Ch02-The Financial Statement of a Bank
Content
Chapter 02: The Financial Statements of a Bank
Lectured by: Mr. Rithjayasedh PEOU, MFin (Melb)
Content
!! Balance Sheet or Report of Condition !! Assets !! Liabilities !! Capital Account !! Income Statement or Report of Income !! Debate
Mr. Rithjayasedh PEOU, MFin (Melb) 2 6 October 2013
Introduction
!! The particular services each bank chooses to offer and the overall size of a banking organization are reflected in its financial statements. !! The two main financial statements that bank managers, customers and the regulatory authorities look at are the balance sheet (Report of Condition) and the income statement (Report of Income). !! The other two key financial statements are often used by credit analysts and bank managers in assessing changes in the fundsusing and funds-raising activities of a bank are the Sources and Uses of Funds Statement (Funds-Flow Statement) and the Statement of Stockholders’ Equity.
Mr. Rithjayasedh PEOU, MFin (Melb) 3 6 October 2013
Balance Sheet
!! A bank’s balance sheet (Report of Condition) lists the assets, liabilities, and equity capital (owners’ funds) held by or invested in the bank on any given date. !! Because bank are simply business firms selling a particular kind of product, the basic balance sheet identity (A = L + E) must be valid. !! In banking, the assets on the BS include four major kinds of assets: !! C: Cash in the vault and the deposits held at other depository institutions !! S: Gov’t and private interest-bearing securities purchased in the open market. !! L: Loans and lease financing made available to customers !! MA: Miscellaneous assets
Mr. Rithjayasedh PEOU, MFin (Melb) 4 6 October 2013
Balance Sheet
!! Liabilities fall into two principal categories: !! D: Deposits made by and owed to various customers !! NDB: Nondeposit borrowings of funds in the money and capital markets !! Equity capital (EC) represents long-term funds that the owners contribute to the bank. !! Therefore, the bank’s BS identity can be written as follows: C + S + L + MA = D = NDB + EC
Mr. Rithjayasedh PEOU, MFin (Melb) 5 6 October 2013
Key Items on a Bank’s Balance Sheet Assets (accumulated uses of funds) Cash (primary reserves)
Balance Sheet
Deposits: Demand NOWs Money market Savings Time
Liabilities (accumulated sources of funds)
Liquid security holdings (secondary reserves) Investment securities Loans: Consumer Real Estate Commercial Agriculture Miscellaneous assets
Nondeposit borrowings Equity capital: Stock Surplus Retained earnings
Mr. Rithjayasedh PEOU, MFin (Melb)
6
Capital reserves
6 October 2013
Bank Assets
!! The Cash Account (Cash and deposits due from banks) !! Cash held in the bank’s vault, !! Deposits the bank has placed with other banks (correspondent deposits), !! Cash items in the process of collection (mainly uncollected checks), and !! The bank’s reserve account held with the Federal Reserve bank in the region, is often labeled primary reserve. !! Note: Banks strive to keep the size of this account as low as possible because cash balances earn little or no interest income for the bank.
Mr. Rithjayasedh PEOU, MFin (Melb) 7 6 October 2013
Bank Assets
!! Investment Securities: The Liquid Portion !! Holdings of shorter-term government securities— both U.S. government and municipal securities, and !! Money market securities, including interest-bearing time deposits held with other banks and commercial paper. !! Note: Serving as secondary reserve, the liquid portion occupy the middle ground between cash assets and loans, earnings some income but held mainly for the ease with which they can be converted into cash on short notice.
Mr. Rithjayasedh PEOU, MFin (Melb) 8 6 October 2013
Bank Assets
!! Investment Securities: The Income-Generating Portion !! Taxable securities—mainly U.S. government bonds and notes, securities issued by various federal agencies and corporate bonds and notes, and !! Tax-exempt securities—principally state and local government (municipal) bonds. !! Note: Investment securities may be recorded on a bank’s books at their original cost, at market value, or at the lower of cost or market value. !! Trading account securities implies that the bank serves as a security dealer for certain kinds of securities. The amount recorded in the account represents those securities the bank intends to sell before they reach maturity, valued at market.
