Chapter 7 Commercial bank financial statement Salwa Elshorafa 2009 © 2005 Pearson Education Canada...

Chapter 7

Commercial bank financial statement

Salwa Elshorafa

2009

© 2005 Pearson Education Canada Inc.

3-2© 2005 Pearson Education Canada Inc.

The balance sheet

A bank's balance sheet presents financial information comparing what a bank owns with what it owes and the ownership interest of stockholders .

Assets indicate what bank owns ; liabilities represent what the bank owes; and equity refers to the owners interest such that

Assets = Liabilities + Equity


• Balance sheet figures are stock values calculated for a particular day or point in time .

• the balance sheet represent the balance of cash , loans, investments and premises owned by the bank on a particular day .

• Regulators require that banks report balance sheet and income statement data quarterly , so figures are available publicly for the three month period


Bank assets

• Bank assets fall into one of four general categories: loans, investment

securities , noninterest cash and due from banks and other assets :

1) loans :- are the major asset in most banks portfolio and generate the

greatest amount of income before expenses and taxes.

2) investment securities :-are held to earn interest , help meet liquidity

needs , speculate on interest rate movement , meet pledging requirement

3) noninterest cash and due from banks consists of vault cash, deposit

held at federal reserve banks deposits held at other financial institutions ,

and cash item in the process of collection .


Bank assets

These assets are held to meet customer withdrawal need

and legal reserved requirement , assist in check clearing

and wire transfers and effect the purchase and sale of

treasury security.

4) Other assets are residual assets of relatively small

magnitudes such as bankers, acceptance , equipment and

other smaller amounts.


Loans :

• A bank negotiates terms with each borrower that vary with the use of

proceeds , source of payment and type of collateral .

• There are six categories of loans :-

1) real estate loans :- are loans secured by real estate and generally consist

either of property loans secured by first mortgage

2) commercial loans: consist of commercial and industrial loans to

financial institution .

commercial loans appear in many forms but typically finance a firm's

working capital needs, equipment purchases . This category also includes

credit extended to other financial institutions , security brokers and

dealers


Loans :

3) Individual loans:- include those negotiated directly with individual for household , family , and other personal expenditure . And those obtained indirectly through the purchase of retail paper

4) Agricultural loans: appear in many forms but typically finance agricultural production and include other loans to farmers

5) Other loans in domestic office : include all other loans and all lease – financing receivables in domestic office

6) International loans :- loan and lease in foreign office


Investment

• A bank's investment include both short – term and long – term

investment security:-

• 1) short –term security:- those with maturity of one years or less –

that can be easily sold to obtain cash .

*They have maturities ranging from overnight to one year and carry

return that vary quickly with changes in money market condition

* lower risk

* the bank earns significantly less interest than what could be earned

on longer –term securities .

* short –term security include treasury and agency securities ,

foreign debt securities , and other securities


Investment

• 2)long –term investment securities :

* Consist of notes and bonds that have maturity of more than one year and generate taxable .

* Treasury security and obligations of federal agencies represent the bulk of taxable

* purchase mortgage- backed security

* small amount of foreign

* corporate bonds

Most of these carry fixed interest rate with maturities up to 20 years


Investment

• 3) Noninterest cash and due from banks:-

This asset category of vault cash , deposit held at held federal reserve banks , deposit held at other financial institutions and cash item in the process of collection :

Vault cash :- is coin and currency that the bank hold to meet customer withdrawals

2) Deposits held at the federal reserve are demand balances used to meet legal reserve requirement , assist in check clearing and effect the purchase and sale of treasury securities


Investment

3) cash item in the process of collection :-

Are generally the largest component of cash , representing cash written against other institution and presented to the bank for payment for which credit has not been given.

4) Other assets this category consists of residual assets of relatively small magnitudes including the depreciated value of bank , equipment, customers liability to the bank under acceptance.

Commercial banks own relatively few fixed assets .


