), cash flow risk, and other risks in operations and for trading. The
accounting and reporting standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities are set forth in FASB Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended. Statement No. 133 requires all derivatives to
be recognized at their fair value.

Long-Term Liabilities

 Notes payable
  Mortgages payable, which may have been incurred for commercial property where either the headquarters,
offices or branches of the bank are located.

 Subordinated Note (or debenture) is a form of debt issued by a bank or a consolidated subsidiary. When
issued by a bank, a subordinated note or debenture is not insured by a federal agency, is subordinated to the
claims of depositors, and has an original weighted average maturity of five years or more. Such debt shall be
issued by a bank with the approval of, or under the rules and regulations of, the appropriate federal bank
supervisory agency.

 Contingent Core Tier 1 Capital / CoCos is debt that will automatically convert into equity shares of the
bank if the bank's core capital ratio declines below a specific level.

 Accrued/deferred taxes

Stockholder's Equity / Share Capital

 Common shares (authorized and outstanding). Is there a tier system of voting shares and common shares?

Why is it a poor decision for banks to buy back shares on the open market in order to increase the market price
of the common equity? Because corporate stock purchases actually reduce capital (instead of increasing
retained earnings). Why is it an even worse decision of taking on debt to buy back shares on the open market?
Because the bank is actually increasing leverage while it is simultaneously reducing capital.

 Preferred shares (restrictions?). Preferred stock is a form of ownership interest in a bank or other company
which entitles its holders to some preference or priority over the owners of common stock, usually with respect
to dividends or asset distributions in a liquidation.
 Some trust related preferred securities may have equity characteristics and are treated favorably under Tier
1 guidelines; and may have lower interest costs. The instruments are deeply subordinated (just ahead of
common stock) and have long maturities although they may have call provisions. Dividend payments may have
some favorable tax treatment for the issuers. However, these securities generally have debt-like
characteristics. The bank is unlikely to defer dividend payments due to the message it may send to other
sources of funding.

 Retained Earnings: equity will increase if retained earnings are increasing.

 Subordinated, perpetual notes

 Trust Preferred Securities / TruPS. TruPS were approved by the Federal Reserve in 1996 as Tier 1
capital (maximum 25.0% of tier 1 capital). The Trust issuer is usually a wholly-owned subsidiary of a bank
holding company, or a direct subsidiary of the bank. The Trust sells securities to investors and then uses the
proceeds from the sale to purchase subordinated debentures of the parent holding company or bank. The Trust
uses the interest payments that it receives from the purchased debentures to make payments to the holders of
its preferred securities. A TruPS issue is subordinate to all debt on a financial institution's balance sheet, but is
senior to both preferred and common equity issues. A TruPS issue usually has a term of 30 years, and are non-
amortizing instruments that pay quarterly or semi-annual interest in the form of a dividended payment (the
dividend payment can be deferred for up to five years). TruPS issued by small financial institutions were
pooled / securitized in CDOs during the early to mid-2000's (larger financial institutions had issued TruPS
individually since 1996). When the financial crisis and recession 2008 - 2010 commenced many financial
institutions suspended the interest / dividend payment and the CDOs, which had originally been rated Triple-A,
either substantially lost value or defaulted.

Clarifying the value of Stockholder's Equity. Equity invested into any type of financial institution is an
accounting entry. It is not a situation where there is a separate account where segregated cash and assets are
held independently for an emergency of what is indicated on the balance. Rather, equity is utilized to
purchase / invest in assets from which the financial institution can generate revenue. Thus, the value of
Equity is only as good as the quality of the Assets that have been purchased. That is why one of the
first considerations of analyzing Equity is to deduct Intangible Assets (can not be monetaized) to determine
Tangible Net Worth. Then, Non-Performing Assets must be deducted, along with any other other asset they
may not be able to be monetized, or then any assets that need to be discounted from the book entry value on
the balance sheet (either due to questionable value, market conditions or time constraint). The first test is
always to determine if there are sufficient enough Assets that could be sold quickly to cover short-term liquidity
needs (anything from 72 hours to 28 days). The second test is to determine whether there are sufficient
enough high quality assets, after deducting intangibles and / or discounting assets, in an amount that exceeds
Liabilities by a minimum percentage (which is the same as the basic accounting equation of Assets - Liabilities
= Stockholder's Equity). Indicating that the financial institution has sufficient Equity based on computing a ratio
without examining the quality of the Assets is a mistake. The value of Assets are always questionable, the value
amount of Debt is not.
Income Statement
Income
 Interest income (gross or net?): is adversely affected by falling long and short-term interest rates.

Interest expense
 Subtracted from Interest Income Only
 The cost of funds the company borrows on a short- and long-term basis, buys in the money markets, or
takes in from depositors. Competition for customer funding will increase interest expense, placing pressure on
margins. Some banks and financial services companies will also break out the average annual interest rate paid
on the various sources of funds.
 If interest expense is increasing is competition forcing the bank to pay more for deposits? Is management
relying on high cost funds instead of alternative lower-cost funds to meet the bank’s funding needs?

Net Interest Income

 This is interest income minus interest expense.
 Even a small decline in net interest income can result in a large decline in net income if not offset by a
decline in expenses.
 See how to determine Net Interest Margin below.

Non-interest Income
 It is important that banks develop/increase revenues derived from non-interest sources (bank services, fees
such service charges on deposits, trust income, mortgage servicing fees, securities processing and brokerage
services, results of trading operations) that have more stable growth rates and are not tied to loan growth
cycles, and can provide an offset if loan growth slows.

Other Income
 Dividend income: from third party investment or subsidiary/affiliate?
 Net/gain loss from securities trading: volatility from year to year.
 Foreign exchange: based on customer activity and volatility in the market.
 Sale of investments: is it exceptional?
 Net commission/fee income; based on transactions such as insurance brokering, stock-broking
 Related party transaction(s)
 Watch-out for financial institutions that utilize "gain on sale" accounting which means that the company
records the sale of a loan immediately but the actual profit is received over the life of the loan. The profit is the
difference between the spread that the loan is sold at to the investor and what the seller receives from the
Obligor. The problem is that the application of estimated future interest rates (and default rates) is incorrect
and the loans are over-valued compared to where interest rates may actually be during the life-time of the loan
and whether it will prepay if rates decline, and/or if the loan will default and become un-collectible.

Non-interest expense
 Personnel costs

As part of the $787 billion U.S. economic stimulus package passed in February 2009, there is a stipulation that
all banks that receive infusions from the government's $700 billion financial rescue fund must restrict executive
compensation to those persons earning $1 million or more per year in salary may receive only $500,000 in
additional bonus compensation. The prohibition does not apply to bonuses that were negotiated as part of an
executive's compensation contract signed prior to Feb. 11, 2009. www.ustreas.gov/press/releases/tg15.htm

 Premises / branch operating expenses (rent).

 Systems development costs, merger of networks: as companies must compete based on the ability to
provide state-of-the art trading, retail access and information service, these costs have risen.
 Overseas expansion: as the percentage of non-U.S. income rises, this cost increases as facilities expand.

Operating income
 After expenses but before provisions and taxes and extraordinary items.

Extraordinary / Non-recurring Items

 Material events and transactions that are unusual and infrequent.
 Profit (gains) or loss on sale of fixed assets.

Provision (for loan losses)

 Changing market conditions where the bank operates may result in a deterioration of loan and lease assets,
which may result in actual and anticipated losses (write-down or write-off of the asset's value). The
accumulated loss may exceed the existing Loan Reserve thus earnings may have to added to the Loan Reserve
account to either increase or replenish the amount to meet an acutal or anticipated loss.

Taxation
 Current taxation (tax payable on recognized income for the fiscal year, which was paid to federal, state and
local, and foreign revenue authorities).
 Deferred taxation
Footnotes
Allowance for losses (Loan Loss Account) - is a reserve account that is set aside by management to cover an
estimate of losses (charge-offs) in the loan portfolio. The loan loss account has an opening balance at the
beginning of the year, it receives additional provisions based on actual losses and anticipated losses for the
coming year; has actual charged-off loans subtracted from the account and then has a closing balance for the
year).

Classified Loans - loans that have been determined to be not collectable for the full amount due to the
deteriorating performance and/or condition of the borrower. The "classification" is based upon internal
examination and rating system (based on generally accepted industry practices) such as non-performing
accrual, non-accrual. The Office of the Comptroller of the Currency (OCC) also rates loans are classified as
substandard, doubtful, and loss.

Call Report
In the United States, banks must file on a quarterly basis a Consolidated Report of Condition and Income (Call Report;
Form Number: FFIEC 031 for banks with domestic and foreign offices and FFIEC 041 for banks with domestic offices only).
These information collections are mandatory: 12 U.S.C. 161 (for national banks), 12 U.S.C. 324 (for state member banks),
and 12 U.S.C. 1817 (for insured state nonmember commercial and savings banks) and are submitted by the banks to their
respective regulator, which includes the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal
Reserve and the Federal Deposit Insurance Corporation (FDIC). The Thrift Financial Report (Form Number: OTS 1313) is
submitted to the Office of Thrift Supervision (U.S. Treasury). The agencies are proposing several changes to the FFIEC Call
Report and The TFR.
Consolidated Report of Condition and Income: edocket.access.gpo.gov/2009/pdf/E9-19911.pdf
Thrift Financial Report edocket.access.gpo.gov/2009/pdf/E9-19908.pdf

What happens to a bank when a regulator steps in and seizes a financial istitution and appoints the FDIC as Receiver of the
failed institution?
 All creditors must submit their claim in writing, with proof of the claim, to the Receiver by a specific date (referred to as
the Bar Date).
 The FDIC arranges for a transfer of the deposits to another insured institution (deposits normally are sold at percentage
of their notional amount).
 U.S. Federal law 12 U.S.C. Section 1822(e) requires that depositors must claim ownership of the deposit transferred to
the new institution within 18 months (failure to do so will result in the funds being transferred to the FDIC).
 The deposits can be claimed by simply making a deposit or withdrawal from the account, executing a new signature
card and entering into a new deposit account with the new institution, providing the new institution with a change of
address card, or writing to the new institution and indicating that one wishes to keep the account active.
 Any checks (cashier check, money order, interest check, expense check) issued by the failed institution must also be
claimed within 18 months.
 The FDIC will attempt to sell assets, primarily outstanding loans, to the institution purchasing the deposits and / or
branches (the institution purchases the real estate or the institution will assume the lease obligation for the branch and
may retain some of the employees) at par or at a reasonable discount.
 The FDIC will allow borrowers whose loan has not been purchased by another institution the opportunity to find another
bank who will take over the loan.
 The FDIC may bundle any left over loans and conduct an on-line auction and the loans are then sold to the highest
bidder. Those borrowers who are current merely send their monthly payment to the new institution. Those borrowers who
are in default under the terms of the loan documentation may have the loan accelerated (demand for payment in full)
and / or have the collateral seized if the loan cannot quickly be worked out.

