Director Responsibilities

Your responsibilities regarding bank earnings are to provide oversight to the bank’s performance and know what factors can impact that performance. A solid and satisfactory core earnings performance allows a bank to fund growth and remain competitive in the marketplace.

A bank's earnings performance is presented in its income statement. The amounts reported on a bank's income statement are driven by management decisions including, for example, the composition (asset/liability mix) of the balance sheet, the level of earning assets relative to total assets, and the level of interest-bearing liabilities to total assets. Because of this, the income statement presents a picture of risk management successes or failures for a specified period of time. Strong, steady earnings are a reflection of good management, and weak, fluctuating earnings are an indicator of poor management.

Information on your bank’s earnings performance and the factors contributing to that performance helps pinpoint strengths and weaknesses and is essential to your success in governing the bank and meeting your responsibilities to its stakeholders. Accordingly, an important task in overseeing a bank’s performance is to review the income statement to see if performance goals are being met. Besides being concerned with how much your bank earns, you should also concern yourself with the quality of the earnings.

Earnings quality refers to the:

  • composition,
  • level,
  • trend and
  • sustainability of bank profits.

Sustainable profits are those that come from a business’ core, or recurring, operations. For banks, the core business is usually lending and investing. Accordingly, you will want to pay attention to interest income, interest expense and the difference between the two, or the net interest margin, to evaluate the quality of a bank's earnings. Reliance on net interest income and fee income generally results in a higher-quality income stream than reliance on nonrecurring income sources, such as securities gains and losses. Sustainable profits provide a longer-term source of income than nonrecurring income, contributing to the long-term health of the bank. Sustainable profits are also the product of conscious, strategic planning by the board and management.