If interest rates change and devalue an asset, for example, by 2, then the loss must be reflected immediately in the earnings report.
The focus should be on the bottom-line result.
The key questions to ask:
Are you getting the desired result (assessing your bank)?
Does the result make sense (assessing another entity)?
Earnings have the capacity to absorb losses.
Earnings Quality
Determine if the earnings are a one-time occurrence or sustainable.
Return on Average Assets (ROA)
ROA is calculated as return on average assets.
It is a right-size ratio, meaning it normalizes for the size of the institution. For example, whether assets are 200,000,000 or 200,000,000,000, ROA conveys the same information regarding efficiency.
ROA indicates what an entity can do with its available assets.
To be considered a top performer ('one' or 'super strong' on earnings), an entity should be in the top quartile for ROA.
Deposit Service Charges
Deposit service charges may include income from overdraft fees.