CAMELS
The CAMELS approach was developed by bank regulators in the United States as a means of measurement of the financial
condition of a financial institution. (Uniform Financial Institutions Rating System established by the Federal Financial
Institutions Examination Council)
The acronym CAMELS stands for:
 Capital Adequacy
 Asset Quality
 Management
 Earnings (Profitability)
 Liquidity & Funding
 Sensitivity to Market Risk (losses arising from changes in market prices)
CAMELS analysis requires:
 financial statements (the last three years and interim statements for the most recent 12-month period)
 cash flow projections
 portfolio aging schedules
 funding sources
 information about the board of directors
 operations/staffing
  macroeconomic information
In reviewing ratios the credit analyst needs to keep 2 concepts in mind:
 Level or whether the ratio for a given fiscal period is either equal to or exceeds (which can be both positive or negative
depending on the ratio) the established parameters of what is considered a generally acceptable position for that specific
ratio.
 Trend or whether the fiscal to fiscal comparison period indicates that the level of the ratio is improving or deteriorating.

In addition, individual ratios must not be reviewed in isolation to other ratios and what is the present strategy of the
management of the financial institution.

Capital Adequacy
On Septmber 3, 2009, the U.S. Department of Treasury proposed that capital requirements for all banking firms should be
increased, and capital requirements for financial firms that could pose a threat to overall financial stability should be higher
than those for other banking firms.
www.treas.gov/press/releases/docs/capital-statement_090309.pdf

The Office of the Comptroller of the Currency along with other agencies are requesting comments regarding a proposal to
modify general risk-based and advanced risk-based capital adequacy frameworks to eliminate the exclusion of certain
consolidated asset-backed commercial paper programs from risk-weighted assets due to the implementation of the
Financial Accounting Standard Board’s (FASB) Statement of Financial Accounting Standards No. 166, Accounting for
Transfers of Financial Assets, an Amendment of FASB Statement No. 140 and Statement of Financial Accounting Standards
No. 167, Amendments to FASB Interpretation No. 46(R). www.occ.gov/ftp/release/2009-101a.pdf

In August 2009, the FDIC approved guidelines to allow private-equity investors to acquire the deposit liabilities and assets
of failed banks operating under FDIC receivership (includes a Minimum Tier 1 leverage ratio of 10.0%).
www.fdic.gov/news/board/Aug26no2.pdf

Capital Adequacy is a measurement of a bank to determine if solvency can be maintained due to risks that have been
incurred as a course of business. Capital allows a financial institution to grow, establish and maintain both public and
regulatory confidence, and provide a cushion (reserves) to be able to absorb potential loan losses above and beyond
identified problems. A bank must be able to generate capital internally, through earnings retention, as a test of capital
strength. An increase in capital as a result of restatements due to accounting standard changes is not an actual increase in
capital.
The Capital Growth Rate, which is calculated by subtracting prior-period equity capital from current-period equity capital,
then dividing the difference by prior-period equity capital, indicates that either earnings are extremely good, minimal
dividends are being extracted or additional capital funds have been received through the sale of new stock or a capital
infusion, or it can mean that earnings are low or that dividends are excessive. The capital growth rate generated from
earnings must be sufficient to maintain pace with the asset growth rate.
The 1988 Basel Committee Capital Accord established a benchmark for measuring bank capital (and for correctly
calculating / risk weighting assets, which became the denominator of the capital ratio):
BIS Tier 1 (core capital): total own funds (allotted, called up and fully paid, ordinary share capital/common
stock net of any shares held; perpetual, non-cumulative, preferred shares, including such shares redeemable at
the option of the issuer; disclosed equity reserves in the form of general and other reserves created by
appropriations of retained earnings, share premiums and other surplus; published interim retained profits
verified by external auditors, minority interests arising on consolidation from interests in permanent
shareholder's equity; fund for general banking risks) must be at least 4% of total risk weighted positions.
Germany, Belgium, the Netherlands, and the UK maintain hidden reserves.

The only intangibles that the FDIC allows to be included in Tier 1 regulatory capital are purchased mortgage
servicing rights and purchased credit card relationships (cannot account for more than 50% of an institution's
Tier 1 capital unless those grandfathered in from February 19, 1992).

BIS Tier 2 (supplemental): total own funds (plus value adjustments; reserves arising from the revaluation of
tangible fixed assets and financial fixed assets; hybrid capital instruments) must be at least 8% of total risk
weighted positions.

In the United States, Capital Adequacy is regulated by Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift
Supervision (OTS).
 The OCC supervises the capital adequacy of national banks and federal branches of foreign banking organizations.
 The Federal Reserve Board supervises the capital adequacy of state-chartered banks that are members of the Federal
Reserve System (state member banks).
 The FDIC supervises the capital adequacy of state-chartered banks that are not members of the Federal Reserve
System.
 The Office of Thrift Supervision (OTS) supervises the capital adequacy of all federally chartered and many state-
chartered savings associations.
The 1988 Basel Accord serves as the basis for current U.S. capital regulations. The 1988 Accord required that
internationally active banking organizations adopt the new capital rules, but some countries, including the United States,
chose to apply the 1988 Basel framework to all banks and thrifts. As indicated above, in the United States Tier I capital
must constitute at least 50% of a bank’s total capital. Total of Tier 2 capital is limited to 100% of Tier 1 capital. The add-
back of the allowance for loan and lease losses is limited to 1.25% of weighted-risk assets.
The Basel / U.S. baking regulation guidelines for a "Well Capitalized institution"
 5% or better Tier 1 Leverage Ratio (the ratio of Tier 1 capital to average total assets)
 6% or better Tier 1 risk-based ratio (the ratio of Tier 1 capital to total risk-adjusted assets, with assets
categorized by risk level)
 10% or better total risk-based ratio (the ratio of total capital to total risk-adjusted assets).

FDIC guidelines for a "Adequately Capitalized institution"

 4% or better Tier 1 Leverage Ratio
 4% or better Tier 1 risk-based ratio
 8% or better total risk-based ratio
In the United States, a bank is expected to meet a minimum ratio of qualifying total capital to risk-weighted assets of
8.0%, of which at least 4.0% should be in the form of core capital (Tier 1). Any bank that does not meet the minimum
risk-based capital ratio, or whose capital is otherwise considered inadequate, generally will be expected to develop and
implement a capital plan for achieving an adequate level of capital (usually under the terms of an FDIC Order to Cease and
Desist). The concept of prompt corrective action by the FDIC was introduced with the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA). When a bank becomes “Undercapitalized” (below "Adequately
Capitalized") in many cases it means that unless it can rapidly turn the operation around it will be shut down by the
respective supervisors. While "Undercapitalized" a bank:
 must cease paying dividends
 is generally prohibited from paying management fees to a controlling person
 must file and implement a capital restoration plan
 cannot accept, renew or roll over any brokered deposit. Effective yield on deposits solicited by the bank cannot be more
than 75 basis points or .75% over local market yields for comparable size and maturity deposits.
When a bank becomes “Critically Undercapitalized” in many cases it means that unless it can rapidly turn the operation
around it will be shut down by the respective supervisors. A critically undercapitalized bank must be placed in receivership
within 90 days unless the FDIC and the bank’s primary federal regulator concur that other action would better achieve the
purposes of prompt corrective action. Additionally, a "Critically Undercapitalized" bank is prohibited, unless it obtains prior
written FDIC approval, from:
 entering into any material transaction not in the usual course of business
 extending credit for any highly leveraged transaction (any transaction in which the borrower has very little equity)
 paying excessive compensation or bonuses
 paying interest on new or renewed deposits that would increase the bank’s weighted average cost of funds significantly
above prevailing interest rates in its normal markets.
FDIC 2000 Rules and Regulations, Part 325 - Capital Maintenance (12 C.F.R. Part 325)
www.fdic.gov/regulations/laws/rules/2000-4400.html
FDIC 2000 Rules and Regulations, Appendix A to Part 325 - Statement of Policy on Risk-Based Capital
www.fdic.gov/regulations/laws/rules/2000-4600.html
In the United States, Supplemental or Tier 2 Capital consists, within certain specified limits, of such things as the
allowance for loan losses, hybrid capital instruments, and subordinated debt. These supplemental items are often forms of
debt that are subordinate to claims of depositors and the FDIC. As such, they provide depositor protection and are included
in bank capital.
The regulatory treatment of Tier 2 capital is such that securities issued in a subordinate position for regulatory capital
purposes have their capital value amortized over the last five years of the security. This was solved in 1997 through a "10
non-call five/seven step-up." A call provision is put in from one day after year five or year seven and the bank is allowed to
call it with five full years as 100% capital treatment. A coupon step-up is put in at the end of year five or seven to allow for
the bond to roll over for a further five year period.
The sum of Tier I and Tier 2 capital, less certain deductions, represents a bank’s total capital.
It should be noted that in the United States, The Gramm-Leach-Bliley Act (GLB Act) currently requires a bank holding
company (BHC) to keep its subsidiary depository institutions “well capitalized” and “well managed” in order to qualify as a
financial holding company (FHC). FHC status allows a BHC to engage in riskier financial activities such as merchant
banking, insurance underwriting, and securities underwriting and dealing. The GLB Act does not, however, require an FHC
to be “well capitalized” or “well managed” on a consolidated basis.
Contingent Core Tier 1 Capital / CoCos is debt that will automatically convert into equity shares of the bank if the
bank's core capital ratio declines below a specific level. This is a hybird form of capital, which may be drawn upon in the
event that the bank's balance sheet or earnings are under pressure. However, the amount of equity capital that is provided
my be insufficient or it may send the wrong signal to the marketplace with regard to the financial health of the bank.

Risk Weighting Assets

The Basel I guidelines on risk weighting asset classes has been revised by the Basel II framework.

