M. Morshed1 Chapter:05 Financial Statement of Bank

M. Morshed2 The Income Statement of Bank Financial Outputs ( revenues from making use of bank funds & other services ) Financial Inputs (the cost of acquiring funds & other resources) Loan IncomeDeposit Costs Security IncomeCosts of Nondeposit Borrowings. Income from Deposits in other Institutions Employee Costs Income from miscellaneous services. Overhead Expenses. Taxes

M. Morshed3 The Balance Sheet of Bank (Report of Conditions) Financial Outputs ( use of bank funds ) Financial Inputs (sources of bank funds or liabilities) Cash Assets [C]Deposits from the Public [D] Investment in Securities [S]Nondeposit Borrowings [NDB] Loans & Leases [L]Equity Capital [EC] Miscellaneous Assets [MA]

M. Morshed4 Bank Assets 1. The Cash Account (Cash held in bank’s vault + Correspondent Deposits). 2. Investment Securities (Money Market Securities: The Liquid portion) 3. Investment Securities (Capital Market Securities: The Income Generating Portion ) 4. Loans ## 5. Securities Purchased under Resale Agreement.(Repo) 6. Customers’ Liability on Acceptance. 7. Miscellaneous Assets (Bank Buildings & Equipment, Investments in Subsidiary firms, Prepaid insurance, etc.)

M. Morshed5 ## Loans 1) Commercial & Industrial Loans. 2) Consumer or Households Loans. 3) Real Estate Loans. 4) Financial Institutions loans. (loans to other depository institutions.) 5) Foreign Loans (to foreign governments, agencies) 6) Agricultural Production Loans (to farmers & ranchers) 7) Security loans (to investors & security brokers) 8) Leases (operating & financial leases)

M. Morshed6 ## Loans Losses Annual Provision for Loan Loss (PLL) expense is debited in the Income Statement Allowance for Loan Loss (ALL) is credited in the Balance Sheet. Worthless Loan deducted and recovered loan added with ALL at the end of the year and that becomes the opening balance in the next year

M. Morshed7 Bank Liabilities 1. Deposits: a.Noninterest-bearing demand deposits (permits unlimited check writing) b.Savings Deposits (lower rate of interest with minimum size requirement of deposits) c.NOW Accounts (held only by individuals & nonprofit institutions, bear interest & permit the customer to withdraw at will) d.Money Market Deposit Accounts (MMDAs pay competitive interest rate with limited checking privileges, normally 7 days prior notice is required before withdrawal of cash) e.Time Deposits (fixed maturity term & stipulated interest rate) 2. Nondeposits Borrowings - No reserve requirement or insurance fee required, that reduces the cost of fund and makes it flexible but interest rate is highly volatile - During the time of financial problems, lender may refuse to extend credit - Sources are : Money & Capital Market, Euro Market, Long-term borrowings. 3. Capital Accounts (less than 10% of the total asset)

M. Morshed8 Off-balance-Sheet Items Banks have converted many of their customers in recent years into fee-generating transactions that are not recorded on their balance sheet. –Standby Credit Agreements (bank pledges to guarantee repayment of a customer’s loan received from a third party) –Interest Rate Swaps (bank promises to exchange interest payment on debt securities with another party) –Financial Futures & option Interest-rate Contracts (bank agrees to deliver or to take delivery of securities from another party at a guaranteed price) –Loan Commitments (bank pledges to lend up to a certain amount of funds until the commitment matures) –Foreign exchange Rate Contracts (bank agrees to deliver or accept delivery of foreign currencies)

M. Morshed9 Major Components of Income Statement Interest Income: Interest & Fees on Loans Interest on Investment Securities Interest Expenses: Deposit Interest Costs Interest on Short-term debt Interest on Long-term debt Noninterest Income: Service charges on customer deposits Trust department income Noninterest Expenses: Wages, Salaries & other personnel expenses Net occupancy & Equipment expenses Provision for Loan-Loss (PLL) Expenses

M. Morshed10 Features & Consequences of Bank Financial Statements Key Features of Bank Financial Statements Consequences for Bank Managers Heavy dependence on borrowed funds supplied by others increased the use of financial leverage. The bank’s earnings & existence will be at risk if bank cannot repay those borrowings in due time. Growing use of nondeposit borrowings ; little owners’ capital is invested in most banks. The bank must hold a significant proportion of high-quality & readily marketable assets to meet its most pressing debt obligation. Most revenues stem from interest on loans & securities. The largest expense item is the interest cost of borrowed funds. Bank management must choose loans & investments carefully to avoid a high proportion of earnings assets that fail to pay out as planned.