Financial Analysis of Flagstar Bank and Bank of America - Assignment Example

Running Head: FINANCIAL ANALYSIS Part I This is a study that covers two banking s ly Flagstar bank and Bank of America. It considers their background and further on to the financial reports. Towards the end it considers their financial ratios as can be lifted from the financial statements to show the scenarios before and after the financial crisis that hit the globe in around year 2008. Introduction This is a study about financial analysis of banks before and after the global financial crisis that hit the globe starting in year 2008. More specifically, it will consider two banks namely Flagstar Bank and the Bank of America, both of which are listed in the NYSE. The two main financial statements (the Income Statement and Balance Sheet) are going to be analyzed in both cases together with some financial ratios. However, before embarking on the aforementioned task, each of these banking corporations is going to be considered individually in a bid to understand their backgrounds. This is going to be in the order in which they have been mentioned in the introduction part. Flagstar Bank is a banking institution known by the official name Flagstar Bank and Flagstar Bancorp Investment Company acts as its holding company. It is headquartered at Troy, Michigan at the address 5151 Corporate Drive. Its website address is www.flagstar.com and its investor relations phone number is (248) 312-2000 and in case an investor wants to send an e-mail there is a facility on the company’s website to do that(investors@flagstar.com) plus an in case of any suspicion in dealings with Flagstar e-mail abuse@flagstar.com. The stock exchange trading symbol for this company is FBC at NYSE. The current share price is $0.79 and the company’s stock is under Financial Industries and further narrows down to the bank sector of NYSE. According to the 2009’s annual report, there are ten directors of which eight are outside directors and two are inside directors. Outside directors are considered independent when it comes to the company’s management decision making and therefore, mindful of the impact of the decisions’ impact on the shareholders. This is a branch bank and it operates around 175 banking centers. (flagstar.com, 2011) Universal banking refers to a case where banking firms have a network of branches, several firm claims, offers a variety of services as well as taking part in corporate governance upon firms which depend on banks for sourcing funds. Flagstar bank is not a universal bank according to the opinion of the study. (Calomiris, 1995 p1) On the other hand, the official name of the Bank of America is Bank of America Corporation. The bank’s headquarters is in North Carolina at Bank of America Corporate Center, Uptown Charlotte. The address is NC1-007-56-70 100 North Tyron Street, Charlotte, North Carolina 28255. The phone number for support is 1.888.550.6433. for clients in the USA. It is an independent bank. Its website is BankofAmerica.com. The bank is listed in the NYSE with a trading symbol BAC. The price as per 25 October 2011 was $6.58. The bank is classified under the Financial Industry and in the bank sector in the NYSE. The bank has fifteen members of the board of directors of which three are inside and twelve are outside directors. As mentioned earlier, outside directors are considered independent when it comes to the company’s management decision making and therefore, mindful of the impact of the decisions’ impact on the shareholders. The bank is a braches kind of bank and has about 5,900 banking centers. The business operations done by the bank, according to the study’s opinion, befit those of a universal kind of bank. Aid to investors is given at branch level and thus there is no e-mail that serves all. (bankofamerica.com, 2011) Table 1: Annual results from the financial statements Bank of America(million dollars) Flagstar Bank (thousand dollars) 2007 2009 2007 2009 USD USD USD USD Total assets 1,715,746 2,223,299 15,792,736 14,013,331 Total liabilities 1,568,943 1,991,855 15,099,758 13,416,607 Total equity 146,803 231,444 692,978 596,724 Cash 42,531 121,339 129,992 73,019 Securities 64,737 165,942 64,987 691,699 Gross loans 876,344 900,128 8,134,397 7,714,308 Allowance for loans 11,588 37,200 104,000 524,000 Net loans 864,756 862,928 8,030,397 7,190,308 Miscellaneous assets 153,939 191,077 138,561 1,331,897 Interest income 87,304 77,916 905,509 689,338 Interest expense 52,871 30,807 695,631 477,798 Net interest income 34,433 47,109 209,878 211,540 Non-interest income 31,886 72,534 117,115 523,286 Non-interest expense 37,010 66,713 297,510 672,126 Net non-interest income (5,124) 5,821 (180,395) (148,840) Provision for loan losses 8,385 48,570 88,297 504,370 Net income 14,982 6,276 (39,225) (496,678) Part II Liquidity Ratio Liquidity basically refers to the ratio of the aggregate assets. If the liquidity ratio is shows that more than 60% to 70% of assets have been loaned