Analyzing A Bank’s Financial Statements


James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company’s operational, financial and business management issues. James has been writing business and finance related topics for work.chron,, and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.The market values of the assets, liabilities, and stockholder’s equity may greatly different from the reported book values. As such, while it is important to begin to paint a picture of a firm’s financial health from its balance sheet, an analyst should not think of this as a complete picture.Accrued liabilities are expenses that have occurred over the course of a set period, but have not been paid or recorded under accounts payable. Employee wages aren’t paid ahead of time, but are compensation for work already provided. Take for example, a company whose payroll cycle occurs once per month. Charging an employee’s pay in June as an expense for June is inaccurate. You are technically paying for the employee’s work he or she performed in May.For example, banks can sell some of the loans they make in the secondary loan market, as described earlier, and instead hold a greater share of assets in the form of government bonds or reserves. Nevertheless, in a lengthy recession, most banks will see their net worth decline because a higher share of loans will not be repaid in tough economic times. The final entry under assets is reserves, which is money that the bank keeps on hand, and that is not loaned out or invested in bonds—and thus does not lead to interest payments. The Federal Reserve requires that banks keep a certain percentage of depositors’ money on “reserve,” which means either in the banks’ own vaults or as deposits kept at the Federal Reserve Bank. It’s vital that banks diversify their revenue streams by earning income from non-interest rate related products to shield them from any negative moves in yields. Income under this category includes bank account and service fees, trust income, loan and mortgage fees, brokerage fees and wealth management services income, and income from trading operations.

Beyond The Importance Of Financial Statements To Creditors

Chase Smith recommends enlisting a bookkeeper for day-to-day accounting but suggests tapping a CPA to prepare and analyze statements to help plan your financial future. A number of empirical studies have documented the balance sheet effect, in particular the finding that the combination of foreign-currency debt plus devaluation is indeed contractionary. It is not appropriate both to restate the capital expenditure financed by borrowing and to capitalise that part of the borrowing costs that compensates for inflation during the same period. While a bank will quite obviously seek to avoid negative capitalization, i.e., insolvency, finding the optimum mix between debt and equity is complex. The non-performance loan ratio indicates what percentage of loans that are at risk of failing. The comparison of provisions for insolvency against the total amount of loans granted gives an idea of the possible coverage of future contingencies. Access your full business credit scores & reports, including the FICO SBSS — the score used to pre-screen SBA loans.When using the accrual method of accounting, interest expenses and liabilities are recorded at the end of each accounting period instead of recording the interest expense when the payment is made. You can do this by adjusting entry to match the interest expense to the appropriate period. Also, this is also a result of reporting a liability of interest that the company owes as of the date on the balance sheet. Along with diversifying their loans, banks have several other strategies to reduce the risk of an unexpectedly large number of loan defaults.

analyzing a bank's financial statements

Get your full business credit reports & scores, PLUS Nav reports your account payments to the business bureaus as a tradeline. In addition to these three documents, business loan lenders will also review your business and personal tax returns over the past three years. They will also review your cash flow forecast to ensure your business is solvent and has enough cash flow to cover its expenses . The income statement reveals whether the company provides a premium product with a high profit margin but relatively low volume or pursues a discounted price/high volume strategy. These reveal whether the profit figures are sustainable over the coming quarters and years, given the expected shifts in the competitive landscape and the broader economy.

Leverage And Risk

To balance this out, you record the payroll as an accrued expense, as it reflects that it is a payment for May even though the check doesn’t get cut until June. How can banks protect themselves against an unexpectedly high rate of loan defaults and against the risk of an asset-liability time mismatch? One strategy is for a bank to diversify its loans, which means lending to a variety of customers. For example, suppose a bank specialized in lending to a niche market—say, making a high proportion of its loans to construction companies that build offices in one downtown area. If that one area suffers an unexpected economic downturn, the bank will suffer large losses. However, if a bank loans both to consumers who are buying homes and cars and also to a wide range of firms in many industries and geographic areas, the bank is less exposed to risk.

  • In contrast, a firm that is funded by equity can, if its financial circumstances require, miss a dividend payment to shareholders without being declared insolvent.
  • When recording periodic loan payments, first apply the payment toward interest expense and then debit the remaining amount to the loan account to reduce your outstanding balance.
  • This means that a bank’s balance sheet is somewhat different from a company that is not a financial institution.
  • Most banks provide this type of table in their annual 10K statement.
  • The remaining money would belong to the shareholders, or the owners, of the business.

