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Ch. 5 Financial Statements of Banks

Ch. 5 Financial Statements of Banks. Based on Rose and Hudgins, Bank Mgt & Fin Services , Gup text, and adapted by Dorla Evans. Key Topics. Balance Sheet Asset Items Liability Items Off-balance Sheet Items Revenues and Expenses. C = Cash Assets S = Security Holdings L = Loans

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Ch. 5 Financial Statements of Banks

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  1. Ch. 5 Financial Statements of Banks Based on Rose and Hudgins, Bank Mgt & Fin Services, Gup text, and adapted by Dorla Evans

  2. Key Topics • Balance Sheet • Asset Items • Liability Items • Off-balance Sheet Items • Revenues and Expenses

  3. C = Cash Assets S = Security Holdings L = Loans MA = Miscellaneous Assets D = Deposits NDB = Nondeposit Borrowings EC = Equity Capital Balance Sheet C + S + L + MA = D + NDB + EC

  4. Balance sheet ($000) ASSETSDEC. 31, 2007 DEC. 31, 2006 Cash & due from dep. Instit. $ 9,039 $10,522 Investment securities Interest bearing bank balances $ 0 $ 1,000 U.S. Treasury and agency securities 54,082 44,848 Municipal securities 32,78934,616 Investment securities $86,871 $80,464 Trading account assets $ 0 $ 0 Fed Funds Sold $10,500 $ 1,500 Securities $97,371$81,964

  5. Balance sheet ($000) ASSETS DEC. 31, 2007 DEC. 31, 2006 Loans and leases Real estate loans $50,393 $38,975 Commercial loans 9,615 11,381 Individual loans 8,824 10,640 Agricultural loans 20,680 19,654 Other loans and leases-domestic 3,6844,025 Gross loans and leases $93,196 $84,675 Less: unearned income reserves ( 89) (282) Allowance for loan and lease losses (3,006)(2,536) Net loans and leases $90,101$81,857

  6. Balance sheet ($000) ASSETSDEC. 31, 2007 DEC. 31, 2006 Cash $ 9,039$10,522 Total securities $ 97,371$81,964 Net loans and leases $90,101$81,857 Premises, fixed assets, and capitalized leases $2,229 $2,398 Other real estate 2,282 3,012 Other assets 4,951 4,014 Total assets $205,973$183,767

  7. Balance sheet ($000) LIABILITIES & CAPITAL DEC. 31, 2007 DEC. 31, 2006 Demand deposits $ 23,063 $ 22,528 All NOW and ATS accounts 6,021 5,322 MMDA accounts 41,402 49,797 Other savings deposits 3,097 2,992 Time deposits<$100K 31,707 28,954 Time deposits>$100K 83,00957,665 Total deposits $188,299$167,258

  8. Balance sheet ($000) LIABILITIES & CAPITAL DEC. 31, 2007 DEC. 31, 2006 Nondeposit funds Fed funds purchased 0 0 Other borrowings 0 0 Bankers’ acceptance and other liabilities 3,5463,101 Total nondeposit funds $ 3,546$3,101 Total liabilities $191,845$170,359 Subordinated notes and debentures 0 0 All common and preferred equity 14,128 13,408 Total liabilities and capital $205,973$183,767

  9. Off-Balance-Sheet Items • Types • Unused commitments • Standby credit agreements • Derivative contracts • Size • 13x the volume of largest banks’ balance sheet assets • Main exposure is gain and losses, not face value of contracts.

  10. Interest and Fees on Loans Taxable Securities Revenue Tax-Exempt Securities Revenue Other Interest Income Deposit Interest Costs Interest on Short-Term Debt Interest on Long-Term Debt Net Interest Income = Interest Income – Interest Expenses Interest Income Interest Expenses

  11. Simplified Income Statement • Interest Income • -Interest Expense • Net Interest Income • -Provision for Loan & Lease Losses (non-cash outflow) • +Non-interest Income • -Non-interest Expense • Pretax Net Operating Income • +/- Securities Gains (Losses) • Income Taxes • Income Before Extraordinary Items • +/- Extraordinary gains (losses) • Net Income

  12. Income statement

  13. Income statement

  14. Income statement

  15. Income statement

  16. Income statement

  17. Loan losses Suppose bank makes a $10 million loan but the business goes bankrupt. Bank expects to collect only $1 million. Gross loan $10 million Less uncollected loan - 9 million Gross loan $ 1 million Allowance for loan losses (ALL) $100 million Less uncollected loan 9 million Allowance for loan losses (ALL) $ 91 million

  18. Loan losses Suppose bank expects a $1 million loan loss against a $100 million loan reserve. Income statement: Non-cash charge against revenue Provision for loan loss (PLL) - $1 million Balance sheet: Allowance for loan loss (ALL) adjustment Allowance for loan losses $100 million Plus provision for loan loss 1 million Allowance for loan losses $101 million

  19. Reserve for loan losses Now suppose bank finds it has an actual loss of $0.5 million Balance sheet: Allowance for loan loss adjustment Allowance for loan losses $100.0 million Plus annual provision for loan loss 1.0 million Less charged-off loan - 0.5 million Reserve for loan losses $100.5 million

  20. Reserve for loan losses Suppose bank recovers $1.5 million of a previously charged-off loan. Income statement: Cash recovery increases revenue Recovery + $1.5 million Balance sheet: Allowance for loan loss adjustment Allowance for loan losses $100.5 million Plus recovery of previously charged-off loan + 1.5 million Allowance for loan losses ($102.0 million)

  21. Reserve for loan losses Bad loans usually do not affect current income. Ending Beginning allowance for = allowance for - Gross + Provision for + Recoveries loan losses loan losses charge-offs loan losses bal sheet bal. sheet exp. accrued exp. income Bank has a target for its allocation for loan losses.

  22. Questions?

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