商业银行管理英文课件：第5章 Financial Statements and Financial Firm Performance

1、Part two Financial Statements and Financial Firm PerformanceBased on Rose and Hudgins, Bank Mgt & Fin Services, Gup text, and adapted by Dorla EvansChapter Five The Financial Statements of Banks The Balance Sheet or Report of ConditionAsset ItemsLiability ItemsRecent Expansion of Off-Balance Sheet I

2、temsComponents of the Income Statement: Revenues and Expenses5.1 An Overview of Balance Sheets and Income StatementsReport of Condition Balance SheetThe Report of Condition shows the amount and composition of funds sources (financial inputs) drawn upon to finance lending and investing activities and

3、 how much has been allocated to loans, securities, and other funds uses (financial outputs) at any given point in time.Report of Income Income Statementthe financial inputs and outputs on the Report of Income show how much it has cost to acquire funds and to generate revenues from the uses the bank

4、or other financial firm has made of those funds.Report of Condition Balance SheetTABLE 51 Key Items on Bank Financial StatementsAssetsLiabilitiesCash assets: 5.4 Cash on hand 0.9 In the feds deposits 0.6 Deposits In other bank and cash in transit to be collected 3.9Loans： 61.7 Real estate 26.0 Busin

5、ess enterprise 17.0 Consumer 11.7 Other 7.0Securities： 23.9 government 18.4 State and local governments and others 5.5Other assets： 9.9Deposits： 64.7 Transaction Deposit 20.4 Non-transaction Deposits 44.3 Borrowing ： 16.4Other liabilities： 10.6Capital account： 8.3 Total assets 100.0Total Liabilities

6、 +Total Capital 100.0 5.1 An Overview of Balance Sheets and Income StatementsReport of Income Income StatementTABLE 51 Key Items on Bank Financial Statements/cn/600036/lr.shtmlTABLE 51 Key Items on Bank Financial StatementsReport of Income Income Statement5.2 The Balance Sheet (Report of Condition)T

7、he Principal Types of Accounts：the assets, liabilities, and equity capital (owners funds) held by or invested in a bank or other financial firm on any given date. Assets = Liabilities + Equity capital5.2 The Balance Sheet (Report of Condition)C + S + L + MA = D + NDB + ECC = cash in the vault and de

8、posits held at other depository institutionsS = government and private interest-bearing securities purchased in the open marketL = loans and lease financings made available to customersMA = miscellaneous assetsD = Liabilities fall into two principal categories: deposits made by and owed to various c

9、ustomersNDB = nondeposit borrowings of funds in the money and capital marketsEC = equity capital represents long-term funds the owners contributeThe banks balance sheet identity can be written:cashloanother assetsinvestmentAssets of the Banking Firm5.2 The Balance Sheet (Report of Condition)cashcash

10、 on handThe money Due from Central Bank Deposits in other banks receivables loanbusiness loanreal estate loanloans to financial institutionsConsumer loans Agricultural products, securities loaninvestmentMoney market instrumentsCapital market securitiesInnovation investment toolsasset backed Securiti

11、es mutual fund shares other assetsfixed assets, investments in subsidiaries, prepaid expenses, etc.Tier 1 reserves No more than 6% of total assetsThree-quarters of the total assetsAsset business framework Cash and Due from Depository InstitutionsInvestment SecuritiesTrading Account AssetsFederal Fun

12、ds Sold and Reverse Repurchase AgreementsLoans and LeasesLoan LossesSpecific and General ReservesInternational Loan ReservesUnearned Discount IncomeNonperforming (noncurrent) LoansBank Premises and Fixed AssetsOther Real Estate Owned (OREO)Goodwill and Other Intangible Assets5.2 The Balance Sheet (R

13、eport of Condition)Assets of the Banking FirmInvestment Securities: The Liquid PortionA second line of defense to meet demands for cash is liquid security holdings, often called secondary reserves or referenced on regulatory reports as “available for sale.” These typically include holdings of short

