FINANCIAL STATEMENT OVERVIEW
ASSIGNMENT # 3
Members: Zhishuang Liu
1. Assumptions 2
2. I/S Pro Forma 2
1.1 Interest Income 2
1.2 Net Interest Income Margin 2
1.3 Provision for Loan Losses 5
1.4 Net Income Margin 6
1.5 Tax Rate 6
1.6 Non-interest income and Non-interest expense 7
3. B/S Pro Forma 8
3.1 ROA and ROE 8
3.2 The Accounts change according to the Interest Income and Interest Expense 9
3.3 The Other Asset and Liability Accounts 11
3.4 Shareholders’ Equity Forecast 12
3.5 Retained earnings 13
4. Cash Flow Statement Pro Forma 15
(1) Interest Income grows ...view middle of the document...
According to the predictive values of interest income and net interest income margin, get the values of net interest income (interest income* net interest income margin) and interest expense (interest income- net interest income).
Graph 2.3 Int and Fee on Loans/ Int Income
Graph 2.4 Sub-accounts/ Int Income
Graph 2.5 Interest on deposits/ Interest Expense
Graph 2.6 Sub-accounts/ Interest Expense
Based on Graph 2-3 – Graph 2-6, consult proportions of each sub-account of interest income and interest expense in the past years and get the predictive values of each sub-account of 2014-2018.
Provision for Loan Losses
Graph 2-7 Provision for Loan Losses
Graph 2-7 shows the provision for loan losses form year 2006 to year 2013. Orrstown increased its provision for loan losses dramatically since the outbreak of financial crisis. Considering that there is little chance that the financial crisis could happen in the near future, ignore the outliers and use the average of provision for loan losses before 2009 to predict.
Net Income Margin
Graph 2-8 Net Income Margin
Net Income Margin was steady from 2006 to 2013, except for year 2011 and 2012. Ignoring the outliers because of the financial crisis, use the average as the prediction of net income margin for the next five years. The net income equals to interest revenue multiplies net income margin.
Graph 2-9 Tax Rate
Graph 2-9 tells the tax rates of Orrstown from 2006-2013. The last three years had anomalous tax rates owing to the negative net income before tax. Take the arithmetic average of the tax rates to estimate the tax rate from year 2006-2013.
Non-interest income and Non-interest expense
Graph 2-10 Non-interest income
Graph 2-11 Non-interest expense
Based on Graph 2-10 and Graph 2-11, assume that the non-interest income and non-interest expense grow at a geometric average rate. Make slight judgments in order to match with other accounts.
The pro forma of Income Statement is shown on appendix I.
1. B/S Pro Forma
Using the forecast data from Income Statement, we can forecast the total Asset and total Equity in Balance Sheet by predict ROA and ROE ratio.
ROA and ROE
Graph 3-1 ROA ratios
Graph 3-2 ROE ratios
According to the Graph 3-1 and 3-2, except the data in 2011 and 2012, the ROA and ROE ratio deceases gradually. So we assume that in five year, the ROA and ROE ratios will decease at a Compound Annual Growth Rate.
Then, we use Net Income dividend by ROA to derive the future total Asset. Also we use Net Income dividend ROE to obtain the future total Equity. The difference between Asset and Equity is the total Liability.
The Accounts change according to the Interest Income and Interest Expense
In the Balance Sheet, some asset accounts will change the same as the change in Interest Income account, and some liability will change according to the Interest Expanse, such as Interest bearing, Net Loans and...