Mr. Rithjayasedh PEOU, MFin (Melb) 9 6 October 2013
Bank Assets
!! Loans !! The larger, called gross loan, is the sum of all outstanding IOUs owed to the bank in the form of consumer, real estate, commercial, and agricultural loans plus any credit extended by the bank to security dealers and other financial institutions. !! Loan losses, both current and projected, are deducted from the amount of this total (gross) loan figure. !! Note: Loans account is by far the largest asset item of a bank, which generally account for half to almost three-quarters of the total value of all bank assets.
Mr. Rithjayasedh PEOU, MFin (Melb) 10 6 October 2013
Bank Assets
!! Allowance for possible loan losses (ALL), !! ALL, which is a contra-asset account, represents an accumulated reserve against which loans declared to be uncollectible can be charged off. !! When a loan is considered uncollectible, the bank’s accounting department will write (charge) it off the books by reducing the ALL account by the amount of the uncollectible loan while simultaneously decreasing the asset account for gross loans. !! The allowance for possible loan losses is built up gradually over time by annual deductions from current income. !! The se deductions appear on the bank's income statement as a noncash expense item called the provision for loan losses (PLL)
Mr. Rithjayasedh PEOU, MFin (Melb) 11 6 October 2013
Bank Assets
!! Unearned discount !! It is also deducted from gross loans to derive net loans. !! These discounts consist of interest income from loans that has been received from customers but not yet earned under the accrual method of accounting used by banks today. !! Over the life of discounted loan, the income will gradually be earned by the bank and the necessary amounts will be transferred from unearned discount to the bank’s interest income account. !! Nonperforming loans !! A loan is placed in the nonperforming category when any scheduled loan repayment is past due for more than 90 days. !! The bank is forbidden to record any interest income from the loan until a cash payment actually comes in.
Mr. Rithjayasedh PEOU, MFin (Melb) 12 6 October 2013
Bank Assets
!! Federal funds sold and securities purchased under resale agreements !! This item includes mainly temporary loans (usually extended overnight, with the funs returned the next day) made to other banks, securities dealers, or even major corporations. !! The funds for these temporary loans often come from he reserves bank ahs on deposit with the Federal Reserve Bank in its district. !! Some of the these temporary credits are extended in the form of repurchase (resale) agreements (RPs) .
Mr. Rithjayasedh PEOU, MFin (Melb) 13 6 October 2013
Bank Assets
!! Customers’ Liability on Acceptances !! Larger banks often provide a form of credit for their customers known as acceptance financing. !! The reader will note that this term coincides exactly with an item listed under bank liabilities, acceptance outstanding. !! The dual pair of accounts increase each time a bank agrees to stand behind a customer’s credit, usually to help that customer pay for goods imported from overseas. !! Bankers’ acceptance are widely used today for financing international trade, for purchasing foreign currencies and even to support the shipment and storage of goods and agricultural commodities in the domestic economy.
Mr. Rithjayasedh PEOU, MFin (Melb) 14 6 October 2013
Bank Assets
!! Miscellaneous assets !! Bank assets also include building and equipment, the net (adjusted for depreciation) value of bank buildings and equipment, investments in subsidiary firms, prepaid insurance, and other relatively insignificant asset items. !! Note: Fixed assets typically generate fixed operating costs in the form of deprecation expense, property taxes, and so on, which provide operating leverage, enabling the bank to boost its operating earnings if it can increase its sales volume to high enough level and earn more form using its fixed assets than those assets cost.
Mr. Rithjayasedh PEOU, MFin (Melb) 15 6 October 2013
Bank Liabilities
!! Deposits !! Non-interest bearing demand deposit, or regular checking accounts, generally permit unlimited check writing. !! Savings deposits bear the lowest rate of interest offered to depositors by a bank but may be of any denomination and permit the customer to withdraw at will. !! NOW accounts, which can be held by individuals and nonprofit institutions, bear interest and permit drafts (checks) to be written against each account in order to pay third parties.
Mr. Rithjayasedh PEOU, MFin (Melb) 16 6 October 2013
Bank Liabilities
!! Deposits (Cont’d) !! Money market depots accounts (MMDAs) can pay whatever interest rate the offering bank feels competitive and have limited check-writing privileges attached. !! Time deposits (mainly certificates of deposit, or CDs) usually carry a fixed maturity (term) and a stipulated interest rate but may be of any denomination, maturity, and yield agreed upon by the bank and its depositor. Included are large ($100,000-plus) negotiable CDs—interest-bearing deposits that banks use to raise money from their most well-to-do customers.
