Bank Management

Bank Management
Dr. Mohammad Samir Mahmoud

:Learning Outcomes
By the end of this lecture, students will be able to:
• Understand and analyze the financial statements published by modern commercial banks.
• Analyze financial information for depository financial institutions.
• Practice the empirical foundations upon which practices in depository financial institutions are based and the factors that influence
decision making within these contexts.

Lecture 4
:Commercial Bank Financial Statements )4/1(
Commercial Bank Financial Statements:
• The Balance Sheet.
• The Income Statement.
• Balance Sheet figures are stock values calculated for a specific day or point in time.
• Income Statement figures are a record of financial flows (inflows & outflow) over a specific period of time.
Income Statement
Balance Sheet
:The Balance Sheet )4/2(
A bank’s balance sheet presents financial information comparing what a bank owns (assets) with what it owes (liabilities) and the
ownership interest of stockholders (Equity).
Assets = Liabilities + Equity
Liabilities
Assets
Equity
:The Balance Sheet )4/2(
Unlike traditional business firms, bank’s balance sheet items are usually presented descendingly from the most liquid to the least
liquid item.
Most Liquid Item
Least Liquid Item
Bank Balance Sheet

Assets
(4/2) The Balance Sheet (Assets):
NONINTEREST CASH LOANS & LEASES

• Vault Cash. Loans.
01 •
•
Cash items in the Process of Collection.
Bank’s Reserve Account held with Central Bank

04 Leases.
SECURITIES FED FUNDS

• Securities Available-For-Sale (AFS).
Federal Funds Sold & Reserve Repurchase
02 • Held-To-Maturity Securities (HTM).

05 Agreements
TRADING ACCOUNT OTHER ASSETS

Trading Account Securities (TAS) • Fixed Assets.
03 06 •
•
OREO.
All Other Assets.

:The Balance Sheet (Cont.) )4/2(
(A) Assets:
(1) Noninterest Cash & Due from Depository Institutions:
• The first line (The Primary Reserves) of defense against customer deposit withdrawals
• The first source (The Primary Source) of funds for lending customer.
• Bank strive to keep the size of this account as low as possible, as cash balances earn little or no interest income (Non-Interest
Cash).
(A) Assets:
(1) Noninterest Cash & Due from Depository Institutions:
Noninterest Cash and Due from Depository Institutions includes:
• Vault Cash.
• Cash items in the Process of Collection (CIPC).
• Bank’s Reserve Account held with Central Bank.

• Vault Cash: Vault Cash is coin and currency that the bank holds to meet customer withdrawals.
• Cash items in the Process of Collection (CIPC): CIPC are mainly uncollected checks written against other
institutions and presented to the bank for payment for which credit has not been given. They are generally the largest
component of cash.
• Bank’s Reserve Account held with Central Bank: Deposits held at the Federal Reserve (Central Bank) are demand
balances used to meet legal reserve requirements.


01 •
•

04 Leases.


05 Agreements

03 06 •
•
OREO.
All Other Assets.

(2) Securities : At purchase, a bank must designate the objective behind buying investment securities as either:
Available-for-Sale (AFS) Held-to-Maturity

Purchased to be sold at maturity date Purchased to be held until the maturity
during the reporting period date beyond the reporting period
represent the liquid or short-term portion represent the income generating or long-
of total bank securities, that have a term investment portion of total bank
maturity of one year or less, and can be securities, that have a maturity of more
converted into cash on short notice to meet than one year and generate interest, and
the bank’s liquidity needs held primarily for their expected rate of
return or yield.
T-bills / Commercial Notes / Deposits
held with other banking firms Stocks / Bonds
• The second line (The Secondary
Reserves) of defense against customer
deposit withdrawals
• The second source (The Secondary
Source) of funds for lending customer.

01 •
•

04 Leases.


05 Agreements

03 06 •
•
OREO.
All Other Assets.

(3) Trading Accounts Securities (TAS):
• Purchased to provide short-term profits from short-term price movements (speculation on interest rate movements). e.g.
Stocks (Short-term Investment).
• Securities acquired for resale when the banking firm serves as a security dealer. These securities are typically held for short
periods, such as a few days.


01 •
•

04 Leases.


05 Agreements

03 06 •
•
OREO.
All Other Assets.