2003-2004 Balance sheet information for PNC banks PNC ( Bank , National, Association )

Dec-03 % of

Balance sheet Can % 1000$ total

Asset

loans :

Real estate loans

Commercial loans

Individual loans

Agricultural loans

Other loans in domestic off

Loans in the foreign off

Gross loans& leases

Less: unearned income

Net loans & leases

Investment:-

U.S. treasury & agency securities

Municipal securities

Foreign debt security

All other securities

Interest bearing bank balance

Fed fund sold & resale

Trading account asset

Total investment

1.2%

-8.4%

-4.4%

9.2%

20.5%

15.6%

-4.6%

8.0%

-5.8%

-4.5%

90.6%

-46.9%

-100%

1.1%

16.4%

-54.6%

-9.1%

8.7%

15.639.089

11.879.285

2.501.847

984

3.022.795

1.190.025

34.234.025

44.867

606.886

33.582.727

5.574.108

7.719

0

8.804.028

259.318

1.106733

935.042

16.686.948

25.5%

19.2%

4%

0%

4.9%

1.9%

55.2%

.1%

1%

54.1%

9%

0%

0%

14.2%

.4%

1.8%

1.5%

26.9%


2003-2004 Balance sheet information for PNC banks

PNC ( Bank , National, Association )

Dec-03 % of

Balance sheet Can % 1000$ total

Total earning assets

Cash

Fixed assets & capital leases

Other real estate owned

Acceptance and other assets

Total assets

.5%

-6.9%

24.4%

21.8%

252.4%

51.8%

4%

50.269.220

2.926.330

1.039.603

14.208

17.386

7.754.149

62.02.896

81.1%

4.7%

1.7%

0%

0%

12.5%

100%


Bank liabilities and stockholders Equity

Internal resource :-

• The payment of capital

• Retained earning

- Reserves

- profit are not divided

• Debenture


Bank liabilities and stockholders Equity

External resource

• Deposit

- Demand deposit

- time deposit

- Subject – to- notice deposits

- saving account

- foreign deposit

- domestic deposit


The payment of capital

Definition

Important

Regulation


Retained Earning

• Act as part of the equity

• Means to obtain the money

• Divided into :-

- reserve

- profits are not distributed


Reserve

• Definition

• Internal resource

• reserve security of deposit

• Have several forms :-

- Secondary reserve

- Primary reserve


Secondary reserve

• Keep reserve by him self

• There is no percent on it

• To chive some purpose


Primary Reserve

• Central bank demand it

• there is percent on it

• Cut from income before divided the profit

• Named legal , primary or capital reserve


profits are not distributed

• The management of banks don’t distribute all profit


Debentures

• Consist of notes and bonds with maturities in excess of one

year.

• Most meet requirement as bank capital for regulatory purpose.

• When a bank fail deposit are paid before subordinate debt

holders .


External resources

(Deposits)

• Demand deposits

Are held by individuals , partnership , corporation , and government that pay

no interest .

Prior to the depository institutions 1980 they reserved as the only legal

transactions accounting nationally that could be offered by depository

institutions .businesses now own the bulk of existing demand deposit

because they are not allowed to own interest – bearing transaction accounts

at bank


Demand deposits

• Withdrawal in any time

• currant account (checking account )

• (check - cash - ….)

• High liquidity

• Is very important part in the external resource .


Time deposit

• divided into two type:-

1) time deposit

* specific period

* interest is the highest

* broke deposits


Time deposit

• 2) subject – to- notice deposit

* interest is lower than time deposit

* periodic of money


Saving account

• Contribute a large portion of funding , especially at

community banks , passbook saving deposit are small –

denomination account that has no set maturity and no

check writing deposit .


Deposit held in foreign office

• Refer to the same type of dollar –denomination

demand and time deposit discussed above except

that the balance are issued by bank subsidiary

( owned by the bank holding the company) located

out side the united state.


• Active deposit :- non consistence process

• Idle deposit :- consistence process

• restricted deposit : restricted by individual

Active , Idle , or restricted deposit


Matching assets and liabilities

• Unexpected interest – rate fluctuations can hurt financial intermediation with mismatched assets and liabilities

• Gap analysis :-• Estimates the net effect of interest rate on income • Gap = ( rate sensitive assets ) - ( Rate sensitive

liabilities )


Matching assets and liabilities

• Rate sensitive :- interest rate can change during the coming year)

Gap = 40 million – 30 million

= 10$ million

If interest rate increase by 2% ( 7% to 9% )

income will increase by 2% ( 10,000,000)= 200,000$

• Positive gap :- is an important wager that interest rate will increase

Chapter 7 Commercial bank financial statement Salwa Elshorafa 2009 © 2005 Pearson Education Canada...

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