ACCOUNTING CONCEPTS AND BASIC FUNDS MANAGEMENT Presented by Phill S. Rowley

1. 2010 ACCOUNTING CONCEPTS AND BASIC FUNDS MANAGEMENT Presented by Phill S. Rowley Treasury Management Services, Inc.

2. ACCOUNTING REFRESHER

3. BASIC BANK ACCOUNTING PRINCIPLES Financial statements are comprised of: • Balance Sheet • Assets • Liabilities • Capital • Income Statement • Revenue • Expense

4. Accounting Flow Income Statement Revenue Minus Expense Equals Net Income Retained Earnings Net Income Minus Dividends Equals Retained Earnings Retained Earnings Net Income Minus Dividends Equals Retained Earnings Balance Sheet Assets Equal Liabilities Plus Owners’ Equity

5. Double Accounting System Facts Accounts are made up of assets, liabilities, revenue, expense, or capital For every dollar credit(s) that is posted to account(s), there is an equal dollar amount of debit(s) posted to account(s).

6. Double Accounting System A debit: Increases an asset Decreases a liability Decreases capital Decreases revenue Increases an expense

7. Double Accounting System A credit: Decreases an asset Increases a liability Increases capital Increases revenue Decreases an expense

8. T Accounts A visual representation of accounting entries Asset, Liability, Revenue, Expense or Capital Credit Side Debit Side Debit Side

9. Starting a Bank Given the prior simple accounting basics, we can start a bank. What is the first item, from a financial perspective, a bank needs to start its operation? CAPITAL!

10. Day 1 Capital or stockholders’ equity Cash $10,000,000 $10,000,000 WSSB Balance Sheet Cash $10,000,000 Capital $10,000,000 Total Liabilities Total Assets $10,000,000 & Capital $10,000,000

11. Day 1 Fed Funds Sold Cash $5,000,000 $5,000,000 WSSB Balance Sheet Cash $5,000,000 Fed Funds Sold $5,000,000 Capital $10,000,000 Total Liabilities Total Assets $10,000,000 & Capital $10,000,000

12. Day 1 Investments Cash $2,000,000 $2,000,000 WSSB Balance Sheet Cash $3,000,000 Fed Funds Sold $5,000,000 Investments $2,000,000 Capital $10,000,000 Total Liabilities Total Assets $10,000,000 & Capital $10,000,000

13. Day 2 Time Certificate of Deposit Cash $100,000 $100,000 WSSB Balance Sheet Cash $3,100,000 Fed Funds Sold $5,000,000 CD’s $100,000 Investments $2,000,000 Capital $10,000,000 Total Liabilities Total Assets $10,100,000 & Capital $10,100,000

14. Day 3 Loan Cash $300,000 $300,000 WSSB Balance Sheet Cash $2,800,000 Fed Funds Sold $5,000,000 Loans $300,000 CD’s $100,000 Investments $2,000,000 Capital $10,000,000 Total Liabilities Total Assets $10,100,000 & Capital $10,100,000

15. Day 4 Checking Account (DDA) Loan $800,000 $600,000 Savings Investments $200,000 $400,000 WSSB Balance Sheet Cash $2,800,000 DDA $800,000 Fed Funds Sold $5,000,000 Savings $200,000 Loans $900,000 CD’s $100,000 Investments $2,400,000 Capital $10,000,000 Total Liabilities Total Assets $11,100,000 & Capital $11,100,000

16. Month 1 Cash Salaries Interest Income $5,000 $9,000 $5,000 $9,000 $2,000 $1,000 Interest Expense Checking Fees $2,000 $1,000 WSSB Balance Sheet Cash $2,803,000 DDA $800,000 Fed Funds Sold $5,000,000 Savings $200,000 Loans $900,000 CD’s $100,000 Investments $2,400,000 Capital $10,003,000 Total Liabilities Total Assets $11,103,000 & Capital $11,103,000 WSSB Income Statement Interest Income $9,000 Interest Expense $2,000 Checking Fees $1,000 Salaries $5,000 Net Income $3,000

17. Bank Ratios • Earnings • Return on Assets • = Net Income divided by Average Assets • Return on Equity • = Net Income divided by Average Equity • Interest Margin • = (Interest Income minus Interest Expense divided by Earning Assets • Interest Spread • = (Interest Income divided by Earning Assets) minus (Interest Expense divided by Interest Bearing Liabilities)

18. Bank Ratios • Capital Ratios • Leverage • Total Assets divided by Equity • Leverage • Equity divided by Total Assets • Risk Based Capital Ratios • To be presented in class

19. Bank Ratios • Liquidity • Loan/Deposit Ratio • Loans divided by Deposits • Liquidity Gap • To be Covered in Class • Interest Rate Sensitivity • Interest Rate Sensitivity Gap • To be Covered in Class • Simulation • To be Covered in Class • Market Value of Portfolio Equity • To be Covered in Class

20. INTRODUCTION TO FUNDS MANAGEMENT

21. Overview • Funds management is the process of understanding the dynamics of the balance sheet of a financial institution and developing strategies to take advantage of the earnings capacity of the balance sheet within acceptable guidelines with regard to interest rate, liquidity and capital risks. • This session is to develop an understanding of the dynamics of the balance sheet in preparation for the funds management class which will address the opportunities, risks and strategies.

22. Cash & Due From Banks

23. Fed funds sold Reverse Repurchase Agreements Commercial Paper Bankers Acceptances Eurodollar Deposits Certificates of Deposit Short Term Investments

24. Investment Portfolio • Held for Sale • Held to Maturity • Available for Sale

25. Loans • Commercial • Mortgage • Consumer • Leases

26. Loan Loss Reserve

27. Furniture Fixtures & Equipment

28. Other Assets

29. Deposits • Non-interest Bearing • Savings • Interest Checking • Money Markets • CD’s less than $100M • CD’s greater than $100M

30. Short-term Borrowing

31. Long-term Debt

32. Other Liabilities

33. Equity Also includes Trust Preferred Stock

34. Bank Balance SheetWSSB National Bank 2006 2007 2006 2007 Deposits: Cash & Due From 2,416 2,609 Non-Interest Bearing 6,008 6,489 Short Term Investments: 516 526 Savings 1,584 1,505 Investments: Interest Checking 2,709 2,980 Available for Sale 865 952 Money Markets 5,545 5,989 Held to Maturity 3,277 3,539 Held for Sale 280 308 CD’s < $100M 5,685 5,287 Loans Held for Sale 160 -0- CD’s > $100M 1,732 1,732 Short Term Borrowing 3,599 5,587 Loans: Commercial 12,635 14,530 Long Term Debt 1,377 1,377 Other Liabilities 937 1,012 Mortgage 3,477 3,512 Equity 2,617 2,881 Consumer 5,485 6,034 Leases 1,187 1,246 Total Liabilities & Equity 31,793 34,839 Loan Loss Reserve (435) (483) FF&E 634 666 Other Assets 1,296 1,400 Total Assets 31,793 34,839

35. SEE YOU IN A MONTH!!