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How (and why) to read a bank’s call report

As the banking crisis continues to unfold, regulators who scrutinize banks, fintechs wondering if their banking partner is sound, and investors eyeing community banks as acquisition targets all have good reasons to dig into a bank’s detailed financials. Publicly traded banks disclose financials, but most banks are not public, so those interested in monitoring bank performance and financial strength need to be able to read a call report. These essential documents detailing a bank’s performance are filed quarterly with the FDIC and are publicly available through the FFIEC. If you want to understand a bank's capital and/or liquidity condition, its risk profile, and overall performance, your first stop should be its call report.

Bank call reports consist of several schedules, but the most critical ones for analyzing a bank's financial health are Schedules RI (Income Statement) and RC (Balance Sheet). These schedules provide insights into the bank's income, assets, liabilities, and equity.

Schedule RI, or the Income Statement, offers a breakdown of a bank's income and expenses within a given period (typically, a quarter). Each quarterly income statement shows year-to-date line items by quarter (e.g., the income statement in the third quarter shows earnings for the first, second, and third quarters). Key line items in this schedule include:

  • Interest Income: This line item reveals where the bank earns its interest income, such as from investment securities, residential or commercial real estate loans, commercial and industrial (C&I), consumer loans, credit cards, and more.

  • Interest Expense: Line items in this section of the income statement include interest on deposits, fed funds purchased (essentially, money borrowed from other banks), and interest on trading liabilities.

  • Noninterest Income: This includes income from various activities like service charges, securities brokerage, and realized gains on both held to maturity (HTM) and available for sale (AFS) assets.

  • Noninterest Expense: This section outlines the bank's operating expenses, including personnel, offices, and write-offs of goodwill. Noninterest expenses include personnel, offices, and other operational costs.

Schedule RC, or the Balance Sheet, provides a snapshot of the bank's financial position at the end of the period. Key sections of Schedule RC include:

  • Assets: This section lists the bank's assets, including liquidity investments, loans, trading assets, goodwill and other intangible assets, and more. This side of the balance sheet also includes a line item for allowance for credit losses, which are funds set aside to pay for future losses. Goodwill, a phantom asset that is added to the balance sheet when a company buys another for more than the target’s book value, is also listed here. Because regulators cannot liquidate this intangible asset, they deduct it from the bank’s equity.

  • Liabilities: This section includes primarily deposits, federal funds purchased (borrowed money from other banks), repo transactions, and other borrowed money.

  • Equity: Equity represents the difference between assets and liabilities. Most small banks only issue common stock, but more sophisticated institutions will also issue preferred stock, both of which are captured here.

Analyzing Key Items in Bank Call Reports

1. Asset Composition

Understanding the composition of a bank's assets is crucial. This side of the balance sheet can show you where a bank’s loan book may be insufficiently diversified, if it is dealing with liquidity issues, or if its securities portfolio is facing an unrealized loss.

2. Liabilities and Funding Sources

Liabilities primarily consist of deposits, federal funds purchased, repo transactions, trading liabilities, and other borrowed money. Analyzing the mix of these liabilities can provide insights into a bank's funding strategy and its reliance on different sources of funds. The RC-E schedule not only breaks down deposits by account type but also shows what percent of a bank’s funding sources are under the FDIC’s $250K insurance limit. This information can inform regulators and observers alike about the “flightiness” of a bank’s funding. Although regulators tend to view brokered deposits and other forms of wholesale funding as more flighty, that was not the case during the recent SVB crisis. In fact, transaction accounts – traditionally less flighty in regulators’ eyes – were more likely to flee the bank than other deposits.

3. Allowance for Credit Losses

The line item for allowance for credit loss (also known as ACL, or allowance credit losses) can provide insight into how a bank is managing its credit risk. If a bank increases its allowance in a given period (i.e., it sets aside more than it loses), that indicates that it is either taking a more conservative credit risk position or expecting to incur more credit losses in the future. Understanding the bank’s asset composition in the context of macroeconomic conditions is key to understanding which of those two conclusions is correct.

4. Net Interest Income

Understanding the sources of a bank's interest income and the breakdown of interest expenses is vital. By calculating an asset’s effective yield (net interest income divided by the associated average assets within a period) one can see which assets are generating earnings relative to other assets. The same can be done with average liabilities and interest expense to see the effective rate a bank is paying on a given liability. Schedule RC-K shows a bank’s quarterly average balances by line item, simplifying these calculations.

5. Net Noninterest Income

Noninterest income is a key way for a bank to diversify its earnings. During a recession, when lending money is relatively difficult, noninterest income can bolster profitability.

To gain deeper insights into a bank's performance, consider exploring additional schedules. These schedules include (but are not limited to);

  • Schedule RI-B, Part 1: This section covers charge-offs and recoveries, revealing where losses are accumulating on the balance sheet. You can see where a bank is accumulating losses and impute its loss rate. This section also breaks down the change in provision mentioned above.

  • Schedule RC-B: Breakdown of the securities portfolio, including government bonds, agency MBSs, and structured products. This schedule also shows the distribution of maturities for government bonds and agency MBSs.

Other important schedules include RC-C, which provides further detail on the bank’s loan book, and RC-R, which covers regulatory capital ratios.

Although an individual bank’s call report may be informative, it is most useful when compared to comparable banks or the industry as a whole. Tools like S&P Global Capital IQ or public databases on the FFIEC or FDIC’s websites allow you to query individual line items for any and all U.S.-regulated banks, putting indicators like change in net provision, effective yield of an asset, or deposit base composition in context.

Reading a bank call report is a basic but necessary skill for anyone interacting with a bank. Failing to understand a bank’s financial position could lead to a sour partnership, a bad deal, or a jeopardized operating account. When deciding whether or not to work with a bank, its call report should be your first stop.

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