Risk Management Manual of Examination Policies - FDIC

FUTURE EARNINGS PROSPECTS
Assess the reasonableness of earnings projections and supporting assumptions of the business plan in relation to the economic
environment and competition. Projected interest income, expense, non-interest income and expense, and provisions for loan and lease
losses should be analyzed and compared to experiences of other new banks in the trade area or in a similar market. When necessary,
the examiner should make adjustments to the applicant’s projections and discuss the basis for the differences. Incorporators should
demonstrate through realistic and supportable estimates that, within a reasonable period (normally three years), the earnings of the
proposed institution will be sufficient to provide an adequate profit.
Summary and Findings
The Applicant projected a net operating profit (loss) of ($8,429M), ($1,573M), and $893M for the initial three years of operation,
respectively or a cumulative operating loss of ($9,109M). These underlying projections were based on reasonable average earning
assets to average assets assumptions (what-if scenario 5) of 89%, 92%, and 94% over the respective periods. Applicant asserts that the
average earning asset assumptions are on the conservative range given the proposal’s technology platform and lower emphasis on
costly traditional retail branches and fixed assets. The Applicant argues that the assigned average earning asset assumptions represent
the most conservative scenario possible and that higher earning asset utilization during the formative years are plausible based on peer
group data. Any higher utilization may result in improved net interest margins and a higher operating profit in year three.
Margin Analysis
In light of the substantial interest rate volatility during calendar years 2000 (Central Bank tightening of the money supply) and 2001
(aggressive loosening and adding of system liquidity), any meaningful comparative analysis is better served by assessing the net
interest income line as opposed to individual yield and cost factors. This facilitates analysis of the proposal’s assumptions over
varying interest rate environments.
The table below depicts the proposal’s estimates for net interest income and non-interest income to average assets during the
formative years. Comparisons for reasonableness include an Examiner calculated average of denovo institutions (Banks listed on page
6 of this report) as well as, various peer group and State averages for the period ending September 30, 2001.
Institution Net Interest Income Non-Int. Income AEA/AA
Examiner Denovo Sample -Mean 3.71% 0.79% 93.91%
UBPR Peer Group 9 3.91% 0.74% 94.05
UBPR Peer Group 13 3.99% 0.70% 93.47
UBPR Peer Group 25 3.72% 0.57% 91.72
Mean – All Insured Banks –
Anystate.
FDIC 6510/10 (02-2002) 15
3.91% 0.83% 92.19%
National Bank Year 1 3.94% 0.38% 89.37%
National Bank Year 2 4.41% 0.54% 92.46%
National Bank Year 3 4.70% 0.55% 93.70%
Notes: Source: Uniform Bank Performance Reports; Peer Group 9=Banks with TA of $100-$300 million within Metropolitan Area; Peer Group
13=Banks with TA of $50-$100 million within Metropolitan Area; Peer Group 25= Banks established within last 3 years