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Bank Financial Statements & Operations
Copyright 2013 Diane Scott Docking1
2Copyright 2013 Diane Scott Docking
Learning Objectives
Examine how commercial banking is conducted to earn the highest profits possible. Topics include: The Bank Balance Sheet The Bank Income Statement Off-Balance Sheet Activities General Measuring Bank Performance
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Bank Financial Statements
Report of Condition – Balance Sheet
Report of Income – Income Statement
Copyright 2013 Diane Scott Docking
5-3
The Bank Balance Sheet
Flow of funds (tab down to commercial banks) http://www.federalreserve.gov/releases/z1/current/z1r-4.pdf 4
Copyright 2013 Diane Scott Docking
C + S + L + MA = D + NDB + EC
C =Cash Assets
S =Security
Holdings
L = Loans
MA =Miscellaneous
Assets
D =Deposits
NDB =Non Deposit
Borrowings
EC = Equity Capital
Copyright 2013 Diane Scott Docking 5
Copyright 2013 by Diane S. Docking6
To Increase a Bank’s Account:
Debit Credit
Cash Assets
Account is called Cash and Due from Banks
Includes: Vault Cash Deposits with Other Banks Cash Items in Process of Collection Reserve Account with Fed
Sometimes Called Primary Reserves
Copyright 2013 Diane Scott Docking7
Securities Holdings
Money Market Securities (sometimes called Secondary Reserves)Investment Securities Taxable Securities Tax-Exempt Securities
Trading Account Securities Held for Resale Only Valued at Market Value
Copyright 2013 Diane Scott Docking8
Bank Investments and FASB 115
Following FASB 115 a bank, at purchase, must designate the objective behind buying investment securities as either:
Copyright 2013 by Diane S. Docking9
Security Classification
Security Classification
Recorded At
Balance Sheet Reporting
Income Statement Effect
Copyright 2013 by Diane S. Docking 10
Trading Cost Unrealized gain/loss recognized in _____
HTM
AFS
Cost
CostUnrealized gain/loss recognized in _________________
Gain/loss recognized when _____________
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Federal Funds Sold and Reverse Repurchase Agreements
A Type of Loan Account
Generally Overnight Loans
Federal Funds Sold - Funds Come from the Deposits at the Federal Reserve
Reverse Repurchase Agreements – Bank Takes Temporary Title to Securities Owned by Borrower
Copyright 2013 Diane Scott Docking
5-11
Loan Accounts
Gross Loans = Sum of All Loans
- Allowance for Possible Loan Losses Contra Asset Account
For Potential Future Loan Losses
- Unearned Discounts
= Net Loans
Nonperforming Loans
Copyright 2013 Diane Scott Docking12
Problem: Loan Loss ReservesPortland Bank made a provision for loan losses of $3.5 million, took loan charge-offs of $5 million, and had recoveries of $1,750,000 during the year 2XX2. At December 31, 2XX2, the bank’s balance sheet reserve for loan losses was $2 million. What was the bank’s apparent reserve for loan losses at the end of the prior year (December 31, 2XX1)?
Copyright 2013 Diane Scott Docking
Problem: Loan Loss Reserves (cont.)
LLR a/c (in millions)
Beginning Balance 12/31/2xx1
+ Provision
- Charge-offs
+ Recoveries
Ending Balance 12/31/2XX2
Copyright 2013 Diane Scott Docking14
BB = 2 – 1.75 + 5 – 3.5 = __________
The Expense
Problem: Loan Charge-offs
Sycamore Bank’s allowance for loan losses from its balance sheet for the years ending 2XX1 and 2XX2 is:
12/31/2XX112/31/2XX2
Allowance for loan losses $49,235,000 $55,335,000
During the year 2XX2, Sycamore Bank took a provision for loan losses charge of $15 million against its income. Determine the apparent amount of net loan charge-offs during 2XX2.
Copyright 2013 Diane Scott Docking
Problem: Loan Charge-offs (cont.)
LLR a/c
Beginning Balance 12/31/2xx1
+ Provision
- Net Charge-offs
Ending Balance 12/31/2XX2
Copyright 2013 Diane Scott Docking16
Net Charge-offs = 49.235 + 15.00 – 55.335 = ______
Miscellaneous Assets
Net Premises and Equipment
OREO
Goodwill and Other Intangibles
Other Miscellaneous Assets
Copyright 2013 Diane Scott Docking17
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Deposit Accounts
Non interest-Bearing Demand Deposits
Savings Deposits
Now Accounts
Money Market Deposit Accounts (MMDA)
Time Deposits
Core vs. Volatile Deposits
Copyright 2013 Diane Scott Docking
5-18
Nondeposit Borrowings
Fed Funds Purchased/BorrowedSecurities Sold under Agreements to Repurchases (Repurchase Agreements)Acceptances OutstandingEurocurrency BorrowingsDue to Fed (Discount Loans)Long-term Debt Notes and Debentures
notes and bonds with maturities in excess of one year. Stock
Other Liabilities
Copyright 2013 by Diane S. Docking19
Equity Capital Accounts
____________________ Stock Listed at par
____________________ Stock Ownership interest in the bank. Listed at par
____________________ represents the amount of proceeds received by the bank in excess
of par when it issued the stock______________________ Retained Earnings
Treasury StockContingency ReserveReserves for .
