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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

Ch. 5 Financial Statements of Banks

Based on Rose and Hudgins, Bank Mgt & Fin Services, Gup text, and adapted by Dorla Evans

key topics
Key Topics
  • Balance Sheet
  • Asset Items
  • Liability Items
  • Off-balance Sheet Items
  • Revenues and Expenses
balance sheet
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

balance sheet 000
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

balance sheet 0001
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

balance sheet 0002
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

balance sheet 0003
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

balance sheet 0004
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

off balance sheet items
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.
net interest income interest income interest expenses
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

simplified income statement
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
loan losses
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

loan losses1
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

reserve for loan losses
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

reserve for loan losses1
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)

reserve for loan losses2
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.

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