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Bank Financial Statements: Analysis and Overview

Understand the income statement, balance sheet, and off-balance sheet items of a bank, including loans, liabilities, and major components of income statement. Explore features and consequences.

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Bank Financial Statements: Analysis and Overview

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  1. Chapter:05 Financial Statement of Bank M. Morshed

  2. The Income Statement of Bank M. Morshed

  3. The Balance Sheet of Bank (Report of Conditions) M. Morshed

  4. Bank Assets • The Cash Account (Cash held in bank’s vault + Correspondent Deposits). • Investment Securities (Money Market Securities: The Liquid portion) • Investment Securities (Capital Market Securities: The Income Generating Portion ) • Loans ## • Securities Purchased under Resale Agreement.(Repo) • Customers’ Liability on Acceptance. • Miscellaneous Assets (Bank Buildings & Equipment, Investments in Subsidiary firms, Prepaid insurance, etc.) M. Morshed

  5. ## Loans • 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) M. Morshed

  6. ## Loans Losses • 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 M. Morshed

  7. Bank Liabilities • Deposits: • Noninterest-bearing demand deposits (permits unlimited check writing) • Savings Deposits (lower rate of interest with minimum size requirement of deposits) • NOW Accounts (held only by individuals & nonprofit institutions, bear interest & permit the customer to withdraw at will) • Money Market Deposit Accounts (MMDAs pay competitive interest rate with limited checking privileges, normally 7 days prior notice is required before withdrawal of cash) • Time Deposits (fixed maturity term & stipulated interest rate) • Nondeposits Borrowings - No reserve requirement or insurance fee required, that reduces the cost of fund and makes it flexible but interest rate is highly volatile - During the time of financial problems, lender may refuse to extend credit - Sources are : Money & Capital Market, Euro Market, Long-term borrowings. • Capital Accounts (less than 10% of the total asset) M. Morshed

  8. 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) M. Morshed

  9. 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 • Trust department income • Noninterest Expenses: • Wages, Salaries & other personnel expenses • Net occupancy & Equipment expenses • Provision for Loan-Loss (PLL) Expenses M. Morshed

  10. Features & Consequences of Bank Financial Statements M. Morshed

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