14、term government securities and privately issued money market securities, including interest-bearing time deposits held with other banking firms and commercial paper.Investment Securities: The Income-Generating PortionBonds, notes, and other securities held primarily for their expected rate of return

15、 or yield, including taxable securities and tax-exempt securities5.2 The Balance Sheet (Report of Condition)Balance sheet ($000) ASSETS DEC. 31, 2007 DEC. 31, 2006Cash & due from dep. Instit.$ 9,039$10,522Investment securities Interest bearing bank balances $ 0$ 1,000 U.S. Treasury and agency securi

16、ties 54,082 44,848 Municipal securities 32,789 34,616Investment securities$86,871$80,464Trading account assets$ 0$ 0Fed Funds Sold$10,500$ 1,500Securities $97,371 $81,964Balance sheet ($000) ASSETS DEC. 31, 2007 DEC. 31, 2006Loans and leases Real estate loans $50,393 $38,975 Commercial loans 9,615 1

17、1,381 Individual loans 8,824 10,640 Agricultural loans 20,680 19,654 Other loans and leases-domestic 3,684 4,025 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 $81,857depositborrowed fun

18、dLiabilities of the Banking Firm5.2 The Balance Sheet (Report of Condition)Checkable DepositsNoninterest-bearing demand depositsNegotiable Order of Withdrawal Account （NOWs）Super NOW accounts （Super NOWs）Money market deposit accounts (MMDAs)Non-transaction DepositsSavings depositsPublic funds deposi

19、t（government）Time depositsmall-denomination time deposits(Below $100000）certificates of deposit（CDs）Borrowings from Nondeposit SourcesFederal funds purchasedInter-bank borrowingBorrow funds from the parent companyRepurchase agreements（Securities as collateral）Borrowing in the Eurocurrency marketDepo

20、sit may support 70% 80% of total assets No reserve requirements，expanded sizeLiability business framework Banks accumulated fund use（asset）=Bank total capital source（liabilities and shareholders equity）capital sourceCurrent depositsavings depositTime deposit borrowed fundcapital stockcapital poolAcc

21、ording to the priorityapplication of funds Tier 1 reservesTier 2 reservesLoan of All KindsOther securitiesfixed assets5.2 The Balance Sheet (Report of Condition)The equity capital accounts on a depository institutions Report of Condition represent the owners (stockholders) share of the business.Ever

22、y new financial firm begins with a minimum amount of owners capital and then borrows funds from the public to “lever up” its operations.Financial institutions are among the most heavily leveraged (debt-financed) of all businesses.Their capital accounts normally represent less than 10 percent of the

23、value of their total assets.Equity Capital for the Banking Firm5.2 The Balance Sheet (Report of Condition)Bank capitalCommon stock and preferred stockSurplus reserves Capital notes and bondsUndistributed profitBank liabilitiesNarrow sense of liabilities：Bank deposits and borrowingBroad sense of liab

24、ilities ：Bank deposits and borrowing as well as capital instruments and long-term debt capitalcapital source of commercial bankBalance sheet ($000) ASSETS DEC. 31, 2007 DEC. 31, 2006Cash$ 9,039 $10,522Total securities $ 97,371 $81,964Net loans and leases $90,101 $81,857Premises, fixed assets, and ca

25、pitalized leases $2,229 $2,398Other real estate 2,282 3,012Other assets 4,951 4,014Total assets $205,973 $183,767Balance sheet ($000)LIABILITIES & CAPITAL DEC. 31, 2007 DEC. 31, 2006Demand deposits $ 23,063 $ 22,528All NOW and ATS accounts 6,021 5,322MMDA accounts 41,402 49,797Other savings deposits

26、 3,097 2,992Time deposits$100K 83,009 57,665Total deposits $188,299 $167,258 Balance sheet ($000)LIABILITIES & CAPITAL DEC. 31, 2007DEC. 31, 2006Nondeposit fundsFed funds purchased 0 0Other borrowings 0 0Bankers acceptance and other liabilities 3,546 3,101Total nondeposit funds $ 3,546 $3,101Total l

