Most directors receive a wide variety of summary and detailed reports in their board packets prior to a board meeting. If you have some business or accounting experience, then reading and interpreting financial statements may be familiar to you. Even for those directors without much experience, identifying evolving problems should not be too difficult. Once you get past the banking terminology, it isn’t necessary to have a strong financial background to discover potential problems in a bank’s performance. In addition, many of the measures used by financial analysts can be easily learned and applied to the task of assessing bank performance. The “Insights for Bank Directors” course covers many of these measures in the meeting materials and in upcoming lessons.

Bear in mind that directors are responsible for monitoring their bank’s performance. As a board member, you should spend some time studying your bank’s financial reports. Such reports are valuable tools that allow you to gauge the bank’s financial progress.

Here are some things to keep in mind as you review your bank's financial reports: Look for changes that occur from time period to time period. Check to see that the bank’s financial performance stays within limits set by the board. Ask yourself, “Was the change expected based on what you know about management decisions at the bank?”

This course focuses on portfolio risk management because of the important role it plays in determining a bank’s financial health. Portfolio risk, as used in this course, relates to the credit, liquidity and market risk associated with a bank’s holding of interest-earning assets such as loans and investments and interest-paying liabilities like deposits and other borrowings.

Because a bank’s portfolio risks emanate from its asset and liability holdings, a bank’s portfolio risk exposure shows up on its balance sheet. Since the size of the income and expense stream flowing from a bank’s asset and liability holdings is dependent upon how well these holdings are managed, the bank’s income statement is a good tool for monitoring the effectiveness of its risk management. When a bank manages its portfolio risk well it consistently generates good earnings. Conversely, if a bank does a poor job managing its portfolio risk, it reports poor earnings and in the most extreme cases will fail. Combined, the balance sheet and income statement provide valuable information that can be used to ascertain a bank’s condition and performance.

Lesson Objectives

When you finish this section of the course you should be able to:

• Identify basic reports that can be used to monitor a bank’s portfolio risk exposure and its management of this exposure.