Mr. Rithjayasedh PEOU, MFin (Melb) 17 6 October 2013
Bank Liabilities
!! Borrowings from nondeposit sources !! Federal funds purchased and securities sold under agreements to repurchase tracks the bank’s temporary borrowings in the money market, mainly from reserves loaned to it by other banks or from repurchase agreements where the bank has borrowed funds collateralized by some of its own securities from another bank or a large corporate customer. !! Other short-term borrowings include borrowing reserves from the discount windows of the Federal Reserve banks and Eurodollar borrowings from multinational banks abroad or from the borrowing bank’s own overseas branches. !! Other liabilities account include a deferred tax liability and obligations to pay off investors who hold bankers’ acceptances.
Mr. Rithjayasedh PEOU, MFin (Melb) 18 6 October 2013
Bank Capital Accounts
!! Common stock is the total par (face) value of common stock outstanding. !! Capital surplus account is the excess market value of the stock. !! Preferred stock guarantees its holders an annual dividend before common stockholders receive any dividend payments. !! Retained earnings represents accumulated net income left over each year after payment of stockholder dividends. !! Contingency reserve held a s protection against unforeseen losses. !! Treasury stock is stocks that have been retired. !! Subordinated notes and debentures are debt securities that are longterm and carry a claim on the bank’s assets and income that comes after (is subordinated to) the claims of its depositors.
Mr. Rithjayasedh PEOU, MFin (Melb) 19 6 October 2013
Off-Balance-Sheet Items
!! Standby credit agreement, in which a bank pledges to guarantee repayment of a customer's loan received from a third party. !! Interest rate swaps, in which a bank promises to exchange interest payments on debt securities with another party. !! Financial futures and option interest-rate contracts, in which a bank agrees to deliver or to take delivery of securities from another party at a guaranteed price. !! Loan commitments, in which a bank pledges to lend up to a certain amount of funds until the commitment matures. !! Foreign exchange rate contracts, in which a bank agrees to deliver or accept delivery of foreign currencies.
Mr. Rithjayasedh PEOU, MFin (Melb) 20 6 October 2013
Income Statement
!! A bank’s income statement, or Report of Income, indicates the amount of revenue received and expenses incurred over a specific period of time. !! The principal source of bank revenue is the interest income generated by the bank’s earnings assets, mainly: !! Loans (L), !! Securities (S), !! Any interest-bearing deposits that are part of cash assets (C) held with other banks, and !! Any miscellaneous asses (M) generating revenue (including any income earned by subsidiaries of the bank or rental income form property that it owns.
Mr. Rithjayasedh PEOU, MFin (Melb) 21 6 October 2013
Income Statement
!! The major expenses incurred in generating this revenue include: !! Interest paid out to depositors (D), !! Interest owed on nondeposit borrowings (NDB), !! The cost of equity capital (EC), !! Salaries, wages, and benefits paid to bank employees (SWB), !! Overhead expense associated with the bank’s physical plant (O), !! Funds set aside for possible loan losses (PLL), !! Taxes owed (T), and !! Miscellaneous expenses (ME).
Mr. Rithjayasedh PEOU, MFin (Melb) 22 6 October 2013
Key Items on a Bank’s Income Statement Revenues (revenues from the bank’s service outputs) Loan income Investment income Noninterest sources of income Expenses (cost of the bank’s inputs of resources needed to produce its services) Interest paid on deposits Interest paid on nondeposit borrowings Salaries and wages (employee compensation) Provision for loan losses (allocations to the reserve for possible olosses on any loans made) Other expenses Gains or losses from trading in securities Taxes Income before taxes and securities transactions Net income after taxes and securities gains or losses
Income Statement
Income Statement
!! Interest income !! Not surprisingly, interest and fees generated form loans account for most bank revenues (normally two-thirds or more of the total). !! It must be noted, however, that the relative importance of loan revenue versus noninterest revenue sources (so-called fee income) is changing rapidly, with fee income today growing much faster than interest income on loans as bankers work to develop fee-based services. !! Interest expenses is the number 1 expense item for a bank.