Please also see A Guide to the 2004 Capital Accord of the Basel Committee (Basel II)
Capital Adequacy ratio which is calculated by dividing the bank's core capital by the bank's total risk-weighted assets, then
multiply by 100.
Core Capital Adequacy ratio which is calculated by dividing the bank's risk-based capital by the bank's total risk-weighted
assets, then multiply by 100.
The BIS Risk-weighted Assets guidelines were adopted by the Board of Governors of the federal Reserve (Code of Federal
Regulations Title 12, Volume 5; Revised as of January 1, 2002). These guidelines are used to evaluate capital adequacy
based primarily on the perceived credit risk associated with balance sheet assets, as well as certain off-balance sheet
exposures such as unused loan commitments, letters of credit, and derivative and foreign exchange contracts. The risk-
based capital guidelines are supplemented by a leverage ratio requirement. To be "well capitalized" under Federal bank
regulatory agency definitions, a bank holding company must have a Tier 1 ratio of at least 6%, a combined Tier 1 and Tier
2 ratio of at least 10%, and a leverage ratio of at least 3%, and not be subject to a directive, order, or written agreement
to meet and maintain specific capital levels.
Risk-weighted 0%
1. Cash (including domestic and foreign currency owned and held converted into U.S. dollar equivalents)
2. Securities issued by and other direct claims on the U.S. Government or its agencies (to the extent such
securities or claims are unconditionally backed by the full faith and credit of the United States Government).
3. Securities issued by and other direct claims on the central government of an OECD country
4. Notes and obligations issued by either the Federal Savings and Loan Insurance Corporation or the Federal
Deposit Insurance Corporation and backed by the full faith and credit of the United States Government
5. Deposit reserves at, claims on, and balances due from Federal Reserve Banks
6. The book value of paid-in Federal Reserve Bank stock
7. That portion of assets that is fully covered against capital loss and/or yield maintenance agreements by the
Federal Savings and Loan Insurance Corporation or any successor agency
8. That portion of assets directly and unconditionally guaranteed by the United States Government or its
agencies, or the central government of an OECD country

Risk-weighted 20%
1. Cash items in the process of collection
2. That portion of assets collateralized by the current market value of securities issued or guaranteed by the
United States government or its agencies, or the central government of an OECD country
3. That portion of assets conditionally guaranteed by the United States Government or its agencies, or the
central government of an OECD country
4. Securities (not including equity securities) issued by and other claims on the U.S. Government or its agencies
which are not backed by the full faith and credit of the United States Government
5. Securities (not including equity securities) issued by, or other direct claims on, United States Government-
sponsored agencies
6. That portion of assets guaranteed by United States Government-sponsored agencies
7. That portion of assets collateralized by the current market value of securities issued or guaranteed by United
States Government-sponsored agencies
8. Claims representing general obligations of any public-sector entity in an OECD country, and that portion of
any claims guaranteed by any such public-sector entity
9. Bonds issued by the Financing Corporation or the Resolution Funding Corporation
10. Balances due from and all claims on domestic depository institutions. This includes demand deposits and
other transaction accounts, savings deposits and time certificates of deposit federal funds sold, loans to other
depository institutions, including overdrafts and term federal funds, holdings of the savings association's own
discounted acceptances for which the account party is a depository institution, holdings of bankers acceptances
of other institutions and securities issued by depository institutions, except those that qualify as capital
11. Deposit reserves at, claims on and balances due from the Federal Home Loan Banks
12. Claims on, or guaranteed by, official multilateral lending institutions or regional development institutions in
which the United States Government is a shareholder or contributing member
13. That portion of assets collateralized by the current market value of securities issued by official multilateral
lending institutions or regional development institutions in which the United States Government is a shareholder
or contributing member
14. All claims on depository institutions incorporated in an OECD country, and all assets backed by the full faith
and credit of depository institutions incorporated in an OECD country. This includes the credit equivalent
amount of participations in commitments and standby letters of credit sold to other depository institutions
incorporated in an OECD country, but only if the originating bank remains liable to the customer or beneficiary
for the full amount of the commitment or standby letter of credit. Also included in this category are the credit
 equivalent amounts of risk participations in bankers' acceptances conveyed to other depository institutions
incorporated in an OECD country. However, bank-issued securities that qualify as capital of the issuing bank are
not included in this risk category
15. Claims on, or guaranteed by depository institutions other than the central bank, incorporated in a non-
OECD country, with a remaining maturity of one year or less

Risk-weighted 50%
1. Revenue bonds issued by any public-sector entity in an OECD country for which the underlying obligor is a
public- sector entity, but which are repayable solely from the revenues generated from the project financed
through the issuance of the obligations
2. Qualifying mortgage loans and qualifying multifamily mortgage loans
3. Privately-issued mortgage-backed securities (i.e., those that do not carry the guarantee of a government or
government sponsored entity) representing an interest in qualifying mortgage loans or qualifying multifamily
mortgage loans. If the security is backed by qualifying multifamily mortgage loans, the savings association
must receive timely payments of principal and interest in accordance with the terms of the security. Payments
will generally be considered timely if they are not 30 days past due

Risk-weighted 100%
1. Consumer loans
2. Commercial loans
3. Home equity loans
4. Non-qualifying mortgage loans
5. Non-qualifying multifamily mortgage loans
6. Residential construction loans
7. Land loans, except that portion of such loans that are in excess of 80% loan-to-value ratio
8. Nonresidential construction loans, except that portion of such loans that are in excess of 80% loan-to-value
ratio
9. Obligations issued by any state or any politica1 subdivision thereof for the benefit of a private party or
enterprise where that party or enterprise, rather than the issuing state or political subdivision, is responsible for
the timely payment of principal and interest on the obligations, e.g., industrial development bonds
10. Debt securities not otherwise described in this section
11. Investments in fixed assets and premises
12. All repossessed assets or assets that are more than 90 days past due
13. Indirect ownership interests in pools of assets. Assets representing an indirect holding of a pool of assets,
e.g., mutual funds, are assigned to risk-weight categories under this section based upon the risk weight that
would be assigned to the assets in the portfolio of the pool. An investment in shares of a mutual fund whose
portfolio consists primarily of various securities or money market instruments that, if held separately, would be
assigned to different risk-weight categories, generally is assigned to the risk-weight category appropriate to the
highest risk-weighted asset that the fund is permitted to hold in accordance with the investment objectives set
forth in its prospectus
Off-balance sheet items are included in determining risk-weighted assets after reduction by specific reserves.
Risk-weighted 0%
 1. Letters of credit, guarantees or guarantee-type instruments secured by deposits with the issuing bank
Risk-weighted 20%
 1. Unused, non-callable credit lines with original maturity up to one year
 2. Revocable letters of credit
Is the bank increasing its capital from the growth of retained earnings? Does it have the ability to raise capital? Banks,
securities firms and finance companies should show increasing capital due to the growth of principal risk-taking/trading
and the growth of derivatives business which results in these firms taking more off-balance sheet risk. Banks and
Investment Banks must also allocate capital to new/growing international operations.
Leverage is the relationship between the risk-weighted assets of a bank and its equity. Securities firms look at Net Assets
divided by Equity as Leverage.

Key Ratios for Examining Capital Adequacy

Equity Capital
Equity Capital / Average Assets

 This is a primary measurement for judging capital strength.

 Equity capital is defined as the total of common stock, surplus, perpetual preferred stock, undivided profits and capital
reserves before FASB 115 & 133 adjustments.
 Intangibles and net unrealized holding gains (losses) on available-for-sale securities are excluded from Capital.
Tier 1 Leveage Ratio
Tier 1 Capital / Total Tangible Assets (Total Assets less Goodwill and Intangibles)

 Utilized by federal and state banking agencies to determine one of the components of capital adequacy ("Well
Capitalized" is equal to or greater than 5%).
 The greater the number the more capital there is to cover problems on the asset side of the blance sheet.
 For most small to medium-sized banks, Tier 1 Capital generally consists of only common equity, which is the sum of
common stock, surplus and retained earnings.

Tier 1 Risk-based Capital Ratio

Tier 1 Capital / Total Risk-adjusted Assets

 Required to be a minimum 6.0% to be "Well Capitalized"

 Risk-adjusted assets go through the analysis and "weighting" process outlined at the top of this section.

Tier 2 Risk-based Capital Ratio or Total Risk Capital Ratio

Tier 2 Capital / Total Risk-adjusted Assets

 Required to be a minimum 8.0% to be "Well Capitalized"

 For most small banks supplemental / Tier 2 capital is usually the loan loss reserve

Texas Ratio
Delinquent Loans + Non-performing Assets / Capital + Loan Loss Reserves.

 If the ratio is 100% or higher then the bank may be in imminent danger of failing.
 If the ratio is between 50% and 100% then a capital infusion is necessary. The ratio is a quick way to determine the
bank's ability to absorb losses.

Asset Quality
The Assets of a bank are:
 Cash (unrestricted)
 Fed funds sold
 Trading portfolio (securities, although banks also tend to include derivative contracts in this category)
 Securities (available for sale are liquid; held to term as less liquid)
 Loans (various counterparties, collateral and maturities; lease contracts may also be included in this
category)
 Fixed assets (some banks own their headquarters and/or branches, as opposed to leasing, which can be sold
to raise cash)
Asset Quality evaluates risk (and there must be some risk to earn a return), controllability, adequacy of loan loss reserves,
and acceptable earnings; and the affect of off-balance sheet earnings and loss. The quality of a bank's assets hinges on
their ability to be collected a during and at maturity. Thus, one must examine the portfolio quality, the portfolio
classification system (aging schedule and the methodology to classifying a receivable) and the fixed assets (the
productivity of the long-term assets, for instance the branch network). It is also necessary to determine the liquidity and
the maturity structure of various Assets. Investing in assets is how a bank primarily earns a return. How well are these
assets going to perform?
Earning Assets: interest bearing financial instruments which are principally commercial, real estate, and consumer loans;
investment securities and trading account securities; money market investments; lease finance receivables; time deposits
placed in foreign banks.
Risk-based / Risk Weighted Assets: Some investments and loans are riskier than others and regulators realize that there
should be a flexible scale of allocating bank reserve capital to these various types of assets. For instance, a bank that has
U.S Treasury securities in its portfolio of securities does not have to assign any capital reserve for this particular asset.
Risk assets: loans to affiliates, other loans, interest receivables and other assets.
Loans are usually the largest asset category for a bank:
 Change in loan volume, why has it grown or contracted, what percentage has it grown/contract?
 Loan mix: what part of the portfolio is growing (consumer vs. commercial)
 Is the bank overly exposed in one sector (i.e. commercial real estate, industry sector, country) and what is
the environment for the performance and value of the assets?
Title 12 USC 85 regulates the maximum rate of interest that national banks may charge on most types of loans. Banks that
charge a higher rate violate the law and may trigger the penalties for usury described in 12 USC 86. Section 85 authorizes
national banks to charge interest on loans at the rates allowed by the states in which the bank is located. A national bank
is considered to be located in states in which it has either its main office or a branch. If state law permits state lenders to
make loans without interest rate limitations, then national banks may make the same types of loans without interest rate
limitations. Section 85 also provides that on all loans, national banks may charge 1.0% more than the discount rate on 90-
day commercial paper in effect at the Federal Reserve bank in the district in which the bank is located. For example, if the
discount rate is 7.0%, than national banks may charge 8.0%, discounted in advance, without regard to state usury laws.
Under section 85, a national bank may charge the maximum rate of interest permitted by state law for any state-chartered
or state-licensed lending institution. A national bank that charges a higher interest rate on a specified class of loans, as
allowed by state law, is subject to the provisions relative to that class of loans that are material to the determination of the
interest rate. For example, when a state law allows finance companies to charge 20 percent on certain loans, but limits
state banks to 16 percent, national banks may charge 20 percent. However, national banks would be limited to charging
the higher rate only on the same size and type of loans that finance companies are allowed to make. Title 12 USC 85
permits national banks to charge interest rates as permitted by a state in which the bank is located. For an intrastate
bank, that is the state where its main office is located. For an interstate bank, that also generally will be the state in which
the bank has its main office though, in some circumstances, an interstate national bank may be required, or may have the
authority, to charge rates permitted by a state in which one or more of its branches is located.
What percentage of loans (either separate portfolios of consumer loans and commercial loans and/or combined) are
delinquent 30 day? What percentage of total loans are delinquent 90 days? What percentage of total loans are non-
performing (over 90-day, non-accrual and restructured).
What is the percentage of charge-offs to total loans (consumer and commercial receivbles)? What is the percentage
change of charge-offs from the previous fiscal period?
Loan Loss Reserve: is created and built up by placing operating income (provisions) in an account on the asset-side of
the blanace sheet, and which must be a sufficiently funded amount to cover actual or anticipated losses.
 Also referred to as the Allowance for Loan and Lease Losses (ALLL).
 Specific reserves against identified impaired loans are specifed in Statement of Financial Accounting
Standards No. 114 (Accounting by Creditors for Impairment of a Loan—an amendment of FASB Statements No.
5 and 15) and tatement of Financial Accounting Standards No. 118 (Accounting by Creditors for Impairment of
a Loan-Income Recognition and Disclosures—an amendment of FASB Statement No. 114)
If there is a problem with the repayment of a loan, the interest will sometimes be capitalized. Interest begins accruing on
a loan as soon as it is disbursed. The interest can be repaid as scheduled or it can be capitalized, which means that the
interest will continue to accrue and will be added to the loan principal amount thereby increasing the loan principal
amount, which is then the new balance that is used to compute interest for the next period. The net effect of capitalization
is that it increases the total amount paid over the lifetime of the loan.
Asset Growth Rate: computed by subtracting prior-period total assets from current-period total assets, then dividing the
difference by prior-period total assets, indicates the state of economic condition and/or the philosophy (which wants to
rapidly increase or slowly increase the asset side of the balance sheet).

