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swings in earnings. From an economics standpoint these changes are desirable as earnings will incorporate more information about prospective long term cash flows ofthe bank.Noninterest incomeNoninterest income includes income from service charges on deposits, income from fiduciary activities, gains and losses and fees from trading activities and fees from commitments and letters of credit, etc. Noninterest income comprised 34.9% of total income for 2013.Interest income plus noninterest income equals total operating income. This is equivalent to the sales revenue figure for a nonfinancial firm.Noninterest expenseThis component consists of salaries and benefits, expenses for the premises and equipment and other expenses and was 89.2% of total expenses in 2013.Income before taxes and extraordinary itemsOperating profit before taxes and extraordinary items: Operating profit before tax was 30.8% of total income (interest and noninterest income) in 2013.Extraordinary itemsOne off events, including changes in accounting rules, major asset liquidations, lawsuit damages, etc. These were about 0.02% of total income in 2013.Net incomeThe bottom line: Net income was 21.6% of total revenue for 2013. This represents animprovement from the much poorer levels of the crisis years. 12-8
Chapter 12 - Commercial Banks’ Financial Statements and Analysis6thEditiond.The Direct Relationship Between the Income Statement and the Balance SheetNI = Interest revenue – Interest expense – P + (NII – NIE) – T orM1mTNIENIIPLrN1nArNImmnnNI = Net IncomeAn= Value of the bank’s nth asset ($)Lm= Value of the bank’s mth liability ($)rn= rate earned on the bank’s nth assetrm= rate earned on the bank’s mth liabilityP = Provision for loan lossesNII = Noninterest incomeNIE = Noninterest expenseT = bank taxesN = number of assets and M = number of liabilitiesThis equation states that the bank’s net income is the product of the interest rate of return on an asset times the number of dollars invested in that asset less the interest cost on a fund’s source times the dollars raised in that category less the provision for loan loss, plus the net noninterest income minus taxes.Teaching Tip:One can use the above equation to find the required dollar interest spread in order to hit a given ROE target. Suppose that a bank has equity of $200, interest expense of $90, P = $20, net noninterest income of -$15 and a tax rate of 34%. What is the minimum total interest revenue required to give a ROE of 15%? (Numbers in millions)or