Ryan and Ahmed, I would suggest a modestly different approach. Ahmed,
all banks that have FDIC insurance must submit their quarterly call
report to the FDIC, 30 days after the period end. You can find the
most recent Call Report on FDIC.gov under the Details and Financial
Analysis tab. There are Federal guidelines for reporting Liabilities
(cost of funds). Each line item is uniform to all banks. You can
also get the Uniform Bank Performance Report (UBPR), which usually
does not have the cost of funds in it, but you can find the detail of
"Uniform" reporting. That leads to the "Comparison of Peers" reports.
The Federal Reserve and the FDIC tend to think of banks grouped by
asset size. You can select the Peer Group there, which would refine
your comparison list.
Once you have the Liability Types, and Capital Types identified, you
need to make some assumptions. For Liabilities, the deposit size and
duration period can matter. If the Bank purchases Federal Reserve
funds, they have moved dramatically in the last 4 months. If the Bank
uses large amounts of Time Deposits, they may not have the ability to
shift down into lower cost time periods. The breakdown by Dollar size
of deposit and time period is located within Schedule RC-E. Brokered
Deposits are limited by regulation.
Finally, the effect of Basel III on all Banks is the requirement to
raise Tier 1 capital. If the Bank has been lucky enough to self
generate the required increase to 10% Tier 1 capital that is great.
If not, the Regulators do not care how much the Equity Capital costs.
As a result the "Marginal Cost of Capital" may not reflect the
historical, "Cost of Capital".
Sincerely,
Jim
James M. Wilber CMA, MBA
IMA Chicago, President
president.chicago.ima@...https://linkup.imanet.org/chicagochapter/home
Original Message------
Hi Ahmed,
I work for a private company. The founder/majority owner/CEO also owns a bank. This is how I would go about it, though it would vary somewhat depending on the purpose/audience of the WACC. Also not sure if you have a technical definition in mind for "cost of fund."
- Use the interest rate offered for customer deposits.
- If the bank uses lines of credit or other financing, take the contracted rate and adjust for compounding term, additional fees incurred, etc.
- On the equity end, I imagine there's a target ROI or similar terminology used in-house even if fully funded by the founder. If there are any other shareholders there's likely a prospectus detailing what sort of financial return is expected given the bank's growth and risk profile.
- You could also find a few publicly listed banks that you find similar: calculate their WACCs to benchmark your bank's.
Hope this helps.
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Ryan Holden CMA
Accountant
Greater Seattle, WA
United States
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