Mr. Rithjayasedh PEOU, MFin (Melb) 24 6 October 2013
Income Statement
!! Net interest income (interest margin) is the gap between the interest income the bank receives on loans and securities and the interest cost of its borrowed funds. !! Noninterest Expense !! It includes wages, salaries, and other personnel expense. !! The costs of maintaining bank properties and rental fees on office space show in net occupancy and equipment expense. !! The cost of bank furniture and equipment also appears under the noninterest expense category, along with numerous small expense items including legal fees, paper and office supplies, and repair costs.
Mr. Rithjayasedh PEOU, MFin (Melb) 25 6 October 2013
Income Statement
!! Noninterest income !! It includes fees earned from offering trust services, service charges on deposit accounts, and miscellaneous fees and charges for other bank services. !! Recently, bankers have targeted noninterest income—known as fee income–as a key source of future revenues. !! By more aggressively selling services other than loans (such as security brokerage, insurance, and trust services), bankers have found a promising channel for boosting the bottom line on their IS, for diversifying their income sources, and for insulting their banks more adequately from fluctuations in interest rates.
Mr. Rithjayasedh PEOU, MFin (Melb) 26 6 October 2013
Income Statement
!! Loan-loss expense (provision for possible loan losses) is really a noncash expense and to shelter a portion of the bank’s current earnings from taxes in order to help prepare for bad loans. !! Securities gains or losses: Most banks purchase, sell or redeem securities during the year, and this trading activity often results in gains or losses above or below the original cost (BV) of the securities. !! Net income !! Bank accounting practices call for the deduction of both noninterest expenses and interest expenses from the sum of interest and noninterest incomes to yield income (or loss) before taxes. !! Applicable federal and state income tax rates are applied to this income figure to derive the bank’s net after-tax income (or loss).
Mr. Rithjayasedh PEOU, MFin (Melb) 27 6 October 2013
Debate
Mr. Rithjayasedh PEOU, MFin (Melb)
28
6 October 2013
End of Chapter 02
Lectured by: Mr. Rithjayasedh PEOU, MFin (Melb)
Lectured by: Mr. Rithjayasedh PEOU, MFin (Melb)
Content
!! Balance Sheet or Report of Condition !! Assets !! Liabilities !! Capital Account !! Income Statement or Report of Income !! Debate
Mr. Rithjayasedh PEOU, MFin (Melb) 2 6 October 2013
Introduction
!! The particular services each bank chooses to offer and the overall size of a banking organization are reflected in its financial statements. !! The two main financial statements that bank managers, customers and the regulatory authorities look at are the balance sheet (Report of Condition) and the income statement (Report of Income). !! The other two key financial statements are often used by credit analysts and bank managers in assessing changes in the fundsusing and funds-raising activities of a bank are the Sources and Uses of Funds Statement (Funds-Flow Statement) and the Statement of Stockholders’ Equity.
Mr. Rithjayasedh PEOU, MFin (Melb) 3 6 October 2013
Balance Sheet
!! A bank’s balance sheet (Report of Condition) lists the assets, liabilities, and equity capital (owners’ funds) held by or invested in the bank on any given date. !! Because bank are simply business firms selling a particular kind of product, the basic balance sheet identity (A = L + E) must be valid. !! In banking, the assets on the BS include four major kinds of assets: !! C: Cash in the vault and the deposits held at other depository institutions !! S: Gov’t and private interest-bearing securities purchased in the open market. !! L: Loans and lease financing made available to customers !! MA: Miscellaneous assets
Mr. Rithjayasedh PEOU, MFin (Melb) 4 6 October 2013
Balance Sheet
!! Liabilities fall into two principal categories: !! D: Deposits made by and owed to various customers !! NDB: Nondeposit borrowings of funds in the money and capital markets !! Equity capital (EC) represents long-term funds that the owners contribute to the bank. !! Therefore, the bank’s BS identity can be written as follows: C + S + L + MA = D = NDB + EC
Mr. Rithjayasedh PEOU, MFin (Melb) 5 6 October 2013
Key Items on a Bank’s Balance Sheet Assets (accumulated uses of funds) Cash (primary reserves)
Balance Sheet
Deposits: Demand NOWs Money market Savings Time
Liabilities (accumulated sources of funds)
Liquid security holdings (secondary reserves) Investment securities Loans: Consumer Real Estate Commercial Agriculture Miscellaneous assets
Nondeposit borrowings Equity capital: Stock Surplus Retained earnings
Mr. Rithjayasedh PEOU, MFin (Melb)
6
Capital reserves
6 October 2013
Bank Assets
!! The Cash Account (Cash and deposits due from banks) !! Cash held in the bank’s vault, !! Deposits the bank has placed with other banks (correspondent deposits), !! Cash items in the process of collection (mainly uncollected checks), and !! The bank’s reserve account held with the Federal Reserve bank in the region, is often labeled primary reserve. !! Note: Banks strive to keep the size of this account as low as possible because cash balances earn little or no interest income for the bank.