out, then the financial institution is very illiquid. Bank of America’s liquidity ratios are as follows: Year 2007 = 876,344/1,715,746*100 = 51% Year 2009 = 862,928/2,223,299*100 = 39% Flagstar’s bank’s liquidity ratio is as below; Year 2007 = 8,030,397/15,792,736 = 51% Year 2009 = 7,714,308/14,013,331 = 55% Bank of America’s time series ratio analysis shows that its liquidity improved from 51% of 2007 to 39% in 2009 while the equivalent time series analysis shows that the Flagstar’s situation deteriorated from 51% in 2007 to 55% in 2009. A cross-section analysis shows that the situation in 2007 was the same for both banks at 51% while in 2009, the Flagstar’s situation worsened at 55% while compared to 39% of Flagstar. (investopedia.com, 2011) Capital analysis This shows how the capital levels have varied over time to determine whether the capital has grown or otherwise. This shows the general growth of the institution in terms of profitability. Bank of America’s equity in 2007 was million $146,803 while in 2009 it was million $231,444 while the situation of Flagstar’s situation was in 2007 thousand $692,978 and in 2009 thousand $596,724. Bank of America was improving in capital since it grew from million $146,803 to million $231,444 in 2007 to 2009 equivalently and this shows a significant improvement while Flagstar performed dismally both in time-series and across the institutions’ comparison as can be seen in the fall from thousand $692,978 in 2007 to thousand $596,724 in 2009. ROA This shows how variance in the profitability of assets. Bank of America’s rates were as follows: In 2007 = 14,982/1,715,746 = 0.009 In 2009 = 6,276/2,223,299 = 0.003 Flagstar’s situation was as below; In 2007 = (39,225)/15,792,736 = (0.003) In 2009 = (496,678)/14,013,331 = (0.035) In both the two banks the situation deteriorated from 2007 to 2009, but that of Flagstar bank deteriorated more. Conclusion The conclusion that cane be drawn from the analysis of the Balance Sheets and the Income statements of both the financial institutions is that the credit crisis that hit the world in year 2008 was very negative to their performance. This is portrayed even more while checking at the ratios towards the end of the study. References bankofamerica.com . (2011). Bank of America. Retrieved 25 October 2011 http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-irhome Calomiris, Charles W. (1995). Universal Banking and the Financing of Industrial Development. The World Bank, Policy Research Department. p1. flagstar.com. (2011). Flagstar Company. Retrieved 25 October 2011 https://www.flagstar.com/ investopedia.com. (2011). The Industry Handbook: The Banking Industry. Retrieved 25 October 2011 http://www.investopedia.com/features/industryhandbook/banking.asp#axzz1bmeGVpF7 library.corporate-ir.net. (2011). Annual Report 2007. Retrieved 25 October 2011 http://library.corporate- ir.net/library/91/913/91343/items/292211/Flagstar_2007_Annual_Report.pdf library.corporate-ir.net. (2011). Annual Report 2009. Retrieved 25 October 2011 http://phx.corporate- ir.net/External.File?item=UGFyZW50SUQ9MzgwMTM4fENoaWxkSUQ9MzgwMDI5fFR5cG U9MQ==&t=1 media.corporate-ir.net. (2011). Annual Report 2007. Retrieved 25 October 2011 http://media.corporate-ir.net/media_files/irol/71/71595/reports/2007_AR.pdf media.corporate-ir.net. (2011). Annual Report 2009. Retrieved 25 October 2011 http://media.corporate- ir.net/media_files/irol/71/71595/reports/2009_AR.pdf Appendix Table 1. (Bank of America Results) Consolidated Income statement (Figures in million dollars except for share units’ information) 2007 2009 Interest Income Interest and fees on loans and leases $ 55681 $48703 Interest on debt securities 9784 12947 Federal funds sold and securities purchased under agreements to resell 7722 2894 Trading account assets 9417 7944 Other interest income 4700 5428 Total interest income 87304 77916 Interest expense Deposits 18093 7807 Short-term borrowings 21975 5512 Trading account liabilities 3444 2075 Long-term debt 9359 15413 Total interest expense 52871 30807 Net interest income 34433 47109 Non-interest income Card income 14077 8353 Service charges 8908 11038 Investment and brokerage services 5147 11919 Investment banking income 2345 5551 Equity investment income 4064 10014 Trading account profits (losses) (5131) 12235 Mortgage banking income 902 8791 Insurance income - 2760 Gains (losses) on sales of debt securities 180 4723 Other income 1394 (14) Total noninterest income 31886 72534 Total revenue, net interest expense 66319 119643 Provision for credit losses 8385 48570 Non-interest expense Personal 18753 31528 Occupancy 3038 4906 Equipment 1391 2455 Marketing 2356 1933 Professional fees 1174 2281 Amortization of intangibles 1676 1978 Data processing 1962 2500 telecommunications 1013 1420 Other general operating 5237 14991 Merger and restructuring charges 410 2721 Total noninterest expense 37010 66713 Income before income taxes 20924 4360 Income tax expense 5942 (1916) Net income 14982 6276 Consolidated