27、iabilities $191,845 $170,359Subordinated notes and debentures 0 0All common and preferred equity 14,128 13,408Total liabilities and capital $205,973 $183,767Comparative Balance Sheet Ratios for Different Size BanksSmall community Banks and large BanksConsidering the reality of China5.2 The Balance S

28、heet (Report of Condition)Recent Expansion of Off-Balance-Sheet Items in BankingFinancial firms offer their customers a number of fee-based services that normally do not show up on the balance sheet.5.2 The Balance Sheet (Report of Condition)SLC (Standby Letter of Credit) Commitment Business（Guarant

29、ee）Marginal lending facility Loan limit Loan commitment Note issuance facility Loan Sales Note issuance facilities Asset-backed securities Derivatives trading Investment banking 5.2 The Balance Sheet (Report of Condition)5.3 Components of the Income Statement (Report of Income)An income statement, o

30、r Report of Income, indicates the amount of revenue received and expenses incurred over a specific period of time.There is usually a close correlation between the size of the principal items on a banks balance sheet (Report of Condition) and its income statement. After all, assets on the balance she

31、et usually account for the majority of operating revenues, while liabilities generate many of a banks operating expenses.Net income = Total revenue items Total expense itemsthe interest income generated by loans and investments；the fees charged for specific services (such as ATM usage).interest paid

32、 out to depositors; interest owed on nondeposit borrowings; the cost of equity capital; salaries, wages; overhead expenses associated with the physical plant; funds set aside for possible loan losses; and taxes owed.Total revenueTotal expense5.3 Components of the Income Statement (Report of Income)T

33、he simplified computational formula of net incomeInterest Income-Interest ExpenseNet Interest Income-Provision for Loan & Lease Losses (non-cash outflow)+Non-interest Income-Non-interest ExpensePretax Net Operating Income+/- Securities Gains (Losses)Income TaxesIncome Before Extraordinary Items+/- E

34、xtraordinary gains (losses)Net IncomeInterest Income：Loan incomeInterest Expenses：interest on deposits accounted for almost 60 percent of this banks total interest costs.Net Interest IncomeLoan-Loss Expense：Bad debt reserves（ Allowance for loan losses ）Noninterest Income： Growing fastNoninterest Exp

35、enses：wages, salaries, and employee benefits，lured experienced senior management away from competitors；The costs of maintaining a financial institutions properties and rental fees on office space，legal fees, office supplies, and repair costs.Net Operating Income and Net Income5.3 Components of the I

36、ncome Statement (Report of Income)Noninterest IncomeMainly from the intermediary businessSettlement businessCity-wide settlement of accounts Nonlocal settlement of accounts Leasing businessOperating lease Financing lease The credit card businessthe membership fee paied by members of the credit cardD

37、elay, excess chargesFiduciary businessDeposit service revenueAccount retention, overdraft charge, Deal with the draft with insufficient funds ，Clearing checksSecurities trading revenues:Commission to Securities broker , Commission to assist the company to issue new sharesOther financial services Rev

38、enueData processing fees，M&A consulting feeRevenues and ExpensesDecember 31, 2007December 31, 2006Income from loans and lease financing$0$0 Fully taxable Tax-exempt8,880519,03250Interest and fees on loans and leases$8,931$9,082 Estimated tax benefit3821Total income on loans and leases$8,969$9,103Inc

39、ome statementIncome statementRevenues and ExpensesDecember 31, 2007December 31, 2006Investment interest income U.S. Treasury and agency securities income$3,735$3,571 Muni securities income3,0973,025 Estimated tax benefit1,8822,103 Other securities income130Total investment interest income$8,727$8,69

40、9Interest on federal funds sold192194Interest due from banks275Total interest income$17,915$18,001Income statementRevenues and ExpensesDecember 31, 2007December 31, 2006Interest expense Interest on CDs $100K$3,248$2,924 Interest on other deposits6,7577,167 Interest on Fed Funds bought and repos1659

