Financial Statement of Bank

1. Financial Statement of Bank www.assignmentpoint.com

2. The Balance Sheet of Bank (Report of Conditions) A bank’s balance sheet, or Report of Conditions, lists the assets, liabilities and equity capital (owners’ funds) held by or invested in the institution on any given date. Bank’s balance sheet is prepared based on basic accounting principle. Assets = Liabilities + Equity Capital The assets on the balance sheet are of four major types: Cash (C), Securities (S), Loan and Leases (L), and Miscellaneous Assets (MA). Liabilities fall into two principal categories: Deposit made by and own to various customers (D), and Non deposit borrowings (NDB). Equity capital represents owners contribution to the bank (EC). www.assignmentpoint.com

3. The Balance Sheet of Bank (Report of Conditions) C+S+L+MA = D+NDB+EC www.assignmentpoint.com

4. Bank Assets • The Cash Account (Cash held in bank’s vault + Correspondent Deposits). • Securities i. Investment in Securities: The Liquid portion ii. Investment in Securities: The income generation portion iii. Trading Account iv. Central bank funds sold and Reverse Repurchase Agreement • Loans and Leases • Miscellaneous Assets (Goodwill and Other Intangible Assets) www.assignmentpoint.com

5. Cash Cash and due from Depository Institutions, is the first item of a bank’s balance sheet. Which includes cash held in the bank’s vault and any deposits the bank has placed with other depository institutions (called correspondent deposit), cash item in the process of collection (cash in transit), and the bank’s reserve account held with the central bank, is often labeled primary reserve. This account is the banks first line of defence against withdrawals and to meet the loan demand. Normally banks strive to keep the size of this account as low as possible, because cash balances earn little or no interest income. www.assignmentpoint.com

6. Securities Investment Securities: The Liquid Portion – second line of defence to meet the demand for cash and serve as a quick source of funds. Holding liquid securities act as a secondary reserve for the bank. Investment Securities: The Income Generating Portion- Bonds notes, and other securities the bank holds primarily for their expected rate of return or yield are known simply as investment securities. Trading Account Assets – securities purchased for short term profits from short term price movements. If the bank serves as security dealer, the securities acquired for resale are included here, at market value. www.assignmentpoint.com

7. Securities, cont… Central bank funds sold and Reverse Repurchase Agreements- temporary loans made to other depository institutions, securities dealers, and major corporations. Banks often uses their central bank reserve (central bank funds) for funding this kind of temporary loan. Some of this temporary credits are extended in the form of reverse repurchase (resale) agreements (RPs) in which the lende bank acquires temporary title of the securities owned by the borrower bank and hold those securities as collateral until the loan is paid off. www.assignmentpoint.com

8. Loans A bank’s loan account typically is broken down into several groups of similar type loans. For example- • Commercial & Industrial Loans. • Consumer or Households Loans. • Real Estate Loans. • Financial Institutions loans. (loans to other depository institutions.) • Foreign Loans (to foreign governments, agencies) • Agricultural Production Loans (to farmers & ranchers) • Security loans (to investors & security brokers) • Leases (operating & financial leases) www.assignmentpoint.com

9. Loan, cont.. Loan Losses: Loan losses, both current and projected, are deducted from the amount of this total (gross) loan figure. • Institutions are allowed to build up a reserve for future loan losses, called Allowance for Loan Losses (ALL). • ALL is a contra-asset account, represents an accumulated reserve against which loans declared to be uncollectible can be charged off. • The allowance for possible loan losses is built up gradually over time by annual deductions from current income, as the provision for loan losses (PLL). • Annual Provision for Loan Loss (PLL) expense is debited in the Income Statement • Allowance for Loan Loss (ALL) is credited in the Balance Sheet. • Worthless Loan deducted and recovered loan added with ALL at the end of the year and that becomes the opening balance in the next year www.assignmentpoint.com

10. Bank Liabilities Deposits: The principle liability of any bank is its deposits, representing financial claims held by business, households, and governments against the bank. There are five major types of deposits: • Non-interest bearing demand deposits- permits unlimited check writing and they can not pay any explicit interest rate. • Savings Deposits- lower rate of interest with minimum size requirement of deposits and permit the customer to withdraw at will. • NOW (Negotiable Order of Withdrawal)Accounts- held only by individuals & nonprofit institutions, bear interest & permit drafts to be written against each account to pay third parties. • Money Market Deposit Accounts (MMDAs)- pay competitive interest rate with limited checking privileges, normally 7 days prior notice is required before withdrawal of cash. Banks are normally offer floating interest rate for MMDAs. • Time Deposits- carry a fixed maturity term & stipulated interest rate, may be of any denomination, maturity and yield. www.assignmentpoint.com

11. Bank Liabilities, cont.. Non-deposits Borrowings: The important non-deposit funding sources for the bank is the Central Bank Funds Purchased and Repurchase Agreement. Other borrowed funds includes both short-term and long-term borrowings. Short-term funds consists of, borrowing reserve from the discount windows of central bank, issuing commercial paper, borrowings in the Euro currency market, or from the borrowing bank’s own overseas branches. Bank may issue long-term debt, it includes, limited-life preferred stock and any no collateralized borrowings of the bank. www.assignmentpoint.com

12. Bank Liabilities, cont.. Reasons for Non-deposit borrowings- • No reserve requirement or insurance fee required, that reduces the cost of fund and makes it flexible but interest rate is highly volatile Drawback ofNon-deposit borrowings- • During the time of financial problems, lender may refuse to extend credit Sources are- Money & Capital Market, Euro Market, Long-term borrowings. www.assignmentpoint.com

13. Bank Liabilities, cont.. Equity Capital Accounts The equity capital account on a bank’s Report of Condition represent the owner’s share of the business. Every new bank or other corporate financial firm begins with a minimum amount of owner’s capital and then borrowers funds from the public to “lever up” its operation. Sources of Equity Capital- • Common stock, • Capital in excess of par, • Preferred stock, and • Retained earning. www.assignmentpoint.com

14. Off-balance-Sheet Items • Banks have converted many of their customers in recent years into fee-generating transactions that are not recorded on their balance sheet. • Standby Credit Agreements (bank pledges to guarantee repayment of a customer’s loan received from a third party) • Interest Rate Swaps (bank promises to exchange interest payment on debt securities with another party) • Financial Futures & option Interest-rate Contracts (bank agrees to deliver or to take delivery of securities from another party at a guaranteed price) • Loan Commitments (bank pledges to lend up to a certain amount of funds until the commitment matures) • Foreign exchange Rate Contracts (bank agrees to deliver or accept delivery of foreign currencies) www.assignmentpoint.com

15. The Income Statement of Bank www.assignmentpoint.com

16. Major Components of Income Statement • Interest Income: • Interest & Fees on Loans • Interest on Investment Securities • Interest Expenses: • Deposit Interest Costs • Interest on Short-term debt • Interest on Long-term debt • Noninterest Income: • Service charges on customer deposits • Fee income from Trust services • Trading account gains • Additional non-interest income (Invest banking, security brokerage, insurance service & trust department income) • Extra-ordinary Gains/Losses • Nonrecurring sales of assets • Noninterest Expenses: • Wages, Salaries & other personnel expenses • Premises & Equipment expenses • Provision for Loan-Loss (PLL) Expenses www.assignmentpoint.com

17. Features & Consequences of Bank Financial Statements www.assignmentpoint.com