Key Ratios for Examining Asset Quality

Loan Loss Reserves to Total Loans Ratio

Loan Loss Reserves / Total Loans

 This is a primary measurement for judging capital strength.

 Traditionally the amount is a minimum 1.0% but it is not sure if it is adequate unless it is compared to Provisions/Total
loans: percentage of provisions from fiscal income statement as a percentage of the portfolio.
 Intangibles and net unrealized holding gains (losses) on available-for-sale securities are excluded from Capital.

Coverage Ratio
Loan Loss Reserves / Non-Performing or Non-current Loansand leases

 Non-performing or Non-current loans consist of loans that are 90 days or more overdue and still accruing and
nonaccrual loans.
 Also sometimes known as the coverage ratio, should be in excess of 1.5x

Overdue Loans to Total Loan Ratio

Total Loans 30-89 Days Past Due / Total Loans

 Indicates that either credit underwriting standards are inappropriate or collection procedures are inadequate.

90-Day Overdue Loans to Total Loans Ratio

Total Loans 90-Days Past Due / Total Loans

 Indicates that the loan portfolio may be experiencing some deterioration through either poor underwriting and/or
collections.

Management Structure
 Is the bank newly privatized from government ownership?
 What is the ownership structure of the bank? (Government support? Independently capitalized or a branch?
Can rely on parent support implicit/explicit?)
 Is as small branch network a constraint on business?
 Loan portfolio management, credit administration, policy development, employee training, loan workout
 Is it possible to determine Governence, Audit oversight and Strategic planning?

Earnings (Profitability)
Earnings determine the ability of a bank to increase capital (through retained earnings), absorb loan losses, support the
future growth of assets, and provide a return to investors. The largest source of income for a bank is net interest revenue
(interest income from lending activity less interest paid on deposits and debt). The second most important source is from
investing activity. A substantial source of income also comes from foreign exchange and precious metal trading, and
commissions/transaction fees and trust operations.
New banks, or De Novo banks, are usually not profitable for the first two to three years as they develop their core business
operations, hire employees, open branches and may also have to pay a higher interest rate to attract deposits. What the
analyst should look at in this case is the "burn rate" (on a monthly and quarterly basis), which is an indication of how
much of the initial equity investment (stockholder's equity) is being used up to cover operating expenses. What needs to
be demonstrated is that income is increasing faster than expenses and the monthly and quaterly losses are decreasing,
hence equity is not decreasing as rapidly.
Overall, the issues to consider include:
 What is the concentration of business: retail, trade finance, corporate, mortgage, merchant, personal,
investment, portfolio management, asset financing, leasing, advisory, nominee and custodial services, executor
and trustee?
 Are the bank's core earnings in its home market only?
 What is the ratio between interest and non-interest income sources?
 Is operating income declining compared to previous periods due to insufficient revenue or higher operating
expense?
 Is net income low due to non-accrual loans?
 Is an improvement in revenue and earnings coming from extraordinary / non-recurring items? Would the
elimination of this one-time item actually result in a loss? Is the increase in earnings derived from the adoption
of new accounting standards?
The need to charge provisions for loan and lease losses against earnings can also reduce profitability, at lease on a
quarterly basis. The bank's management has to look at what type of loans are in the portfolio, what the preformance is of
the portfolio and what is happening with national, regional and local economic conditions. For instance, recession, increase
in bankruptcies, increase in unemployment, local corporate layoffs and plant closings, drought, low farm prices, and so on
suggest rising numbers of delinquent loans that the bank must correctly estimate and have sufficent reserves thus
provisions may be taken against earnings just as the bank's revenues may be declining. Conversely, if economic conditions
are deteriorating and the bank is not provisioning for anticipated losses in order to maintain profitability then problems
may develop during the next fiscal period.

Key Ratios for Examining Profitability

Net Interest Margin
Net Interest Income (annualized) / Average Interest Earning Assets

 This is net interest income expressed as a percentage of average earning assets.

 Net interest income is derived by subtracting interest expense from interest income.
 Indicates how well management employed the earning asset base (the denominator focuses strictly on assets that
generate income).
 May come under pressure from offering preferential rates to customer base, a low level of growth in savings and the
higher percentage of more expensive wholesale funds available. The lower the net interest margin, approximately 3.0% or
lower, generally it is reflective of a bank with a large volume of non-earning or low-yielding assets.
 Conversely, are high or increasing margins the result of a favorable interest rate environment, or are they the result of
the bank moving out of safe but low-yielding, low-return securities into higher-risk, higher yielding and less liquid loans or
investment securities?

Return on Average Assets (ROAA)

Net operating income (annualized) after taxes (including realized gain or loss on investment securities) / Total Average
Assets (assets at the previous fiscal year plus assets at this current fiscal year divided by 2) for a given fiscal year

 Actual net income should be examined for the inclusion of extraordinary earnings (which may be excluded).
 This measures how the assets are utilized by indicating the profitability of the assets base or asset mix.
 Ranges from approximately 0.60% to under 2.0% for U.S. Banks. Historically in the U.S. the benchmark was 1.0% or
better for the bank to be considered to be doing well. De novo banks are usually below the 1.0% benchmark.
If the bank is a Subchapter S Corp. then the coporation is treated as a pass-through entity and is not subject to Federal
income taxes at the corporate level. Therefore, an adjustment to net income is needed to improve the comparability
between banks that are taxed at the corporate level and those that are not.

Return on Average Equity (ROAE)

Net operating income after taxes (including realized gain or loss on investment securities) / Total (average) equity
(common stock) for a given fiscal year

 This ratio is affected by the level of capitalization of the financial institution.

 Measures the ability to augment capital internally (increase net worth) and pay a dividend.
 Measures the return on the stockholder's investment (not considered an effective measure of earnings performance
from the bank's standpoint).
 In the long run, a return of around 15% to 17% is regarded as necessary to provide a proper dividend to shareholders
and maintain necessary capital strengths.
Adjusted ROE or ROAE: Net income / Total equity plus loan loss reserves in excess of 10% of equity.

Return on Earning Assets (ROEA)

Revenue from loans, securities, cash equivalents and earning assets (including non-interest) before interest expense /
Earning Assets

 Measures the results of operations prior to funding costs and as if the operations were totally funded by equity.

Operating Profit Margin

Operating profits (before the loan loss provision and excluding gains or losses from asset sales and amortization expense
of intangibles) / Net operating revenues (interest income less interest expense plus noninterest income)

 This ratio measures the percent of net operating revenues consumed by operating expenses, providing the remaining
operating profit (the higher the margin the more efficient the bank).
 Inverse of the efficiency ratio.
Non-interest Income to Average Assets Ratio
Non-Interest Income (annualized) / Total Average Assets

 Non-interest income is income derived from fee-based banking services such as service charges on deposit accounts,
consulting and advisory fees, rental of safe deposit boxes and other fee income, fiduciary, brokerage and insurance
activities.
 Realized gains on the sale of securities is excluded.
 It is important that a bank devlop non-interest income sources but it should become a major portion of the bank's total
revenue unless it really is an annual core business operation.

Average Collection of Interest (Days)

Accrued Interest Receivable / Interest Income x 365

 This is a measurement of the number of days interest on earning assets remains uncollected and indicates that volume
of overdue loans is increasing or repayment terms are being extended to accommodate a borrower's inability to properly
service debt.

Overhead Ratio
Total Non-Interest Expenses (annualized) / Total Average Assets

 Non-interest expenses (annualized), which are the normal operating expense associated with the daily operation of a
bank such as salaries and employee benefits plus occupancy / fixed asset costs plus depreciation and amortization.
 These costs tend to rise faster than income in a time of inflation or if the institution is expanding by the purchase or
construction of a new branches.
 Provisions for loan and lease losses, realized losses on securities and income taxes should not be included in non-
interest expense.

Efficiency Ratio
Total Non-interest expenses / Total Net Interest Income (before provisions) plus Total Non-Interest Income

 Efficiency improves as the ratio decreases, which is obtained by either increasing net interest income, increasing non-
interest revenues and/or reducing operating expenses.
 Non-interest expenses (expenses other than interest expense and loan loss provisions, such as salaries and employee
benefits plus occupancy plus depreciation and amortization) tend to rise faster than income in a time of inflation.
 This is a measure of productivity of the bank, and is targeted at the middle to low 50% range. This may seem like
break-even but it is not; what this is saying is that for every dollar the bank is earning it gets to keep 50 cents and it has
to spend 50 cents to earn that dollar. The ratio can be as low as the mid to low 40% range, which means that for every
dollar the bank earns it gets to keep 60 cents and spends 40 cents, a very efficient bank.
 Ratios in excess of 75% mean the bank is very expensive to operate.

