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In the past, a bank earning 1 percent on average assets was considered to be doing reasonably well. Today, the benchmark is higher with the 2002 return on average assets for all U.S. banks averaging 1.33 percent. If your bank has elected Subchapter S status, where earnings and their associated tax liability flow to the bank’s shareholders, net income to average assets will probably be much higher. If your bank is relatively new, its bottom line will probably be much lower. When reviewing bottom line performance consider the following: Is the bank relying on non-reoccurring items to achieve its profit performance? What is the trend in the bank earnings? Are earnings meeting forecast, budget or expectations? Are earnings on par with those of similar banks? Is there evidence of earnings management? For example, are loan losses mounting and the ALLL falling, yet the provision for loan loss remains unchanged or is reduced? If so, the bank may be overstating its earnings and the reasons for not increasing the provision for loan loss should be explored with management.
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