Copyright 2013 Diane Scott Docking20
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Off-Balance-Sheet Items
Unused Commitments
Standby Credit Agreements
Derivative Contracts Futures Contracts Options Swaps
OBS Transactions Exposes a Firm to Counterparty Risks
Copyright 2013 Diane Scott Docking
5-21
22Copyright 2013 Diane Scott Docking
Off-Balance-Sheet Activities
1. Loan sales (secondary loan participation)2. Fee income from
Foreign exchange trades for customers Servicing mortgage-backed securities Guarantees of debt Backup lines of credit
3. Trading Activities and Risk Management Techniques1. Financial futures and options 2. Foreign exchange trading3. Interest rate swaps
All these activities involve risk and potential conflicts
Banks' Income Statement
23Copyright 2013 Diane Scott Docking
Banks' Income Statement (cont.)
24Copyright 2013 Diane Scott Docking
Net Interest Income =Interest Income - Interest Expenses
Interest on: Loans Taxable Securities Tax-exempt Securities Deposits held at other
institutions, Other Interest Income
Interest on: Deposits Short Term Debt Long Term Debt
Copyright 2013 Diane Scott Docking 25
Interest Income Interest Expenses
Net Noninterest Income =Noninterest Income - Noninterest Expenses
Fee income
Service Charge on Customer Deposits
Trust Department Income
Trading account gains and fees
Other Operating Income
Wages, Salaries, and benefits
Other Personnel Expenses
Net Occupancy Expenses rent and depreciation on
equipment and premises
Other Operating Expenses Utilities, advertising,
deposit insurance premiums, etc.
Copyright 2013 Diane Scott Docking 26
Noninterest Income Noninterest Expenses
Problem: Bank Income Statements
You know the following figures:Total interest income $140 Provision for loan losses
$5
Total interest expense $100 Income taxes$5
Total noninterest income $ 15 Increases in bank’s undivided profits$6
Total noninterest expenses $ 35
Calculate the following items:a) Net interest income e) Total operating revenues
b) Net noninterest income f) Total operating expenses
c) Pretax net operating income g) Dividends paid to common stockholders
d) Net income after taxes Copyright 2013 Diane Scott Docking 27
Solution: Bank Income Statements
Calculate the following items:a) Net interest income
b) Net noninterest income
c) Pretax net operating income
Copyright 2013 by Diane S. Docking 28
= Total Interest Income – Total Interest Expense= 140 – 100 = _____
= Total Noninterest Income – Total Noninterest Expense= 15 – 35 = _______
= Net Interest Income + Net Noninterest Income + PLL= 40 – 20 – 5 = _______
Solution: Bank Income Statements (cont.)
d) Net income after taxes
e) Total operating revenues
f) Total operating expenses
g) Dividends paid to common stockholders
Copyright 2013 by Diane S. Docking 29
Pretax net operating income – Taxes= 15 – 5 = ______
Interest Income + Noninterest Income=140 + 15 = ______
Interest Expenses + Noninterest Expenses + PLL= 100 + 35 + 5 = _______
Net Income After Taxes – Increase in Undivided Profits= 10 – 6 = _____
Problem: Bank Balance Sheets
You know the following figures:Gross loans $275 Miscellaneous assets $ 38
Cash and due from banks $ 9 Nondeposit borrowings $ 20
Investment securities $ 36 Allowance for loan losses $ 5
Trading account securities $ 2 Preferred stock$ 3
Goodwill and other intangibles $ 3 Common stock $ 5
Other real estate owned $ 4 Surplus $ 19
Bank premises and equipment, gross $ 34 Total liabilities $375
Bank premises and equipment, net $ 29 Total equity capital $ 39
Calculate the following items:a) Total assets d) Accumulated Depreciation
b) Net loans e) Total deposits
c) Undivided profits f) Fed funds soldCopyright 2013 by Diane S. Docking 30
Solution: Bank Balance Sheets
Calculate the following items:a) Total assets
b) Net loans
c) Undivided profits
d) Accumulated Depreciation
Copyright 2013 by Diane S. Docking 31
Total Liabilities + Total Equity Capital= 375 + 39 = ______
Gross Loans – ALL= 275 – 5 = _____
Total Equity Capital – Preferred Stock – Common Stock – Surplus= = 39 – 3 – 5 – 19 = ______
PPE, gross – PPE, net= 34 – 29 = ______
Solution: Bank Balance Sheets
Calculate the following items:e) Total deposits
f) Fed funds sold
Copyright 2013 by Diane S. Docking 32
Total Liabilities – Nondeposit Borrowings= 375 – 20 = _______
Total Assets: Cash and Due from Banks $ 9 Federal Funds Sold ? Investments 36 Gross Loans 275 Less: Allowance for Loan Losses -5 Bank Premises and Equipment, Net 29 Miscellaneous Assets 38 Trading Account Securities 2 Other Real Estate Owned 4 Goodwill and other Intangibles 3 Subtotal 391 Less Total Assets 414 Difference = Fed Funds Sold** ____
33Copyright 2013 Diane Scott Docking
Measuring Bank Performance
As, much like any firm, ratio analysis is useful to measure performance and compare performance among banks. The following slide shows both calculations and historical averages for key bank performance measures.
ROE can be misleading
If ROE is high - may mean there is not enough capital and this is not good
If ROE is low - May mean a lot of capital. This is okay, but bank may be inefficient.
Copyright 2013 Diane Scott Docking34