Funding & Liquidity

Funding and Liquidity are related, however they are separate situations. Funding is what a bank relies upon to grow its
business and the asset side of the balance sheet above and beyond what could be accomplished with just equity. Funding
is provided by deposits, short-term debt and longer-term debt. Funding means access to capital.
Liquidity is what a bank requires if Funding is interrupted and the bank must still be able to meet certain obligations
(bank's ability to repay depositors and other creditors without incurring excessive costs). What is the liability structure /
composition of the institution’s liabilities, including their tenor, interest rate, payment terms, sensitivity to changes in the
macroeconomic environment, types of guarantees required on credit facilities, sources of credit available to the institution
and the extent of resource diversification.
A bank's least expensive means of funding loan growth is through deposit accounts. When this is not available, banks must
rely on more expensive funding sources such as borrowing funds at wholesale rates or liquidating investment securities
portfolios. The best type of deposits are "core" deposits, which are balances that are left at the bank due to convenience
(the depositor resides in the area) or through loayalty. Non-core deposits / funding are sources that can be very sensitive
to changes in interest rates such as brokered deposits, CDs greater than $100,000, and borrowed money.
The Deposit Growth Rate, which is computed by subtracting prior-period total deposits from current-period total
deposits, then dividing the difference by prior-period total deposits, indicates how a bank is funding the asset side of its
balance sheet.
Funding sources also include:
 Net earnings
 Issuance of common and preferred securities
 Trust preferred securities
 Commercial paper
 Senior debt
 Subordinated debt
 Securitizing various financial assets including credit card receivables and other receivables generally secured
by collateral such as single-family residences and automobiles
 Monetizing investment securities
Liquidity refers to reserves of cash, securities, a bank's ability to convert an asset into cash, and unused bank lines of
credit. The faster the conversion the more liquid the asset. Illiquidity is a risk in that a bank might not be able to convert
the asset to cash when most needed. Moreover, having to wait for the sale of an asset can pose an additional risk if the
price of the asset decreases while waiting to liquidate. Thus, if loans or assets are illiquid then liquidity is also limited,
especially if the loans exceed stable deposits and available lines of credit. Liquidity must be sufficient to meet all maturing
unsecured debt obligations due within a one-year time horizon without incremental access to the unsecured markets.
Probably the most critical issue to examine for a bank is the ability to meet obligations. If earnings are poor and liquidity is
high, the bank's lending may be too conservative, with a high proportion of proceeds from deposits are invested in low
yielding liquid assets. If earnings are low and liquidity is low, then the bank may have an aggressive lending policy coupled
with heavy borrowing. It examines "internal" sources of funds: maturing loans and marketable securities; and "external"
sources of funds: is the bank dependent on large deposits from a single source or does it have a large and stable retail
funding base? (single sources should not exceed 10% of short-term liabilities).
Liquidity Gap Analysis is an attempt to measure future funding needs of a bank by comparing the amount of assets and
liabilities maturing over time.
The overall goal of management in the asset/liability/capital structure of the institution is to maximize the return earned
from the assets, with the lowest risk profile and default ratio, and also minimize the cost of funds as much as possible to
widen the spread between earnings and expenses (manage the net interest margin); and to utilize leverage over invested
capital.
Liquidity Management: "cash-out" or the risk of being illiquid when cash is needed.
 Sources and uses of funds approach: liquidity required for deposit withdrawals and loan demand.
 Structure of deposits approach: focuses on the stability of deposit liabilities.
Awareness of gap management: gap analysis is a measurement of interest rate sensitivity of assets and liabilities. If a
company has a negative duration gap that means that its assets are paying off faster than its liabilities. The response can
either be defensive or aggressive with regard to managing the spread between the yields of the institution's assets and
their income from service sales and the cost of carrying on their operations, especially the return paid to savers to attract
deposits and equity investments.
Management's goal for assets:
Primary reserves
 Sufficient cash on hand to cover customer deposits and withdrawals or clearing and collecting check
payments; and maintain contemporaneous reserve requirements.
 Cash in the vault is not earning interest.
 Cash/total assets ratio rises in relation to the size of the institution.
Secondary reserves
 Marketable securities portfolio: short-term and liquid for cash needs and pledging collateral.
 U. S. Treasury: relatively short-term maturities, increasing to 20% of total assets due to favorable tax and
capital reserve treatment.
 Securities of states and municipalities: declined due to less favorable tax and capital treatment.
Loans
 At a rate in excess of the cost of funds, to borrower with a good credit profile.
 Rates on corporate loans have been declining due to disintermediation/competition.
 Real estate loans have the highest margin but are less liquid and riskier.
 Total loans tend to approximate 60% of the total assets.
Liquidity Management related to assets: match maturity of assets with liquidity needs.
 The historical decline in liquid assets on hand is related to better management.
 Anticipation of deposit and loan changes.
 If the bank invests for yield, it will not be able to cover demands.
 Could be covered by liquidation of assets and borrowings.
 Commercial loan theory: confine loans to short-term, self-liquidating commercial loans.
 Money market approach: hold money market instruments such as Treasury bills, CP or banker's
acceptances.
Management's goal for liabilities: to also manage sources of funds (not just uses of funds/asset management) to meet
liquidity requirements; and increase income potential.
Funding requirements.
 Customer deposits: the least expensive source of funding for the institution. The institution is seeking "core
deposits," or passive accounts that stay with the institution out of loyalty or convenience (checking accounts,
savings certificates and regular savings accounts). What happens if a bank experiences a credit ratings
downgrade: deposits from local municipalities, state governments, escrow accounts and fiduciary deposits must
be withdrawn if the downgrade results in a non-investment grade rating.
 Non-deposit borrowed funds: cost more than customer deposit funds
 Federal funds for short-term liquidity.
 CDs if funding is needed for a longer period
Liquidity Management related to Liabilities:
 Interest rates may be higher when the institution seeks to acquire funds.
 Requires that the financial condition of the bank be strong.
Management's goal for Capital: provide the buffer to absorb losses, must maintain adequate equity capital to satisfy
regulatory requirements, and have a financial condition that allows it to borrow funds.
 Must meet BIS risk assets to capital guidelines: 4% Tier one, 8% including Tier two capital; risk weighted
asset categories.
 If condition has weakened, then funds will cost more.
It is poor liquidity, as opposed to poor asset quality or inadequate capital, that leads to most bank failures.

Key Ratios for Examining Liquidity

Loans as a Percentage of Deposits

Loans (gross) / Total Deposits

 Indicates the percentage of a bank's loans funded through deposits (measures funding by borrowing as opposed to
equity)
 Maximum 80% to 90% (the higher the ratio the more the institution is relying on borrowed funds)
 However, cannot also be too low as loans are considered the highest and best use of bank funds (indicates excess
liquidity).
 Between 70% to 80% indicates that the bank still has capacity to write new loans.
 A high loan-to-deposit ratio indicates that a bank has fewer funds invested in readily marketable assets, which provide
a greater margin of liquidity to the bank.

Liquid Assets to Total Deposits

Liquid Assets / Total Deposits

 Measures deposits matched to investments and whether they could be converted quickly to cover redemptions.

BOPEC
BOPEC was the former bank holding company examination ratings system. Bank Holding Companies (BHC) are usually the
stock-issuing entity within a banking organization and the BHC can have a number of operating subsidiaries. BOPEC was
designed to examine the subsidiary operations as the condition of a BHC is closely related to the condition of its subsidiary
banks. The examination of the bank holding company by federal regulators in the United States would rate banks on a
scale from 1 to 5 with 1 being the highest rating and 5 being close to insolvency. The system was replaced by RFI/CD (see
next below).
BHC's Bank subsidiaries condition
Other nonbank subsidiaries / affiliates condition
Parent company condition
Earnings Comsolidated poistion of the parent
Capital Consolidated position of the parent

RFI/CD
As of January 2005, the BHC evaluation system was revised to the acronym RFI/CD which stands for:
Risk management (R) such as policies, procedures, limits, risk monitoring and managment information systems.
Financial condition (F) such as Capital, Asset Quality, Earnings and Liquidity.
Impact (I) of the parent company and nondepository entities on subsidiary depository institutions.
Composite rating (C), which is the BHC's overall evaluation and rating of its managerial and financial condition and an
assessment of future potential risk to its subsidiary depository institution(s).
Depository institutions (D), which is the assessment of the subsidiary depository institutions by the primary regulator.

Book Value
If the financial istitution had to be shut down immediately, the book value of the financial institution is equal to the Total
Assets minus Liabilities, Preferred Stock, and Intangible Assets. However, this is a straight arithmetic exercise. The reality
is that a distressed bank has impaired or hard to sell assets and it is not likely that another bank or investor is going to
purchase them at par. Thus, the assets must be examined to determine whether there are any secured lenders who have a
claim on assets, what type of securities is the financial institution holding in its portfolio and what is the present
performance of the loan portfolio. The fixed assets are not going to be readily marketable and the fixtures and furniture
will either disappear with employees or be of salvage value only. Liabilities usually tend to be definite in value while assets
tend to have fluctuating or questionable value.

Issues Affecting Banks

 Further disintermediation of bank assets: trend toward the securitization of assets by corporate customers
(banks will decrease as primary suppliers of credit to high quality borrowers. This means that a higher
proportion of bank's remaining credit exposure will be to less marketable credits where there is less demand
and less hedging instruments available) and the increasing use of mutual funds and private pension funds by
consumer customers.
 The continuing increase in non-bank competitors offering similar services.
 Continued deregulation and globalization of services.
 Increased technological innovation and technology costs in order to compete effectively.
 How to differentiate and appropriately price services such as origination, structuring and administration.
 Consistent risk pricing and Basle Committee capital requirements for credit risk.