Mr. Rithjayasedh PEOU, MFin (Melb) 7 6 October 2013
Bank Assets
!! Investment Securities: The Liquid Portion !! Holdings of shorter-term government securities— both U.S. government and municipal securities, and !! Money market securities, including interest-bearing time deposits held with other banks and commercial paper. !! Note: Serving as secondary reserve, the liquid portion occupy the middle ground between cash assets and loans, earnings some income but held mainly for the ease with which they can be converted into cash on short notice.
Mr. Rithjayasedh PEOU, MFin (Melb) 8 6 October 2013
Bank Assets
!! Investment Securities: The Income-Generating Portion !! Taxable securities—mainly U.S. government bonds and notes, securities issued by various federal agencies and corporate bonds and notes, and !! Tax-exempt securities—principally state and local government (municipal) bonds. !! Note: Investment securities may be recorded on a bank’s books at their original cost, at market value, or at the lower of cost or market value. !! Trading account securities implies that the bank serves as a security dealer for certain kinds of securities. The amount recorded in the account represents those securities the bank intends to sell before they reach maturity, valued at market.
Mr. Rithjayasedh PEOU, MFin (Melb) 9 6 October 2013
Bank Assets
!! Loans !! The larger, called gross loan, is the sum of all outstanding IOUs owed to the bank in the form of consumer, real estate, commercial, and agricultural loans plus any credit extended by the bank to security dealers and other financial institutions. !! Loan losses, both current and projected, are deducted from the amount of this total (gross) loan figure. !! Note: Loans account is by far the largest asset item of a bank, which generally account for half to almost three-quarters of the total value of all bank assets.
Mr. Rithjayasedh PEOU, MFin (Melb) 10 6 October 2013
Bank Assets
!! Allowance for possible loan losses (ALL), !! ALL, which is a contra-asset account, represents an accumulated reserve against which loans declared to be uncollectible can be charged off. !! When a loan is considered uncollectible, the bank’s accounting department will write (charge) it off the books by reducing the ALL account by the amount of the uncollectible loan while simultaneously decreasing the asset account for gross loans. !! The allowance for possible loan losses is built up gradually over time by annual deductions from current income. !! The se deductions appear on the bank's income statement as a noncash expense item called the provision for loan losses (PLL)
Mr. Rithjayasedh PEOU, MFin (Melb) 11 6 October 2013
Bank Assets
!! Unearned discount !! It is also deducted from gross loans to derive net loans. !! These discounts consist of interest income from loans that has been received from customers but not yet earned under the accrual method of accounting used by banks today. !! Over the life of discounted loan, the income will gradually be earned by the bank and the necessary amounts will be transferred from unearned discount to the bank’s interest income account. !! Nonperforming loans !! A loan is placed in the nonperforming category when any scheduled loan repayment is past due for more than 90 days. !! The bank is forbidden to record any interest income from the loan until a cash payment actually comes in.
Mr. Rithjayasedh PEOU, MFin (Melb) 12 6 October 2013
Bank Assets
!! Federal funds sold and securities purchased under resale agreements !! This item includes mainly temporary loans (usually extended overnight, with the funs returned the next day) made to other banks, securities dealers, or even major corporations. !! The funds for these temporary loans often come from he reserves bank ahs on deposit with the Federal Reserve Bank in its district. !! Some of the these temporary credits are extended in the form of repurchase (resale) agreements (RPs) .