(4) Loans and Leases:
• Loans are the major asset in most commercial banks’ portfolios.
• Loans generate the greatest amount of income before expenses and taxes.
• Loans exhibit the highest default risk and some are relatively illiquid.
50% 75%
Loans account for 50% to 75% of the total value of all bank assets
(4) Loans and Leases:
• Loans are Negotiables: A bank negotiates loan terms with each borrower that vary with the use of proceeds,
source of repayment, and type of collateral.
• Loans Maturity Date: Range from Call Loans Payable on Demand to Residential Mortgages amortized over
30 years.
• Loans Interest Rate: May be Fixed over the life of the loan or Vary with changes in market interest rates.
• Loans Repayment: May be repaid Periodically or as a Lump Sum.

• Loans are categorized into six categories according to the use of proceeds:
1) Commercial (Business) Loans.
2) Consumer (Household) Loans.
3) Agricultural Loans.
4) Real Estate Loans.
5) Financial Initiations Loans.
6) Foreign or International Loans (Extended to foreign governments and institutions).
7) Security Loans (To aid investors and dealers in their security trading activities).
8) Leases (bank buying equipment for its business, and making it available for the customer’s use for a specific period of time, in
return for a series of rental payments).

Questions

01 •
•

04 Leases.


05 Agreements

03 06 •
•
OREO.
All Other Assets.

(5) Allowance for Loans & Lease Loss (ALLL):
• ALLL is a reserve held by banking firms for future loan losses. ALLL is accumulated gradually over time by annual deductions from current
income appears in the Income Statements. It is a contra-asset (negative asset) reserve account that exists in recognition that some loans will
not be repaid.
Year Balance Sheet Income Statement

Year
2016 2016
2017 2017
2018 2018
2019 2019
2020 2020
Accumulated Reserve Annual Deduction

Example (4/1):
• Suppose a banking firm expected loan losses this year of $1 million and held $100 million already in its ALL account.
• If the bank subsequently discovers that its truly worthless loans, which must be charge-off, total only $500000.
• At about the same time suppose that bank management discovers it has been able to recover some of the funds $1.5 million that it had
previously charged off as losses on earlier loans, and make the needed recoveries.
Beginning balance in Allowance for Loan Loss Account (ALLL) million $100
This year’s Provision for Loan Losses (PLL) + million $1
Adjusted Allowance for Loan Losses (ALLL) = million $101
Actual charge-offs of Worthless Loans - )million $0.5(
Net Allowance for Loan Losses (ALLL) after all charge-offs = million $100.5
Recoveries from previously charged-offs + million $1.5
Ending balance in the Allowance for Loan Loss Account (ALLL) million $102
(6) Unearned Income:
Unearned income consists of collected interest income on loans but not yet earned under the accrual method of accounting. ‫ايرادات (فوائد) حصلت ولكنها‬
‫لم تستحق بعد‬
Net Loans and Leases = Gross Loans & Leases - ALLL - Unearned Income

01 •
•

04 Leases.


05 Agreements

03 06 •
•
OREO.
All Other Assets.

(7) Federal Funds Sold and Reserve Repurchase Agreements:
• Federal Funds: Temporary loans (usually extended overnight) made to other depository institutions, securities
dealers, or even major industrial corporations.
• They called Federal as these temporary loans often come from the reserves a bank has on deposit with the Federal
Reserve Bank.
• Reserve Repurchase Agreements: Temporary credits in the form of reserve repurchase (resale) agreements in which
the banking firm acquires temporary title to securities owned by borrower and holds those securities as collateral
until the loan is paid off.
.‫أوراق مالية مرهونة لدى البنك لحين قيام المقترض بسداد القرض‬

01 •
•

04 Leases.


05 Agreements

03 06 •
•
OREO.
All Other Assets.

(8) Other Assets:
• Other Assets are nonearning assets that generate no income, they includes:
(8/1) Bank Premises and Fixed Assets:
Bank Premises and Fixed Assets are net (depreciated) value of buildings and equipment (fixed assets). A banking firm usually devotes
only a small percentage (less than %2) of its assets to institutions’ physical plant.
(8/2) Other Real Estate Owned (OREO):
OREO is commercial and residential properties obtained to compensate for nonperforming loans. OREO can be substantial at
problem banks because it normally represents property taken as collateral against a loan that was unpaid.
(8) Other Assets:
(8/3) Goodwill and Other Intangible Assets:
• Goodwill occurs when a firm acquires another firm and pays more than the market value of its Net Assets (Assets less
Liabilities).
• Other intangible assets include purchased credit card relationships.
(8/4) All Other Assets:
Include:
• Investment in subsidiary firms.
• Income earned but not collected on loans ‫إيرادات استحقت ولكنها لم تحصل بعد‬
• Net deferred tax assets (Overpaid taxes and taxes paid in advance), and all other assets.