Researching U.S. Banks

FDIC Bank Find allows you to locate a single FDIC-insured institution www2.fdic.gov/idasp/main_bankfind.asp
U.S. Banks can be searched for by their ABA Routing Number, FDIC Certificate Number, IDRSSD, OCC Charter Number or
OTS Docket Number. One can also seach by name or address using the FDIC Institution Directory www2.fdic.gov/idasp/
Consolidated Reports of Condition and Income (Call Reports) are produced by the Federal Financial Institutions
Examination Council (FFIEC). Institution regulated by the Office of Thrift Supervision (OTS) files a Thrift Financial Report
(TFR) on a quarterly basis. To locate a Call / TFR: cdr.ffiec.gov/public/ManageFacsimiles.aspx
The FFIEC / FDIC produces the Uniform Bank Performance Report (UBPR).
www2.fdic.gov/ubpr/UbprReport/SearchEngine/Default.asp
The National Information Center (Federal Reserve Board) also provides an institution search option by holding company
RSSD ID#, Routing Transit Number (RTN) or by FDIC Certificate Number
www.ffiec.gov/nicpubweb/nicweb/SearchForm.aspx

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Financial Ratios

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FB
keyfinratio FB 200603 201003

201003

« Previous Years
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Key Financial Ratios of Federal

------------------- in Rs. Cr. -------------------
Bank

Mar
Mar '07 Mar '08 Mar '09 Mar '10
'06
Investment Valuation Ratios
10.0
Face Value 10.00 10.00 10.00 10.00
0
Dividend Per Share 3.50 4.00 4.00 5.00 5.00
30.8
Operating Profit Per Share (Rs) 48.04 23.99 38.41 42.74
2
Net Operating Profit Per Share 180.
229.85 157.25 206.51 235.82
(Rs) 58
65.4
Free Reserves Per Share (Rs) 80.81 168.04 180.00 192.25
9
51.0
Bonus in Equity Capital 51.09 25.57 25.57 25.57
9
Profitability Ratios
Interest Spread 4.84 5.01 4.79 6.31 5.21
15.0
Adjusted Cash Margin(%) 15.02 13.80 14.25 11.95
5
13.6
Net Profit Margin 13.91 12.78 13.14 10.79
4
89.7
Return on Long Term Fund(%) 99.01 55.12 65.47 65.91
1
22.9
Return on Net Worth(%) 19.57 9.39 11.58 9.91
9
Adjusted Return on Net 17.9
19.52 9.39 11.57 9.90
Worth(%) 2
Return on Assets Excluding
1.09 174.71 229.16 252.57 273.90
Revaluations
Return on Assets Including
1.09 175.48 229.53 252.93 274.24
Revaluations
Management Efficiency Ratios
Interest Income / Total Funds 8.26 8.61 9.34 9.90 9.78
Net Interest Income / Total
3.79 3.86 3.62 4.29 4.29
Funds
Non Interest Income / Total
0.56 0.59 0.66 0.77 0.65
Funds
Interest Expended / Total Funds 4.47 4.75 5.72 5.61 5.48
Operating Expense / Total
2.38 2.06 2.19 2.45 2.52
Funds
Profit Before Provisions / Total
1.83 2.29 1.98 2.49 2.30
Funds
Net Profit / Total Funds 1.20 1.28 1.28 1.40 1.13
Loans Turnover 0.15 0.15 0.16 0.17 0.16
Total Income / Capital
8.82 9.20 10.00 10.67 10.43
Employed(%)
Interest Expended / Capital
4.47 4.75 5.72 5.61 5.48
Employed(%)
Total Assets Turnover Ratios 0.08 0.09 0.09 0.10 0.10
Asset Turnover Ratio 4.67 5.42 6.19 6.84 7.21
Profit And Loss Account Ratios
Interest Expended / Interest 58.2
59.70 65.49 60.32 61.59
Earned 5
Other Income / Total Income 6.37 6.45 6.58 7.23 6.24
Operating Expense / Total 26.9
22.41 21.94 22.99 24.17
Income 7
Selling Distribution Cost
0.18 0.19 0.28 0.23 0.25
Composition
Balance Sheet Ratios
13.7
Capital Adequacy Ratio 13.43 22.46 20.22 18.36
5
69.3
Advances / Loans Funds(%) 72.96 77.07 75.07 76.40
1
Debt Coverage Ratios
62.1
Credit Deposit Ratio 67.49 71.17 71.06 72.29
7
36.5
Investment Deposit Ratio 33.72 35.92 38.11 36.88
0
Cash Deposit Ratio 5.76 6.20 7.55 7.86 6.64
14.3
Total Debt to Owners Fund 14.43 6.61 7.45 7.70
8
Financial Charges Coverage
1.44 0.50 0.36 0.47 0.44
Ratio
Financial Charges Coverage
1.30 1.29 1.24 1.27 1.23
Ratio Post Tax
Leverage Ratios
Current Ratio 0.03 0.03 0.02 0.02 0.02
14.9
Quick Ratio 13.62 11.65 15.99 21.68
8
Cash Flow Indicator Ratios
15.1
Dividend Payout Ratio Net Profit 13.68 21.74 19.99 21.46
6
Dividend Payout Ratio Cash 13.6
12.64 20.14 18.41 19.37
Profit 1
Earning Retention Ratio 84.6 86.29 78.26 79.99 78.52
 7
86.2
Cash Earning Retention Ratio 87.33 79.86 81.57 80.62
6
71.9
AdjustedCash Flow Times 68.31 65.22 59.32 70.11
4

Mar
Mar '07 Mar '08 Mar '09 Mar '10
'06

26.3
Earnings Per Share 34.20 21.52 29.26 27.16
1
145.
Book Value 174.71 229.16 252.57 273.90
19

Source : Dion Global Solutions Limited

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Federal Bank

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balance FB 200603 201003

201003

« Previous Years
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Balance Sheet of Federal Bank ------------------- in Rs. Cr. -------------------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 12 mths 12 mths 12 mths 12 mths

 mths

Capital and Liabilities:

Total Share Capital 85.60 85.60 171.03 171.03 171.03
Equity Share Capital 85.60 85.60 171.03 171.03 171.03
Share Application Money 0.00 0.00 0.00 0.00 0.00
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
1,157.3
Reserves 1,409.98 3,748.30 4,148.74 4,513.55
0
Revaluation Reserves 7.08 6.63 6.36 6.11 5.86
1,249.9
Net Worth 1,502.21 3,925.69 4,325.88 4,690.44
8
17,878.
Deposits 21,584.44 25,913.36 32,198.19 36,057.95
74
Borrowings 610.49 770.21 791.95 748.94 1,546.76
18,489.
Total Debt 22,354.65 26,705.31 32,947.13 37,604.71
23
Other Liabilities & Provisions 903.69 1,233.08 1,875.45 1,577.86 1,380.45
20,642.
Total Liabilities 25,089.94 32,506.45 38,850.87 43,675.60
90
Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12
12 mths 12 mths 12 mths 12 mths
mths

Assets
1,214.5
Cash & Balances with RBI 1,231.54 2,355.69 2,214.40 2,318.88
9
Balance with Banks, Money at
657.91 1,081.60 389.79 1,222.70 404.51
Call
11,736.
Advances 14,899.10 18,904.66 22,391.88 26,950.11
47
6,272.3
Investments 7,032.66 10,026.59 12,118.97 13,054.65
8
Gross Block 330.78 362.71 434.75 516.40 559.26
Accumulated Depreciation 156.91 176.61 201.91 235.62 269.49
Net Block 173.87 186.10 232.84 280.78 289.77
Capital Work In Progress 0.00 0.00 0.00 0.00 0.00
Other Assets 587.70 658.93 596.87 622.15 657.69
20,642.
Total Assets 25,089.93 32,506.44 38,850.88 43,675.61
92
 7,834.4
Contingent Liabilities 5,005.69 5,632.10 6,239.48 8,424.89
2
9,145.2
Bills for collection 8,479.74 8,500.40 2,137.62 2,160.83
7
Book Value (Rs) 145.19 174.71 229.16 252.57 273.90

Source : Dion Global Solutions Limited

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Results of Federal Bank

News

Results

Estimates

Analysis

16.05.2011
Accumulate Federal Bank; target of Rs 497: SKP Securities

12.05.2011
Buy Federal Bank; target of Rs 530: ULJK Securities

12.05.2011
Buy Federal Bank; target of Rs 535: Motilal Oswal

12.05.2011
Accumulate Federal Bank; target of Rs 447: Angel Broking

More »

11.05.2011
Federal Bank Mar '11 profit at Rs 1,100.02 crore

06.05.2011
Federal Bank FY11 cons net profit up 26% at Rs 556.5cr

01.02.2011
Federal Bank Dec '10 profit at Rs 1,021.88 crore
29.10.2010
Federal Bank Q2 net profit at Rs 140 cr

More »

11.04.2011
Federal Bank Mar qtr PAT seen up at Rs 153 cr: Sharekhan

28.01.2011
Federal Bank Q3 net profit seen up 36.3% at Rs 150.3 cr

12.01.2011
Federal Bank Dec qtr PAT seen up 31.8% at Rs 145cr: Angel

28.10.2010
Federal Bank Q2 net profit seen up at Rs 141.8 cr

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26.10.2006
Federal Bank results in line with estimates: India Infoline

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20.05.2011
Karur Vysya Bank Q4 net profit up at Rs 115 cr
19.05.2011
Lakshmi Vilas Bank Q4 net profit at Rs 27cr

16.05.2011
J&K Bank Q4 FY11 PAT up 16% at Rs 139 cr

11.05.2011
Federal Bank Mar '11 profit at Rs 1,100.02 crore

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27.04.2011
ICICI Bank Q4 PAT seen up 47% at Rs 1,476 cr

21.04.2011
Axis Bank Q4 PAT seen up 25% at Rs 960 cr

19.04.2011
ING Vysya Bank Q4 PAT seen up 23% at Rs 84cr

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account - Federal Bank

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FB
profit FB 200603 201003

201003

« Previous Years
Bottom of Form

Profit & Loss account of Federal

------------------- in Rs. Cr. -------------------
Bank

Mar
Mar '07 Mar '08 Mar '09 Mar '10
'06

12
12 mths 12 mths 12 mths 12 mths
mths
Income
1,436.
Interest Earned 1,817.35 2,515.44 3,315.38 3,673.24
53
Other Income 233.10 302.59 394.99 515.78 530.91
1,669.
Total Income 2,119.94 2,910.43 3,831.16 4,204.15
63
Expenditure
Interest expended 836.73 1,084.96 1,647.42 1,999.92 2,262.40
Employee Cost 228.36 260.45 271.23 317.45 366.05
Selling and Admin Expenses 176.61 171.06 297.72 477.85 566.72
Depreciation 25.74 23.97 29.22 42.84 50.19
Miscellaneous Expenses 176.99 286.77 296.78 492.60 494.23
Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0.00
Operating Expenses 471.06 495.39 660.93 917.96 1,090.00
Provisions & Contingencies 136.64 246.86 234.02 412.78 387.19
1,444.
Total Expenses 1,827.21 2,542.37 3,330.66 3,739.59
43
Mar
Mar '07 Mar '08 Mar '09 Mar '10
'06

12
12 mths 12 mths 12 mths 12 mths
mths

Net Profit for the Year 225.21 292.73 368.05 500.49 464.55
Extraordionary Items 0.00 0.00 0.00 0.00 0.00
Profit brought forward 2.30 13.46 14.46 14.62 21.93
Total 227.51 306.19 382.51 515.11 486.48
Preference Dividend 0.00 0.00 0.00 0.00 0.00
Equity Dividend 29.96 34.24 68.41 85.52 85.52
Corporate Dividend Tax 4.20 5.82 11.63 14.54 14.21
Per share data (annualised)
Earning Per Share (Rs) 26.31 34.20 21.52 29.26 27.16
Equity Dividend (%) 35.00 40.00 40.00 50.00 50.00
Book Value (Rs) 145.19 174.71 229.16 252.57 273.90
Appropriations
Transfer to Statutory Reserves 79.31 121.47 156.11 195.87 155.34
Transfer to Other Reserves 100.57 130.21 131.74 197.25 208.27
Proposed Dividend/Transfer to
34.16 40.06 80.04 100.06 99.73
Govt
Balance c/f to Balance Sheet 13.46 14.46 14.62 21.93 23.14
Total 227.50 306.20 382.51 515.11 486.48

