Commercial Banks’ Financial Statements and Analysis.doc

Commercial Banks’ Financial Statements and Analysis 374 part three Commercial Banks WHY EVALUATE THE PERFORMANCE OF COMMERCIAL BANKS? CHAPTER OVERVIEW Unlike other private corporations, commercial banks (CBs) are unique in the special ser- vices they perform (e.g., assistance in the implementation of monetary policy) and the level of regulatory attention they receive (see Chapters 1 and 13 ). CBs are, as a result, unique in the types of assets and liabilities they hold. Like any for-profit corporation, how- ever, the ultimate measure of a CB’s performance is the value of its common equity to its shareholders. This chapter discusses the financial statements of these institutions. Man- agers, stockholders, depositors, regulators, and other parties use performance, earnings, and other measures obtained from financial statements to evaluate commercial banks. For example, the In The News box looks at how regulators use financial statement data to evaluate the overall safety and soundness of a bank. As we proceed through the chapter, notice the extent to which regulators’ evaluation of the overall safety and soundness of a bank (or their assignment of a so-called CAMELS rating) depends on financial statement data. Given the extensive level of regulation and the accompanying requirements for public availability of financial information, the financial statements of commercial banks are ideal candidates to use in examining the performance of depository institutions. This chapter uses commercial banks to illustrate a return on equity (ROE) frame- work as a method of evaluating depository institutions’ profitability. The ROE framework decomposes this frequently used measure of profitability into its various component parts Commercial Banks’ Financial Statements and Analysis L e a r n i n g G o a l s LG 1. Understand the four major categories of assets on a commercial bank’s balance sheet . LG 2. Distinguish between core deposits and pur