Profitability
Net Operating Income to Average Assets
Also known as Net Operating Income
Net operating income is a bank's after-tax earnings from its ongoing business (including securities gains or losses but excluding discontinued operations) measured against average assets. It is a cleaner read on recurring profitability than headline net income.
How is Net Operating Income calculated?
Net operating income is income after securities gains or losses and applicable taxes, but before discontinued operations. GAAP eliminated extraordinary items in 2015 (ASU 2015-01), and the Call Report now reports discontinued operations on that line instead. Dividing by average total assets and annualizing puts it on the same basis as return on assets.
Why does Net Operating Income matter?
Headline net income can be distorted by discontinued operations, such as the results of a business the bank has agreed to sell. Net operating income removes them so analysts can judge the profitability the bank can actually repeat quarter after quarter, which is what supports dividends and capital growth.
How do you interpret Net Operating Income?
Net operating income to average assets tracks closely with return on assets for most banks; a wide gap between them flags that discontinued operations are propping up or dragging down reported net income. Other one-off items, such as a branch-sale gain or a merger charge, stay inside net operating income, so check the income statement for them too. A healthy community bank runs 1.0%-1.5% on this measure.
What is a good Net Operating Income?
| Range | Label | Interpretation |
|---|---|---|
| > 1.3% | Strong | Solid recurring profitability. |
| 0.9-1.3% | Normal | Typical recurring return. |
| 0.5-0.9% | Watch | Thin recurring earnings. |
| < 0.5% | Weak | Recurring profitability under pressure. |
Worked example
Frequently asked
How is net operating income different from net income?
Net operating income excludes discontinued operations, while net income includes everything. When the two diverge, a business being sold or exited is influencing the headline number.
Does net operating income include securities gains and losses?
Yes. Net operating income includes realized gains and losses on securities, because those are considered part of normal balance-sheet management, but it excludes discontinued operations.
Sources
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