Commercial Bank

Appendix 2B

Commercial Banks’ Financial Statements and Analysis

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Appendix 2B Commercial Banks’ Financial Statements and Analysis

WHY EVALUATE THE PERFORMANCE OF COMMERCIAL BANKS?

Unlike other private corporations, commercial banks (CBs) are unique in the special services they perform (e.g., assistance in the implementation of monetary policy) and the level of regulatory attention they receive. CBs are, as a result, unique in the types of assets and liabilities they hold. Like any for-profit corporation, however, the ultimate measure of a CB’s performance is the value of its common equity to its shareholders. This appendix discusses the financial statements of these institutions. Managers, 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 appendix, 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 appendix uses commercial banks to illustrate a return on equity (ROE) framework as a method of evaluating depository institutions’ profitability. The ROE framework decomposes this frequently used measure of profitability into its various component parts to identify existing or potential financial management and risk exposure problems.1 The fact that bank size and/or niche (i.e., the financial market segment the bank specializes in servicing) may affect the evaluation of financial statements is...