Specifically, the bank owes any deposits made in the bank to those who have made them. The net worth, or equity, of the bank is the total assets minus total liabilities. Net worth is included on the liabilities side to have the T account balance to zero.

How Debt Financing Impacts A Company’s Balance Sheet

The short-term notes to indicate what is owed within a year and long-term notes for the amount payable after the year. If the loan is expected to be paid in less than a year, there will be no long-term notes. Figure 1 illustrates a hypothetical and simplified balance sheet for the Safe and Secure Bank.

analyzing a bank's financial statements

This asset-liability time mismatch—a bank’s liabilities can be withdrawn in the short term while its assets are repaid in the long term—can cause severe problems for a bank. For example, imagine a bank that has loaned a substantial amount of money at a certain interest rate, but then sees interest rates rise substantially. If it does not raise the interest rate it pays to depositors, then deposits will flow to other institutions that offer the higher interest rates that are now prevailing. Clearly, the bank cannot survive in the long term if it is paying out more in interest to depositors than it is receiving from borrowers. The reported financial statements for banks are somewhat different from most companies that investors analyze. For example, there are no accounts receivables or inventory to gauge whether sales are rising or falling.

Everything To Know About Your Business Balance Sheet

Its value is equivalent to the difference between the products and financial costs, and institutions’ strategy is to obtain the lowest cost for others’ money and the highest income from funds lent to third parties. Accountants, lenders, and creditors will review your balance sheet to analyze your company’s financial performance. The balance sheet is also used in accounting calculations to determine your debt-to-income ratio and your accounts receivable ratio.

What Is “due From Shareholder” On A Balance Sheet?

Also, as interest rates rise, banks tend to earn more interest income on variable-rate loans since they can increase the rate they charge borrowers as in the case of credit cards. However, exceedingly high-interest rates might hurt the economy and lead to lower demand for credit, thus reducing a bank’s net income.We can see that BofA’s revenue is well balanced with roughly half of the bank’s revenue coming from fee and service income. In addition to drafting a balance sheet, it’s important to prepare an income statement. The income statement will show how well your company is currently performing. Overhead expenses are typically comprised of many items, including utility bills and payroll.When currency mismatch is combined with a major devaluation, otherwise solvent firms have trouble servicing their debts. They may have to lay off workers and close plants or go bankrupt altogether. Such weak balance sheets have increasingly been fingered in many models, not only as the major contractionary effect in a devaluation, but also as a fundamental cause of currency crises in the first place. The group also enters into operating leases, provides guarantees, letters of credit, and warranties. A bank balance sheet is a key way to draw conclusions regarding a bank’s business and the resources used to be able to finance lending. The volume of business of a bank is included in its balance sheet for both assets and liabilities .A portfolio lender is an institution that originates mortgage loans and holds a portfolio of loans instead of selling them in the secondary market. In essence, this allowance can be viewed as a pool of capital specifically set aside to absorb estimated loan losses. This allowance should be maintained at a level that is adequate to absorb the estimated amount of probable losses in the institution’s loan portfolio. Securities are typically short-term investments that the bank earns a yield from that include U.S. Total interest earned was $57.5 billion for the bank from their loans and all investments and cash positions. Here’s a breakdown of those terms as well as valuable tips, resources, and examples to help you create a snapshot of your business financials.Methods to advance strategic plans, and with today’s technology, can easily be entered into a financial calculator. Hence some variants of PPP structures just cover the construction phase, with the Facility reverting to public-sector control thereafter (cf. On the other hand, if the lessor is the economic owner, this is known as an ‘operating lease’ and the asset remains on the lessor’s balance sheet. The short-term car rental mentioned above comes into this category.In effect, the safety net acts as a subsidy that contributes to banks’ preference for debt over equity. As a result of these factors, banks typically have very low levels of capital when compared to other types of firms. Your income statement lists the revenues, expenses, and profits and losses accrued during a specific time period. It gives a quick picture of what profits your business is generating. Unlike a balance sheet, it doesn’t show your liabilities and debt. A lender wants to know that your daily operations will generate enough cash to repay the loan, reports Bizfilings, so along with the income statement, the bank also studies the cash flow statement. This statement details the sources of cash inflows as well as outflows.