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

3-2 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

© 2005 Pearson Education Canada Inc. 3-3 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

© 2005 Pearson Education Canada Inc. 3-4 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.

© 2005 Pearson Education Canada Inc. 3-5 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.

© 2005 Pearson Education Canada Inc. 3-6 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

© 2005 Pearson Education Canada Inc. 3-7 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

© 2005 Pearson Education Canada Inc. 3-8 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

© 2005 Pearson Education Canada Inc. 3-9 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

© 2005 Pearson Education Canada Inc 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

© 2005 Pearson Education Canada Inc 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.

© 2005 Pearson Education Canada Inc Balance sheet information for PNC banks PNC ( Bank, National, Association ) Dec-03 % of Balance sheetCan %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% % 19.2% 4% 0% 4.9% 1.9% 55.2%.1% 1% 54.1% 9% 0% 14.2%.4% 1.8% 1.5% 26.9%

© 2005 Pearson Education Canada Inc Balance sheet information for PNC banks PNC ( Bank, National, Association ) Dec-03 % of Balance sheetCan %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% % 4.7% 1.7% 0% 12.5% 100%