01 •
•

04 Leases.


05 Agreements

03 06 •
•
OREO.
All Other Assets.

:The Balance Sheet (Representation) )4/3(
Bank Balance Sheet
As on XX December 20XX
Assets
Cash and Due from Depository Institutions xxx
Securities xxx
Trading Account Securities xxx
Gross Loans and Leases xxx
(Less) Allowance for Loans & Leases Loss )xx(
(Less) Unearned Income )xx(
Net Loans and Leases xxx
Federal Funds Sold & Reserves Rep. Agrees. xxx
Bank Premises and Fixed Assets xxx
Other Real Estate Owned xxx
Goodwill and Other Intangibles xxx
All Other Assets xxx
Total Assets xxxx
:The Balance Sheet (Representation) )4/3(
Bank Balance Sheet
As on XX December 20XX
Liabilities & Equity Capital:
Liabilities:
Deposits xxx
Other Borrowed Funds xxx
Federal Funds Purchased & Repurchased Agrees. xxx
All Other Liabilities xxx
Total Liabilities xxxx
Equity Capital:
Preferred Stock xxx
Common Stock xxx
Surplus xxx
Retained Earnings xxx
Other Equity xxx
Total Equity Capital xxxx
Total Liabilities & Equity Capital xxxx
Questions
Thank You
Ibn.khaldun.1976@gmail.com + (2)
Dr. Mohammad Samir

Bank Management - Lecture 04

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Bank Management - Lecture 04

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Dr. Mohammad Samir Mahmoud

By the end of this lecture, students will be able to:

• Analyze financial information for depository financial institutions.

decision making within these contexts.

Commercial Bank Financial Statements:

• The Balance Sheet.

• The Income Statement.

ownership interest of stockholders (Equity).

Assets = Liabilities + Equity

Most Liquid Item

Least Liquid Item

Bank Balance Sheet

NONINTEREST CASH LOANS & LEASES

Bank’s Reserve Account held with Central Bank

SECURITIES FED FUNDS

02 • Held-To-Maturity Securities (HTM).

TRADING ACCOUNT OTHER ASSETS

All Other Assets.

(1) Noninterest Cash & Due from Depository Institutions:

(1) Noninterest Cash & Due from Depository Institutions:

Noninterest Cash and Due from Depository Institutions includes:

• Cash items in the Process of Collection (CIPC).

• Bank’s Reserve Account held with Central Bank.

balances used to meet legal reserve requirements.

NONINTEREST CASH LOANS & LEASES

Bank’s Reserve Account held with Central Bank

SECURITIES FED FUNDS

02 • Held-To-Maturity Securities (HTM).

TRADING ACCOUNT OTHER ASSETS

All Other Assets.

Available-for-Sale (AFS) Held-to-Maturity

NONINTEREST CASH LOANS & LEASES

Bank’s Reserve Account held with Central Bank

SECURITIES FED FUNDS

02 • Held-To-Maturity Securities (HTM).

TRADING ACCOUNT OTHER ASSETS

All Other Assets.

(3) Trading Accounts Securities (TAS):

Stocks (Short-term Investment).

periods, such as a few days.

NONINTEREST CASH LOANS & LEASES

Bank’s Reserve Account held with Central Bank

SECURITIES FED FUNDS

02 • Held-To-Maturity Securities (HTM).

TRADING ACCOUNT OTHER ASSETS

All Other Assets.

• Loans are the major asset in most commercial banks’ portfolios.

source of repayment, and type of collateral.

• Loans Repayment: May be repaid Periodically or as a Lump Sum.

1) Commercial (Business) Loans.

2) Consumer (Household) Loans.

4) Real Estate Loans.

5) Financial Initiations Loans.

6) Foreign or International Loans (Extended to foreign governments and institutions).

return for a series of rental payments).

NONINTEREST CASH LOANS & LEASES

Bank’s Reserve Account held with Central Bank

SECURITIES FED FUNDS

02 • Held-To-Maturity Securities (HTM).

TRADING ACCOUNT OTHER ASSETS

All Other Assets.