Source : Dion Global Solutions Limited

Explore Federal Bank connections

Results of Federal Bank

News

Results

Estimates

Analysis

16.05.2011
Accumulate Federal Bank; target of Rs 497: SKP Securities

12.05.2011
Buy Federal Bank; target of Rs 530: ULJK Securities

12.05.2011
Buy Federal Bank; target of Rs 535: Motilal Oswal

12.05.2011
Accumulate Federal Bank; target of Rs 447: Angel Broking

More »

11.05.2011
Federal Bank Mar '11 profit at Rs 1,100.02 crore

06.05.2011
Federal Bank FY11 cons net profit up 26% at Rs 556.5cr

01.02.2011
Federal Bank Dec '10 profit at Rs 1,021.88 crore

29.10.2010
Federal Bank Q2 net profit at Rs 140 cr

More »
11.04.2011
Federal Bank Mar qtr PAT seen up at Rs 153 cr: Sharekhan

28.01.2011
Federal Bank Q3 net profit seen up 36.3% at Rs 150.3 cr

12.01.2011
Federal Bank Dec qtr PAT seen up 31.8% at Rs 145cr: Angel

28.10.2010
Federal Bank Q2 net profit seen up at Rs 141.8 cr

More »

26.10.2006
Federal Bank results in line with estimates: India Infoline

More »

Results of Banks - Private Sector Sector

News

Results

Estimates

Analysis

23.05.2011
Buy HDFC Bank, says Hemant Thukral

23.05.2011
Multibaggers: SP Tulsian's 3 picks that can fetch you money

23.05.2011
Lakshmi Vilas can move to Rs 145: Tulsian

23.05.2011
Yes Bank has target of Rs 295: Gaurang Shah

More »

20.05.2011
Karur Vysya Bank Q4 net profit up at Rs 115 cr

19.05.2011
Lakshmi Vilas Bank Q4 net profit at Rs 27cr
16.05.2011
J&K Bank Q4 FY11 PAT up 16% at Rs 139 cr

11.05.2011
Federal Bank Mar '11 profit at Rs 1,100.02 crore

More »

27.04.2011
ICICI Bank Q4 PAT seen up 47% at Rs 1,476 cr

21.04.2011
Axis Bank Q4 PAT seen up 25% at Rs 960 cr

19.04.2011
ING Vysya Bank Q4 PAT seen up 23% at Rs 84cr

19.04.2011
Yes Bank Q4 PAT seen up 43% at Rs 200 cr

More »

25.04.2011
Axis Bank's margins may decline in Q1: Prabhudas Lilladhar

24.01.2011
Q3 results: Review of IndusInd, Bk, LIC Housing, JSW Energy

18.01.2011
Axis Bk Q3 review: ICICI Direct maintains target of Rs 1520

06.01.2011
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Federal Bank

Federal Bank

BSE: 500469 | NSE: FEDERALBNK | ISIN: INE171A01011 | Banks - Private Sector

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FB 200603 201003 201003 « Mar 09
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200603,200703,2

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Directors Report Year End : Mar '10

The Directors take great pleasure in presenting the 79th Annual Report
on the business and operations of your Bank together with the audited
accounts for the year ended March 31, 2010.

FINANCIAL PERFORMANCE

The financial highlights of your Bank for the financial year 2009-10
are given below:

Rs. in crore

For the year ended

Financial Parameters March 31,2010 March 31, 2009

Net Interest Income 1410.83 1,315.46

Fee and Other Income 530.91 515.77

Net Revenue 1941.74 1,831.23

Operating Expenses 676.89 571.45

Profit before Depreciation and Tax 909.73 835.85

Net Profit 464.55 500.49

Profit Brought Forward 21.93 14.62

Total Profit Available for Appropriation486.48 515.11

Appropriations:

Transfer to Statutory Reserves 116.14 125.12

Transfer to Revenue Reserves 208.27 197.25

Transfer to Capital Reserves 8.20 29.75

Transfer to Special Reserves 31.00 11.00

Transfer to Investment Fluctuation
Reserve 0.00 0.00

Transfer to Contingency Reserve 0.00 30.00

Proposed Dividend 85.52 85.52

Provision for Dividend Tax 14.21 14.54

Balance Carried Over to Balance Sheet 23.14 21.93

Financial Position:

Deposits 36057.95 32,198.19

Advances 26950.11 22,391.88

Total Business (Deposits + Advances) 63008.06 54,590.07

Other Borrowings 1546.76 748.94

Investments 13054.65 12,118.97

Total Assets (Balance Sheet Size) 43675.61 38,850.86

Capital 171.03 171.03

Ratios:

Return on Total Assets (%) 1.15 1.48

Return on Equity (%) 10.30 12.13

Earnings Per Share (Rs.) 27.16 29.26

Book Value Per Share (Rs.) 274.24 252.93

Operating Cost to Income (%) 34.86 31.21

Capital Adequacy Ratio (%) 17.27 20.14

Considering the economic slowdown and the risks in going for

exponential growth, your Bank had opted for a consolidation phase. But
at the same time, the Bank used the opportunity for reaching out to new
areas through Branch expansion, putting up of new ATMs and to improve
and enhance various channels. Strategic investments were also made to
enhance the shareholder value .

OPERATING PROFIT

Operating Profit registered a small growth from Rs.l, 259.78 crore to

reach Rs. 1,264.85 crore. The liquidity overhang throughout the period
under review affected the growth of operating profit. There was an
increase in net interest income from Rs.l, 315.46 crore to Rs. 1,410.83
crore and the non-interest income has gone up from Rs.515.77 crore to
Rs. 530.91 crore.

INCOME GROWTH

The interest/discount income from advances has gone up from Rs.2564.25

crore to Rs.2, 849.73 crore. In spite of the uncertainties prevailed
in the economy, the Bank could create select good quality earning
assets. Bank continued to enjoy a decent interest spread (4.75%) on
advances. Based on the increase in interest income, total income has
gone up from Rs.3831.15 crore to Rs.4204.14 crore registering a growth
of 9.74%. Income from advances as percentage to total income was
67.78%. Income from investments recorded an increase of Rs. 118.86
crore and touched Rs.894.90 crore. Cumulative income from advances and
investments recorded a growth of 11.92% and stood at Rs. 3,744.63 crore
against Rs. 3,345.79 crore of the previous year. Yield on advances
moved in tandem with the market movement of interest rates and
decreased by 100 bps to 11.30%. Return on advances plus investments
decreased to 10.20%% from 11 %. As a result of the adverse movement in
the yield on advances, the net interest margin declined from 4.28% to
3.82% , still one of the best in the industry. The growth in other
income was marginal with a growth of 2.93%from a level of Rs.515.77
crore to Rs.530.91 crore. Recovery from written off accounts
contributed Rs.l 27.70 crore as against Rs.l 32.77 crore during the
last financial year.

The net revenue, that is the net interest income plus other income, of
the Bank increased by Rs. 110.51 crore fromRs. 1,831.23 crore as on
March 31, 2009 to Rs. 1,941.74 crore.

EXPENDITURE

The Bank embarked upon organic expansion adding 60 branches and 115
ATMs. Total expenses for the financial year 2009-10 increased from Rs.
2,571.37 crore, to Rs. 2,939.29 crore registering an increase of 14.31
%. Interest expenses increased from Rs. 1,999.92 crore in FY 09 to Rs.
2,262.40 crore in FY 10. Cost of all funds (deposits plus borrowings
plus bonds) decreased to 6.62% from 7.08% of last financial year. Cost
of deposits witnessed a downward trend and has fallen by 43 bps to
6.55% from last years 6.98%. The Bank was conscious in shedding bulk
deposits and concentrated on retail deposits. Interest rates did not
show large movements during the last financial year. Operating expenses
increased by Rs. 105.44 crore and amounted to Rs, 676.89 crore.
Employee costs came to Rs.366.05 crore during the year compared to last
years figure of Rs. 317.45 crore. Other operating expenses came to Rs.
310.84 crore. Employee costs as percentage to total income has gone up
from 8.29% for the year ended March 31, 2009 to 8.71% for the year
ended March 31, 2010. Cost to income ratio is 34.86% (31.21% % in FY
2008-09) which is still one of the best in the industry. This figure is
maintained even after the spurt in recruitment during the last 2
financial years and increase in other operating expenses including
expenses for technological advancement.

NET PROFIT

The net profit for the year after making all provisions, was Rs.464.55
crore as on March 31,2010 as against Rs. 500.49 crore showing a
marginal decrease of 7.18%. Total provisions amounted to Rs. 800.30
crore, excluding Income Tax provisions amounting to Rs.395 crore. The
profit margin decreased from 13.07% to

11.05%. Return on average equity stood at 10.30%. Earnings per share

was at Rs.27.16 and the return on average total assets at 1.15%. Book
value increased from Rs.252.93 as on March 31, 2009 to Rs.274.24 as of
March 31, 2010.

DIVIDEND

The Bank has been consistently rewarding shareholders through cash pay
outs after taking into account the requirement for ploughing back of
profits to support growth. Retained profits add impetus for the future
growth and enhance the value of the stake of the shareholders. In view
of the satisfactory performance, the Board of Directors recommends a
dividend of 50% on the paid up capital of the Bank which is the same
percentage as that of last financial year.

GROWTH IN BUSINESS
Attracting new customers and further enhancing relationships with the
existing customers were the cornerstones of the business philosophy of
the Bank. New products were introduced taking into account the customer
preferences. The policy of the Bank is to enter new geographies to
enhance visibility of the Bank. Tiered Current and Savings Bank account
products have started attracting customer interest. Most of the back
office functions were centralised to take advantage of volume as well
as expertise. Deposits grew to Rs.36057.95 crore clocking 11.99%
growth. The Bank had assiduously avoided bulk deposits and hence the
fall in growth rate of deposits. However, average deposits have shown a
decent growth of 23.33%. Advances registered 20.36% growth touching a
figure of Rs.26, 950.11 crore. Savings Bank deposits has grown from a
base of Rs.6, 445.84 crore to Rs.7, 611.13 crore. The NRI deposits of
the Bank stood at Rs. 7,350.71 crore. Investments grew to Rs. 13054.65
crore from Rs.12,118.97 crore. The size of the balance sheet for the
year grew to Rs. 43,675.61 crore from Rs. 38,850.86 crore.

