YOUNGSTOWN – Like clockwork, they come out every three months. Sheets of numbers and industry jargon that paint a picture of a bank’s performance. If you aren’t sure of what phrases like “Basel III standardized approach risk-weighted assets” mean or don’t know which figures really tell you how a bank did last quarter, don’t fret.
As part of The Business Journal’s new Quarterly Earnings Roundup series, The Business Journal is publishing earnings from banks and other public companies, along with insights from investors and analysts.
For those who aren’t banking industry insiders, a handful of numbers can help investors, businesses and consumers decide where to put their money or where to borrow.
From an investment standpoint, says Premier Bank President Gary Small, the most important number is obvious: earnings per share, which every bank reports, often at the top of its quarterly statement. That number can be combined with a dividend payout to produce total shareholder return.
“That’s what I look at because it tells me what my actual return is,” Small says.
Other important figures include net income, which Cortland Bank President and CEO James Gasior says is best used when examining comparable quarters.
There’s a seasonality to banking, Gasior explains, such as the typical trend of slow mortgage business in the first quarter or, in Cortland Bank’s case, expenses for the annual shareholder’s meeting, which always takes place in the second quarter.
“Larger banks can smooth some of that out. Smaller banks like Cortland can see that number shift from quarter to quarter. I like to look at it from an annual perspective to smooth out the recurring items that don’t really affect another quarter,” he says.
Buried in banks’ earnings statements are a set of indicators that help to piece together the puzzle of its performance. While the exact phrasing can vary by institution, they’re more or less always the same set of numbers: net interest margin, return on assets and efficiency.
“Right now, we’re in a low-rate environment. A good indication on an earnings statement is the net interest margin,” Gasior says. “That’s yield on earning assets less the cost of deposits and funds. The higher that number, the more profitable and shows a rising rate environment.”
With interest on loans often providing the lion’s share of a bank’s income, the net interest margin serves as a way to predict a bank’s future revenue, Small adds. A dropping number means the bank is earning less on its lending, he says.
“On days like today, where rates are falling, that number gets compressed and it’s a headwind for banking. Mortgages are in the low twos. My deposit rate could be zero,” he says. “That creates a very different market than when rates were around 4% and deposits were slightly higher.”
Return on assets, meanwhile, is a useful tool when comparing institutions to one another.
“It isn’t the be all and end all. But it sets the barometer and answers if you’re a well-performing organization,” Small says. “If you look at five banks next to each other and one has a much higher return on assets, you want to know. It’s usually a good indicator that it’s an institution you can depend on.”
Finally, efficiency shows how well a bank spends its money. The ratio is calculated by dividing noninterest expenses by net income. The lower the resulting number, the better.
“If a bank is posting in the mid-50s, that’s pretty good. If another is around 70%, that’s a high indication that there’s excess capacity, whether it’s staffing or the number of branches,” Gasior says. “It shows that there are aspects of their business that aren’t generating revenues.”
For businesses, though, not all the numbers in an earnings statement can help to figure out if they’re the best source of loans, the Cortland Bank president says. Sometimes, it helps to meet with a banker and dive deeper.
“Is there an expertise [in a particular sector]? How many loans do they do in commercial real estate versus consumer lending?” he says. “There are differences in banks that are business-focused versus those that are consumer-focused. Things like that go beyond an income statement.”
Investors have largely stayed away from the banking industry since the Great Recession, says Stephen VanSuch, a financial adviser at the Canfield office of Merrill Lynch. That such stocks aren’t high in demand could provide a value to investors, he says.
“A lot of experts believe they may have tremendous value because of that, while others counter that it’s a value trap,” he says. “To me, the fact that many people aren’t inquiring means there probably is value. But bank stocks might not ‘work’ until the next cycle. It’s hard to say when that may be, as we’re in a tech-driven market.”
For his clients who are shareholders in local banks, they’re almost exclusively “legacy money” investors – people who bought their stock years ago largely out of a connection with the institution.
“They may not be buying more of them. But they put them on a dividend reinvestment program, holding onto them for decades,” VanSuch says.