Balance Sheet (in Dollar millions) 2007 2008 Assets Cash and equivalents $42531 $121339 Time deposits placed and other short-term investments 11773 24202 Federal funds sold and securities purchased under agreements to resell 129552 189933 Trading account assets 162064 182206 Derivative assets 34662 80689 Debt securities Available-for-sale 213330 301601 Held-to-maturity 726 9840 Total debt securities 214056 311441 Loans and leases 876344 900128 Allowance for loan and lease losses (11588) (37200) Loans and leases, net allowance 864756 862928 Premises and equipment, net 11240 15500 Mortgage servicing rights 3347 19774 goodwill 77530 86314 Intangible assets 10296 12206 Other assets 153939 43874 Total assets 1715746 81996 liabilities Deposits in domestic offices Noninterest-bearing 188466 269615 Interest-bearing 501882 640789 Deposits in foreign offices Noninterest-bearing 3761 5489 Interest-bearing 111068 75718 Total deposits 805177 991611 Federal funds purchased and securities sold under agreements to repurchase 221435 255185 Trading account liabilities 77342 65432 Derivative liabilities 22423 43728 Commercial paper and other short-term borrowings 191089 69524 Accrued expenses and other liabilities 53969 127854 Long-term debt 197508 438521 Total liabilities 1568943 1991855 Shareholders’ equity Preferred stock 4409 37208 Common stock 60328 128734 Retained earnings 81393 71233 Accumulated other comprehensive income 1129 (5619) Other (456) (112) Total shareholders’ equity 146803 231444 Total liabilities and shareholders’ equity 1715746 2223299 Table 2: (Flagstar Results) Consolidated Balance Sheet (in thousands dollars) 2007 2008 Assets Cash and cash items $129992 $73019 Interest-bearing deposits 210177 1009470 Cash and cash equivalents 340169 1082489 Securities classified as trading 13703 330267 Securities classified as available for sale 1308608 605621 Mortgage-backed securities held maturity 1255431 - Other investments 26813 15601 Loans available for sale 3511310 1970104 Loans held for investment 8134397 7714308 Less: allowance for loan losses (104000) (524000) Loans held for investment, net 8030397 7190308 Total interest-earning assets 14356439 11121371 Accrued interest receivable 57888 44941 Repossessed assets, net 109274 176968 Federal Home Loan Bank Stock 348944 373443 Premises and equipment, net 237652 239318 Mortgage servicing rights, net 413986 3241 Mortgage servicing rights fair value - 649133 Other assets 138561 1331897 Total assets 15792736 14013331 Liabilities and Stockholders’ Equity Liabilities Deposits 8236744 8778469 Federal Home Loan Bank advances 6301000 3900000 Security repurchase agreements 108000 108000 Long term debt 248685 300182 Total interest-bearing liabilities 14894429 13086651 Accrued interest payable 47070 26086 Secondary market reserve 27600 66000 Payable for securities purchased - - Other liabilities 130659 237870 Total liabilities 15099758 13416607 Shareholders’ equity Common stock 637 3 Additional paid in capital 64350 4688 Additional paid in capital- preferred - 243778 Additional paid in capital- common - 443230 Accumulated other comprehensive (loss) income (11495) (48263) Retained earnings 681165 (46712) Treasury stock (41679) - Total stockholders’ equity 692978 596724 Total liabilities and stockholders’ equity 15792736 14013331 Consolidated income statement 2007 2009 Interest income loans $769485 $579439 Mortgage-backed securities 59960 - Securities available for sale 56578 107486 Interest-bearing deposits 12949 2383 Other 6537 30 Total interest income 905509 689338 Interest expense deposits 357430 241507 FHLB advances 271443 218231 Security repurchase agreements 51458 4676 Other 15300 13384 Total interest expense 695631 477798 Net interest income 209878 211540 Provision for loan losses 88297 504370 Net interest income after provision for loan losses 121581 (292830) Non-interest income Loan fees and charges 1497 125168 Deposit fees and charges 22999 32429 Loan administration 12715 7167 Net gain on loan sales 59030 501250 Net gain on sales of mortgage servicing rights 5898 (3886) Gain on trading securities - 5861 Loss on residual and transferor’s interest - (82867) Net loss on securities available for sale (16679) 8556 Loss on trading securities (6785) - Other fees and charges 38440 (49645) Total other-than-temporary impairment losses - (67799) Losses recognized in other comprehensive income before taxes - 47052 Net impairment losses recognized in earnings - (20747) Total non-interest income 117115 523286 Non-interest expense Compensation and benefits 168559 296500 Occupancy and equipment 69122 70005 Communication 5400 - Asset resolution - 96591 Federal insurance premiums - 36613 Other taxes (1756) 16025 Loss on extinguishment of FHLBI debt - 16446 Warrant expense - 23339 General and administrative 56185 116607 Total non-interest expense 297510 672126 (loss) earnings before federal taxation (58814) (441670) (benefit) provision for federal income taxes (19589) 55008 Net (loss) earnings (39225) (496678) Read More