LOAN ASSET QUALITY

Loan delinquencies were higher during the year which was a fall out of
the economic recession. Gross NPA as on March 31, 2010 stood at
Rs.820.97 crore as against Rs.589.54 crore in the previous year. Gross
NPAs as percentage to Gross Advance is 2.97% as against 2. 57 % in the
previous year. Net NPAs stood at Rs. 128.79 crore (0.48% of Net
Advances) as against Rs. 68.12 crore (0.30% of Net advances) in the
previous financial year.

The Bank has initiated various measures to contain the NPA. Maximum
thrust is given for recovery through SARFAESI Act. Proceedings and
settlements are reached through compromise with a humanitarian
approach. Services of Recovery Officers/Agents are used strictly
adhering to Codes of Conduct prescribed by RBI. During the financial
year 132 recovery camps and 14 Lok Adalaths were held at different
centres and the results were overwhelming. A Mega Adalath was held
exclusively for the Bank, which was inaugurated by the acting Chief
Justice of Kerala.

As on 31.03.2010, the Bank held a total provision of Rs 684.43 crore.

This includes a Floating Provision of Rs.l 79.52 crore. The total
provision coverage for NPAs as on March 31, 2010 is 83.37 %. As per the
extant RBI directive, banks should achieve provision coverage of 70 %
(by Sept. 2010) including technically written off accounts. As on 31st
March 2010, Provision Coverage Ratio of your bank including technically
written off accounts is 91.82%.

EXPANSION OF NETWORK

During the financial year, the Bank opened 60 new branches and 115 new
ATM centres. As on March 31, 2010, the total number of branches and ATM
centres of the Bank increased to 672 and 732 respectively, as against
612 and 617 of last financial year.

CAPITAL ADEQUACY

The Capital to Risk-weighted Assets Ratio (CRAR) as per BASEL I as on

March 31, 2010 stood at 17.27%. As per BASEL II CRAR came to 18.36%.
As per RBI guidelines lower of the above two shall be reckoned and
accordingly CRAR is 17.27%. Tier-1 CRAR (core CRAR) was 15.27%.

BUSINESS PRODUCTIVITY

The business per average employee increased to Rs. 8.13 crore as

against Rs.7.50 crore of the fast financial year. Profit per employee
stood at Rs. 6.01 lakh on an enhanced workforce.

EXTERNAL RATING

The certificate of deposit and short term fixed deposits (with a

contracted maturity upto one year) of the bank are rated PI + by
Crisil. Tier II subordinated debts issued by the bank aggregating to
Rs.320 crore is rated CARE AA by Care and AA - (Ind) by Fitch.

CORPORATE GOVERNANCE

Your Bank is committed to achieving highest levels of ethical

standards, professional integrity, corporate governance and regulatory
compliance. The corporate governance practices followed by the Bank are
given in the annexure.

BOARD OF DIRECTORS

The Board consists of nine members as on 31 March 2010, including

Managing Director and Chief Executive Officer and two Executive
Directors (whole time directors). All other members of the Board are
Non-Executive & Independent Directors.

Shri. M. Venugopalan, Managing Director & Chief Executive Officer has

laid down the office on July 31, 2010 after being at the helm of
affairs for 63 months. He was Chairman & Chief Executive Officer of the
Bank from May 01, 2005 to July 30, 2008. Pursuant to the implementation
of the Dr.Ganguly Committee recommendations on Corporate Governance, he
was designated as Managing Director & Chief Executive Officer from July
31, 2008. Shri. M. Venugopalan made significant contribution towards
the development, growth and visibility of the Bank. He could
successfully position the Bank with capital and bring in strategic
structural and technological changes to remain agile to meet todays
competition. The Board acknowledges his valuable services.

The Board has appointed Shri. Shyam Srinivasan, as the MD & CEO of the
Bank on the retirement of Shri. M. Venugopalan. RBI has also accorded
their approval vide letter DBOD No: 1785/08.38.001/2010-11 July 29,
2010 for the appointment of Shri. Shyam Srinivasan,

Shri. P. R. Kalyanaraman has taken charge of the office of MD and CEO

from 31st July, 2010, as an interim arrangement as approved by RBI
(Shri P. R. Kalyanaraman has been designated as MD & CEO in charge
during the interim period,) and will work subject to the overall
control of the Board, until Shri. Shyam Srinivasan, the new MD & CEO
designate assumes office.

Prof. A.M. Salim retired from the Board on August 22, 2009 after
rendering 8 years of valuable service in the Board. The Board extends
its appreciation to the meritorious services of Prof. Salim as a member
of the Board of the Bank.

Executive Director, Shri. K. S. Harshan retired from the Bank after

completing a five year tenure in the Bank, out of which three years as
a member of the Board, The Board acknowledges his valuable services.

Shri. P C Cyriac and Prof. Abraham Koshy are due to retire by rotation
at the forthcoming Annual General Meeting (AGM), as per the Articles of
Association of the Bank, our Code of Corporate Governance and the
provisions of the Companies Act, 1956, Shri. P C Cyriac and Prof.
Abraham Koshy being eligible, offer themselves for re-appointment.

Shri P Surendra Pai is retiring at the forthcoming AGM, after

completing his term of appointment of three years as approved by the
Board at the time of his initial appointment and is not offering
himself for re-appointment. The Board records its appreciation of the
valuable services of Shri P Surendra Pai as a member of the Board of
the Bank.
A shareholder of the Bank has expressed his intention to propose
Dr.T.C.Nair as a candidate for the office of directorship in this
vacancy and has given notice in writing along with deposit of Rs.500/-
in terms of Sec.257 of the Companies Act, 1956.

The Board also co-opted Shri. P.C. John as Executive Director from 1st
May 2010 and RBI approval has been received vide letter DBOD No:
21949/08.38.001/2009-10 dated June 24, 2010.

SUBSIDIARY

Fedbank Financial Services Ltd. is a fully owned subsidiary of the

Bank. As required under Section 212 of the Companies Act, 1956, the
financial statements relating to this company, the sole subsidiary of
the Bank, for FY10 are attached.

ANNUAL FINANCIAL STATEMENTS AND AUDIT REPORT

As required by section 212 of the Companies Act, 1956, the Banks

balance sheet as on 31 March 2010, its profit and loss account for
FY10, and the statutory auditors report and statements required under
the section, are attached.

STATUTORY AUDIT

M/s. Varma & Varma, Chartered Accountants, Kochi, and M/s. Price Patt &
Co., Chartered Accountants, Chennai, jointly carried out the statutory
central audit of the Bank. The statutory central/branch auditors
audited all the branches and other offices of the Bank.

Special Reserve created under section 36(l)(viii) of the Income Tax Act
1961.

As per section 36(1 )(viii) of the Income tax Act, 1961, deduction is
available for any Special Reserve created and maintained to the extent
of 20% of the profit derived from the business of providing long term
finance for industrial or agricultural development or development of
infrastructure facility or housing in India. Because of Banks term
lending for housing, power, bridges, roads and other segments of
infrastructure in the last year and the availability of the tax benefit
under the section 36(l)(viii) of the Income tax Act, the Bank has
created a Special Reserve of Rs.31crore during this year (previous year
Rs.l 1 Crore), being the eligible amount of deduction available under
the said section.

JOINT VENTURE IN LIFE INSURANCE BUSINESS

The Banks joint venture Life Insurance Company, in association with

IDBI Bank Limited and Fortis Insurance International N.V., namely IDBI
Fortis Life Insurance Company Limited commenced its operation in March
2008. The Bank has infused Rs. 117 crore as its share of capital into
this company holding 26% of the equity capital of the company. The
performance of this Life Insurance Company is encouraging and it has a
range of customer-centric products.

AWARDS RECEIVED DURING THE YEAR

- Most Efficient Bank in India in the large bank category by Business

Today - KPMG survey

- Federal Bank was adjudged, as the best bank among the Old Private
Sector Banks category in the survey conducted by the Financial Express
in association with Ernst & Young.

- Federal Bank has won the Great Mind Challenge award for
implementing the most innovative solution for business. This award was
introduced by IBM for the first time in India for business development
initiatives. Federal Bank is the first Bank in India to receive the
award

- Ranked 8th among all banks in India, in a study conducted by Economic

Times under four parameters of growth, efficiency, financial strength
and shareholder returns. Of these, our Bank was ranked No. 1 in
Efficiency and Financial Strength.

STATUTORY DISCLOSURE

STOCK EXCHANGE INFORMATION

The Banks equity shares are listed on:

1. Bombay Stock Exchange Limited Phiroze Jeejeebhoy Towers Dalai

Street, Mumbai - 400 001.

2. National Stock Exchange Ltd. Exchange Plaza

Bandra - Kurla Complex Bandra East, Mumbai-400 051.

3. Cochin Stock Exchange Ltd. MES, DrPK Abdul Gafoor Memorial
Cultural Complex 4th Fl, 36/1565, Judges Avenue, Kaloor, Kochi - 682
017.

The GDRs issued by the Bank are listed on the London Stock Exchange.

The annual listing fees have been paid to all the Stock Exchanges
listed above.

The requirement of disclosure of steps taken for conservation of energy

and technology absorption does not apply to the Bank.

Through its export-financing operations, the Bank supports and

encourages the countrys export efforts.

The requirement of disclosure under section 217(2A) of the Companies

Act, 1956, is given as a separate annexure.

PERSONNEL

As required by the provisions of Section 217(2A) of the Companies Act,

1956, read with Companies (Particulars of Employees) Rules, 1975, as
amended, the names and other particulars of the employees are set out
in the Annexure to the Directors Report.

DIRECTORS RESPONSIBILITY STATEMENT

As required by section 21 7(2AA) of the Companies Act, 1956, the

Directors state that:

a. in the preparation of the annual accounts, the applicable

accounting standards have been followed along with proper explanation
relating to material departures;

b. the Directors have selected such accounting policies and applied

them consistently and made judgments and estimates that are reasonable
and prudent so as to give a true and fair view of the state of affairs
of the Bank at the end of the financial year and of the profit of the
Bank for that period;

c. the Directors have taken proper and sufficient care for the
maintenance of adequate accounting records in accordance with the
provisions of this Act for safeguarding the assets of the Bank and for
preventing and detecting fraud and other irregularities; and

d. the Directors have prepared the annual accounts on a going-concern

basis.

Acknowledgement

The Board of Directors places on record its sincere thanks to

Government of India, Reserve Bank of India, various State Governments
and regulatory authorities in India and overseas for their valuable
guidance, support and co-operation. The Directors also place on record
the gratitude to investment banks, rating agencies and stock exchanges
for their excellent support.

Your Directors record their sincere gratitude to the Banks

shareholders, esteemed customers and all other well-wishers for their
continued patronage. The Directors express their appreciation for the
contributions from every employee of the Bank.

For and on behalf of the Board of Directors

Aluva P.C. Cyriac

August 6, 2010 Chairman of the Board

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