41、Interest on borrowed money050 Interest on mortgages and leases00 Interest on subordinated debt00Total interest expense$10,021$10,200Net interest income$7,849$7,801Income statementRevenues and ExpensesDecember 31, 2007December 31, 2006Net interest income$7,849$7,801Non-interest income571577Adjusted o

42、perating income$8,465$8,378Overhead expense3,6243,876Provision for loan and lease loss1,2943,208 Pre-tax operating income$3,547$1,294Securities gains/(losses)1,2403,331 Pre-tax net operating income$4,748$4,625Income statementRevenues and ExpensesDecember 31, 2007December 31, 2006Pre-tax net operatin

43、g income$4,748$4,625Applicable income taxes2,2672,133Net operating income before extraordinary items$2,520$2,492Net extraordinary items00Net income$2,520$2,492Allowance for loan losses Under current U.S. tax law, depository institutions are allowed to build up a reserve for future loan losses, calle

44、d the allowance for loan losses (ALL) ,from their flow of income based on their recent loan-loss experience. The 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 a

45、ccounting 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.Allowance for loan losses For example, suppose a bank granted a $10 million loan to a property development c

46、ompany to build a shopping center and the company subsequently went out of business. If the bank could reasonably expect to collect only $1 million of the original $10 million owed, the unpaid $9 million would be subtracted from total (gross) loans and from the ALL account.Gross loan$10 million Less

47、 uncollected loan - 9 millionGross loan$ 1 millionAllowance for loan losses (ALL)$100 million Less uncollected loan 9 millionAllowance for loan losses (ALL) $ 91 million The allowance for possible loan losses is built up gradually over time by annual deductions from current income. These deductions

48、appear on the banking firms Report of Income as a noncash expense item called the provision for loan losses (PLL). For example, suppose a banking firm anticipated loan losses this year of $1 million and held $100 million already in its ALL account：Income statement: Non-cash charge against revenuePro

49、vision for loan loss (PLL)- $1 millionBalance sheet: Allowance for loan loss (ALL) adjustmentAllowance for loan losses$100 million Plus provision for loan loss 1 millionAllowance for loan losses $101 millionAllowance for loan losses Now suppose the bank subsequently discovers that its truly worthles

50、s loans, which must be written off, total only $500,000. Then we would have:Balance sheet: Allowance for loan loss adjustmentAllowance for loan losses$100.0 million Plus annual provision for loan loss 1.0 million Less charged-off loan- 0.5 millionReserve for loan losses$100.5 millionAllowance for lo

51、an losses At about the same time suppose that management discovers it has been able to recover some of the funds (say $1.5 million) that it had previously charged off as losses on earlier loans. Often this belated cash inflow arises because the banking firm was able to take possession of and then se

52、ll the collateral that a borrower had pledged behind his or her defaulted loan.Income statement: Cash recovery increases revenueRecovery+ $1.5 millionBalance sheet: Allowance for loan loss adjustmentAllowance for loan losses$100.5 million Plus recovery of previously charged-off loan + 1.5 millionAll

53、owance for loan losses($102.0 million)Allowance for loan losses Ending Beginningallowance for = allowance for - Gross + Provision for + Recoveriesloan losses loan losses charge-offs loan lossesbal sheet bal. sheetexp. accrued exp. income If writing off a large loan reduces the balance in the ALL acc

54、ount too much, management will be called upon (often by examiners representing its principal regulatory agency) to increase the annual PPL deduction (which will lower its current net income) in order to restore the ALL to a safer level. Additions to ALL are usually made as the loan portfolio grows i

55、n size, when any sizable loan is judged to be completely or partially uncollectible, or when an unexpected loan default occurs that has not already been reserved.Allowance for loan lossesAn Overview of Key Features of Financial Statements and Their ConsequencesKey Features of the Financial Statements of Banks and Similar Financial Institutions Heavy dependence on borrowed funds supplied by others (including