William Chittenden edited and updated the PowerPoint slides for this edition. ANALYZING BANK PERFORMANCE: USING THE UBPR Chapter 2
Commercial Bank Financial Statements Commercial banks facilitate the flow of funds from surplus spending unit (savers) to deficit unit (borrowers). Most depository financial institutions own few fixed assets and thus exhibit low operating leverage. Many bank liabilities carry short-term maturities . As a result, interest expense changes coincidentally with short-run changes in market interest rates Banks operate with less equity capital than non- financial companies, which increases financial leverage and the volatility of earnings
Balance Sheet Assets = Liabilities + Equity Assets – What the bank owns. Liabilities – What the bank owes. Equity – Owner’s interest. Balance sheet figures are calculated at a particular point in time and thus represent stock values.
Bank Assets Cash and due from banks Vault cash, deposits held at the Fed and other financial institutions, and cash items in the process of collection. Investment Securities Securities held to earn interest and help meet liquidity needs. Loans The major asset, generate the greatest amount of income, exhibit the highest default risk and are relatively illiquid. Other assets Bank premises and equipment, interest receivable, prepaid expenses, other real estate owned, and customers' liability to the bank
Commercial Bank Financial Statements Bank Assets Loans Real Estate Commercial Individual Agricultural Other loans in domestic offices Loans and leases in foreign offices
Adjustments to total loans …three adjustments are made to obtain a net loan figure. 1. Leases are included in gross loans. 2. Unearned income is deducted from gross interest received. 3. Gross loans are reduced by the dollar magnitude of a bank's loan-loss reserve, which exists in recognition that some loans will not be repaid.
Commercial Bank Financial Statements Bank Assets Adjustment to Loans Gross Loans and Leases minus Unearned Income Loan and Lease Loss (Allowance for Loan Loss or ALL) equals Net Loans and Leases
Provisions for loan losses Provisions for loan losses Reserve for Loan Losses Recoveries Charge offs
Commercial Bank Financial Statements Bank Assets Investment Securities Short-Term Investments One year or less Highly liquid Earns low interest Low risk Examples: Interest-Bearing Deposits Due from Other Banks Fed Funds Sold Reverse Repos T-Bills
Commercial Bank Financial Statements Bank Assets Investment Securities Long-Term Investments Over one year Examples: T-Notes and T-Bonds Government Agency Issues Foreign and Corporate Bonds Mortgage-Backed Securities Municipal Securities: General Obligation Municipal Securities: Revenue
Commercial Bank Financial Statements Bank Assets Investment Securities Held-to-Maturity: recorded on the balance sheet at amortized cost
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- Summer '19
- Balance Sheet, Generally Accepted Accounting Principles, Bank Financial