Bank Balance Sheet Key Terms – Quick Reference

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Commercial Bank Balance Sheet – Common Items on the Assets Side

Line Item Description Cash and Due from Banks Cash held in retail branches and ATMs; earns no interest. Tied to

Deposits on the Liabilities side. Deposits with Banks Used for short-term borrowing and lending needs between other

banks; may earn interest but rates are very low. Tied to Deposits on the Liabilities side.

Federal Funds Sold Related to the central bank’s reserve requirements – a bank must maintain a minimum level of deposits with the country’s central bank at all times. If it has an excess and other banks need to increase their reserves, it can sell its excess funds at the “Fed Funds” rate (the name is different but the idea is the same outside the US). Used to balance the balance sheet.

Securities Borrowed Used to provide funding to bank clients by borrowing their securities in the short-term. Usually tied to Securities.

Trading Assets Represents a bank’s long positions in debt and equity securities (e.g. how much they have invested with the expectation that their investment will rise in value). Also includes certain derivative instruments. Only the debt portion earns interest. These assets are marked-to-market and any gains or losses over the historical cost are reported on the income statement. Most trading assets are used for market-making activities but some may be used for proprietary trading as well. May move independently of loans and deposits.

Securities Primarily available-for-sale (AFS) securities; used to invest cash from excess deposits / funding and to manage exposure to interest rate risk. May move independently of loans/deposits, but often tied to deposits.

Gross Loans The most important line item on a bank’s balance sheet. Consists of loans issued to consumers, corporations, and institutions; the key driver of a bank’s business and where most of their interest income comes from. Reported net of charge-offs on the balance sheet. Projected via a bottoms-up loan portfolio build, or a simple growth %.

Allowance for Loan Losses How much the bank expects to lose on its total gross loans. Listed as a contra-asset in most countries; equivalent to a liability. Add new provisions for credit losses and subtract net charge-offs.

Bank Balance Sheet Key Terms – Quick Reference

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Net Loans The actual loan asset that factors into the Total Assets calculation; Gross

Loans minus Allowance for Loan Losses. Despite this, note that any balance sheet items linked to loans are projected as a percent of Gross Loans rather than Net Loans.

Accrued Interest Interest owed to the bank on interest-earning assets. Usually a % of Gross Loans.

Accounts Receivable Same as AR for a normal company; represents receivables from brokers, dealers, clearing organizations, and so on. % of Gross Loans.

Premises and Equipment Same as PP&E for a normal company, but it is much smaller (relatively) and less important for a commercial bank.

Goodwill Same as Goodwill for a normal company: the premium paid for acquisitions over the fair market value of assets. Usually held constant.

Mortgage Servicing Rights (MSR) A type of intangible asset specific to banks; MSRs represent the right to future cash flows for servicing mortgages. For example, a 3rd party lender might issue a new mortgage and then say, “Hey, can you collect principal, tax, insurance, and so on for us? We’ll pay you to help out with that.” Then when you purchase these rights, they show up on your balance sheet and you get to earn revenue from them in the future. Despite being intangible assets, these are counted as tangible assets and included in Tier 1 Capital and tangible book value – because unlike Goodwill or Other Intangibles, they represent real cash flow in the future. Add the MSR origination each year and subtract Mortgage Fees & Income on the Income Statement to get this number.

Other Intangible Assets Just like intangible assets for a normal company; for a bank they consist of items like credit card relationships and core deposit intangibles (premium paid in excess of another bank’s deposits in an acquisition). Follow the amortization schedule in the filings to get these; sometimes a portion of intangibles is allowed to count toward Tier 1 Capital.

Other Assets Consists of private equity investments, owned life insurance policies, and other miscellaneous assets; held constant or simple % growth.

Associates (Equity Investments) Just like equity investments for a normal company – investments that represent a 20% to 50% ownership in another company. Post-financial crisis and post-regulation, spun-off divisions of banks may start showing up here.

Bank Balance Sheet Key Terms – Quick Reference

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Commercial Bank Balance Sheet – Common Liabilities Line Items

Line Item Description Deposits You walk into a bank and deposit money via the ATM. That money goes

into your checking account, which is a deposit and the key liability of the bank. A bank’s business model in a nutshell: get deposits from consumers and businesses, and then use these funds to issue loans at higher interest rates to other consumers and businesses. Some deposits are interest-bearing (CDs), while others are not (free checking accounts). Always projected as a % of Gross Loans.

Federal Funds Purchased Just like Federal Funds Sold, but on the other side of the balance sheet. If a bank falls short of its central reserve requirements, it can purchase additional funds from other banks at the Fed Funds rate. Increase this to balance the balance sheet if the Liabilities & Shareholders’ Equity side falls below the Assets side.

Commercial Paper Liquidity management and short-term funding needs; low interest rates. Projected as a % of Gross Loans.

Other Borrowed Funds Liquidity management and short-term funding needs; low interest rates. Projected as a % of Gross Loans.

Trading Liabilities Represents a bank’s short positions in equity and debt securities and derivatives. For example, a trader says, “We think Company X’s share price will fall to $10, so we’re going to bet against the stock by shorting it” – the value of that short position shows up under Trading Liabilities. % of Trading Assets.

Accounts Payable Same as AP for a normal company; % of Gross Loans. Interest Payable Interest that a bank owes on borrowed money; % of Deposits,

Borrowings, or Long-Term Debt. Beneficial Interests Interest-bearing liabilities issued by VIEs (Variable Interest Entities);

these are special entities that allow banks to keep securities such as subprime mortgages off their balance sheets. Hold constant.

Long-Term Debt Same as LT debt for a normal company – may consist of Senior Notes or Subordinated Notes. Projected as a % of Gross Loans because a bank raises debt in proportion to how much it needs to issue loans.

Bank Balance Sheet Key Terms – Quick Reference

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Commercial Bank Balance Sheet – Shareholders’ Equity Line Items

Line Item Description Preferred Stock Same as Preferred Stock for a normal company: guaranteed dividends

and a higher claim to a bank’s assets than Common Stock. Often held constant; can also project by adding issuances and subtracting redemptions.

Non-Controlling Interests Same as Non-Controlling Interests or Minority Interest for a normal company – when a bank owns 50% of another company, this represents the portion they don’t own. Increase by Earnings from Non-Controlling Interests.

Common Stock The par value multiplied by all common shares outstanding. You can do the math to get the precise number here, but most of the time you hold this constant and assume that 100% of the value of new shares shows up under Capital Surplus instead.

Capital Surplus Otherwise known as APIC (Additional Paid-In Capital), this is exactly the same as for a normal company: add the value of new stock issuances and stock-based compensation.

Retained Earnings Add Net Income and subtract Dividends. If you add Net Income to Common, only subtract Common Dividends; otherwise subtract Common Dividends and Preferred Dividends.

Accumulated Other Comprehensive Income

The same as for a normal company – any miscellaneous items that don’t show up anywhere else, such as the effect of foreign exchange rate changes, unrealized gains and losses, and so on, go here.

Restricted Stock Units Insider holdings that cannot be sold easily; usually held constant in models.

Treasury Stock Represents the market value of all shares that the bank has repurchased – link to the “Shares Repurchased” line item on the CFS.