Bank Management Chapter 5

Bank Management and Financial Strategies

• Ways to increase profitability:
  • Increase the volume of services that provide fee income
  • Increase fees associated with various services
  • Shift funding sources toward less-costly borrowings
  • Reduce employee, overhead, loan-loss, and miscellaneous operating expenses
  • Reduce owed tax through improved tax management practices

Income Statement

• Components of income statement:

  • Interest income
  • Interest expenses
  • Net interest income
  • Loan loss expense
  • Noninterest income
  • Noninterest expenses
  • Net operating income and net income

• Interest income:

  • Earned from loans and security investments
  • Majority of revenues for most depository institutions

• Interest expenses:

  • Interest on deposits

• Net interest income:

  • Total interest expenses subtracted from total interest income
  • Often referred to as the interest margin
  • The gap between interest income and interest cost
  • Key determinant of profitability

• Loan loss expense:

  • Annual loan loss provision deducted from current revenues before taxes

• Noninterest income:

  • Sources of income other than revenues from loans and investment securities
  • Fees earned from fiduciary activities
  • Service charges on deposit accounts
  • Trading account gains and fees
  • Additional noninterest income (including revenues from investment banking, security brokerage, and insurance services)

• Noninterest expenses:

  • Wages, salaries, and employee benefits
  • Costs of maintaining, rental fees, and costs of furniture
  • Legal fees, office supplies expenses, and repaid costs

• Net operating income and net income:

  • Sum of interest income and net noninterest income
  • Pretax net operating income
  • Net income divided into two categories: cash dividends and retained earnings

Balance Sheet

• Components of balance sheet:

  • Assets
  • Liabilities
  • Equity capital

• Assets:

  • Cash assets
  • Investment securities
  • Trading account assets
  • Federal funds
  • Loan accounts

• Cash assets:

  • Account called Cash and Deposits Due from Bank
  • Includes vault cash, deposits with other banks, cash items in process of collection, and reserve account with the Federal Reserve
  • First line of defense against customer deposits withdrawal
  • First source of fund when a customer comes with a loan request

• Investment securities:

  • Divided into:
    • Liquid portion (short-term government securities, privately issued money market securities, interest-bearing time deposits, and commercial paper)
    • Income-generating portion (held-to-maturity securities)

• Trading account assets:

  • Securities purchased to provide short-term profits from short-term price movements
  • Reported as trading account assets

• Federal funds:

  • Includes mainly temporary loans made to other depository institutions
  • Funds for these temporary loans often come from the reserves a bank has on deposit with the Federal Reserve Bank

• Loan accounts:

  • Major asset item
  • Divided into several groups:
    • By purpose (commercial and industrial, consumer, real estate, financial institutions, foreign, agricultural production, security, and leases)
    • By maturity (short-term and long-term)
    • By collateral (secured and unsecured)
    • By pricing terms (floating-rate and fixed-rate)

• Loan losses:

  • Loan losses, both current and projected, are deducted from the amount of gross loans
  • By law, banks are allowed to build up a reserve for future loan losses, called allowance for loan losses (ALL)
  • ALL represents an accumulated reserve against uncollectable loans

• Unearned income:

  • Interest income on loans received from customer but not earned under the accrual method of accounting banks use today

This quiz covers strategies for increasing fee income, reducing expenses, and improving tax management practices in bank management. Topics include reducing operating expenses, shifting funding sources, and improving tax management practices.