Mr. Rithjayasedh PEOU, MFin (Melb) 13 6 October 2013
Bank Assets
!! Customers’ Liability on Acceptances !! Larger banks often provide a form of credit for their customers known as acceptance financing. !! The reader will note that this term coincides exactly with an item listed under bank liabilities, acceptance outstanding. !! The dual pair of accounts increase each time a bank agrees to stand behind a customer’s credit, usually to help that customer pay for goods imported from overseas. !! Bankers’ acceptance are widely used today for financing international trade, for purchasing foreign currencies and even to support the shipment and storage of goods and agricultural commodities in the domestic economy.
Mr. Rithjayasedh PEOU, MFin (Melb) 14 6 October 2013
Bank Assets
!! Miscellaneous assets !! Bank assets also include building and equipment, the net (adjusted for depreciation) value of bank buildings and equipment, investments in subsidiary firms, prepaid insurance, and other relatively insignificant asset items. !! Note: Fixed assets typically generate fixed operating costs in the form of deprecation expense, property taxes, and so on, which provide operating leverage, enabling the bank to boost its operating earnings if it can increase its sales volume to high enough level and earn more form using its fixed assets than those assets cost.
Mr. Rithjayasedh PEOU, MFin (Melb) 15 6 October 2013
Bank Liabilities
!! Deposits !! Non-interest bearing demand deposit, or regular checking accounts, generally permit unlimited check writing. !! Savings deposits bear the lowest rate of interest offered to depositors by a bank but may be of any denomination and permit the customer to withdraw at will. !! NOW accounts, which can be held by individuals and nonprofit institutions, bear interest and permit drafts (checks) to be written against each account in order to pay third parties.
Mr. Rithjayasedh PEOU, MFin (Melb) 16 6 October 2013
Bank Liabilities
!! Deposits (Cont’d) !! Money market depots accounts (MMDAs) can pay whatever interest rate the offering bank feels competitive and have limited check-writing privileges attached. !! Time deposits (mainly certificates of deposit, or CDs) usually carry a fixed maturity (term) and a stipulated interest rate but may be of any denomination, maturity, and yield agreed upon by the bank and its depositor. Included are large ($100,000-plus) negotiable CDs—interest-bearing deposits that banks use to raise money from their most well-to-do customers.
Mr. Rithjayasedh PEOU, MFin (Melb) 17 6 October 2013
Bank Liabilities
!! Borrowings from nondeposit sources !! Federal funds purchased and securities sold under agreements to repurchase tracks the bank’s temporary borrowings in the money market, mainly from reserves loaned to it by other banks or from repurchase agreements where the bank has borrowed funds collateralized by some of its own securities from another bank or a large corporate customer. !! Other short-term borrowings include borrowing reserves from the discount windows of the Federal Reserve banks and Eurodollar borrowings from multinational banks abroad or from the borrowing bank’s own overseas branches. !! Other liabilities account include a deferred tax liability and obligations to pay off investors who hold bankers’ acceptances.
Mr. Rithjayasedh PEOU, MFin (Melb) 18 6 October 2013
Bank Capital Accounts
!! Common stock is the total par (face) value of common stock outstanding. !! Capital surplus account is the excess market value of the stock. !! Preferred stock guarantees its holders an annual dividend before common stockholders receive any dividend payments. !! Retained earnings represents accumulated net income left over each year after payment of stockholder dividends. !! Contingency reserve held a s protection against unforeseen losses. !! Treasury stock is stocks that have been retired. !! Subordinated notes and debentures are debt securities that are longterm and carry a claim on the bank’s assets and income that comes after (is subordinated to) the claims of its depositors.
Mr. Rithjayasedh PEOU, MFin (Melb) 19 6 October 2013
Off-Balance-Sheet Items
!! Standby credit agreement, in which a bank pledges to guarantee repayment of a customer's loan received from a third party. !! Interest rate swaps, in which a bank promises to exchange interest payments on debt securities with another party. !! Financial futures and option interest-rate contracts, in which a bank agrees to deliver or to take delivery of securities from another party at a guaranteed price. !! Loan commitments, in which a bank pledges to lend up to a certain amount of funds until the commitment matures. !! Foreign exchange rate contracts, in which a bank agrees to deliver or accept delivery of foreign currencies.
Mr. Rithjayasedh PEOU, MFin (Melb) 20 6 October 2013
Income Statement
!! A bank’s income statement, or Report of Income, indicates the amount of revenue received and expenses incurred over a specific period of time. !! The principal source of bank revenue is the interest income generated by the bank’s earnings assets, mainly: !! Loans (L), !! Securities (S), !! Any interest-bearing deposits that are part of cash assets (C) held with other banks, and !! Any miscellaneous asses (M) generating revenue (including any income earned by subsidiaries of the bank or rental income form property that it owns.
Mr. Rithjayasedh PEOU, MFin (Melb) 21 6 October 2013
Income Statement
!! The major expenses incurred in generating this revenue include: !! Interest paid out to depositors (D), !! Interest owed on nondeposit borrowings (NDB), !! The cost of equity capital (EC), !! Salaries, wages, and benefits paid to bank employees (SWB), !! Overhead expense associated with the bank’s physical plant (O), !! Funds set aside for possible loan losses (PLL), !! Taxes owed (T), and !! Miscellaneous expenses (ME).
Mr. Rithjayasedh PEOU, MFin (Melb) 22 6 October 2013
Key Items on a Bank’s Income Statement Revenues (revenues from the bank’s service outputs) Loan income Investment income Noninterest sources of income Expenses (cost of the bank’s inputs of resources needed to produce its services) Interest paid on deposits Interest paid on nondeposit borrowings Salaries and wages (employee compensation) Provision for loan losses (allocations to the reserve for possible olosses on any loans made) Other expenses Gains or losses from trading in securities Taxes Income before taxes and securities transactions Net income after taxes and securities gains or losses
Income Statement
Income Statement
!! Interest income !! Not surprisingly, interest and fees generated form loans account for most bank revenues (normally two-thirds or more of the total). !! It must be noted, however, that the relative importance of loan revenue versus noninterest revenue sources (so-called fee income) is changing rapidly, with fee income today growing much faster than interest income on loans as bankers work to develop fee-based services. !! Interest expenses is the number 1 expense item for a bank.
Mr. Rithjayasedh PEOU, MFin (Melb) 24 6 October 2013
Income Statement
!! Net interest income (interest margin) is the gap between the interest income the bank receives on loans and securities and the interest cost of its borrowed funds. !! Noninterest Expense !! It includes wages, salaries, and other personnel expense. !! The costs of maintaining bank properties and rental fees on office space show in net occupancy and equipment expense. !! The cost of bank furniture and equipment also appears under the noninterest expense category, along with numerous small expense items including legal fees, paper and office supplies, and repair costs.
Mr. Rithjayasedh PEOU, MFin (Melb) 25 6 October 2013
Income Statement
!! Noninterest income !! It includes fees earned from offering trust services, service charges on deposit accounts, and miscellaneous fees and charges for other bank services. !! Recently, bankers have targeted noninterest income—known as fee income–as a key source of future revenues. !! By more aggressively selling services other than loans (such as security brokerage, insurance, and trust services), bankers have found a promising channel for boosting the bottom line on their IS, for diversifying their income sources, and for insulting their banks more adequately from fluctuations in interest rates.
Mr. Rithjayasedh PEOU, MFin (Melb) 26 6 October 2013
Income Statement
!! Loan-loss expense (provision for possible loan losses) is really a noncash expense and to shelter a portion of the bank’s current earnings from taxes in order to help prepare for bad loans. !! Securities gains or losses: Most banks purchase, sell or redeem securities during the year, and this trading activity often results in gains or losses above or below the original cost (BV) of the securities. !! Net income !! Bank accounting practices call for the deduction of both noninterest expenses and interest expenses from the sum of interest and noninterest incomes to yield income (or loss) before taxes. !! Applicable federal and state income tax rates are applied to this income figure to derive the bank’s net after-tax income (or loss).
Mr. Rithjayasedh PEOU, MFin (Melb) 27 6 October 2013
Debate
Mr. Rithjayasedh PEOU, MFin (Melb)
28
6 October 2013
End of Chapter 02
Lectured by: Mr. Rithjayasedh PEOU, MFin (Melb)
