Bank Accounting Essentials

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Bank Accounting Essentials Presented By Your State Banking Association 1

KEY TOPICS Accounting Information System Defining Accounting and Role of Accounting in Decision Making Forms of Business Organizations Decision Makers: The Users of Accounting Information Accounting Equation of Assets, Liabilities, Equity, Income, and Expenses Generally Accepted Accounting Principles Introduction of Financial Statements: Balance Sheet, Income Statement, Statement of Stockholders Equity, Statement of Comprehensive Income, Statement of Cash Flows Recording Financial Transactions Double-Entry System of Debits and Credits Recording and Posting Transactions Measuring Financial Income Accrual Accounting The Basics of Financial Statements Reading and Understanding the Financial Statements Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition 2 2

Definition of Accounting Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. Users of accounting information may be internal or external to the organization. 3 3

Role of Accounting in Decision Making Accounting information system tracks and reports the results of the business activities: Financing borrowing money or selling shares of stock to investors. To whom the company owes money are creditors. Creditors claims on the business are liabilities. A corporation may also obtain funds by selling shares of stock to investors. Creditors have legal right to be paid in accordance to the terms of the agreement. Creditor claims are required to be paid before ownership claims. Payments to stockholders are called dividends. Dividends are paid as long as the corporation has sufficient cash to pay creditors. Also, once stock is issued, the corporation has no obligation to buy the shares of stock back. Investing Once the cash is obtained, assets may be purchased for the operations of the business. Assets may be purchased also for the purpose of investing for the business. Operating After the assets are obtained, the organization may begin its operating activities. Revenue is the increase of assets arising from the sale of a product or service. Expenses are the cost of assets consumed or services used in the process of generating revenue. When revenue exceeds expenses, net income is the result. 4 4

Forms of Business Organizations Sole Proprietorship a business owned by one individual. A sole proprietorship is simple to establish and is owner controlled. Sole proprietor is legally liable for all debts of the business. Partnership a business owned by more than one individual. A partnership is also simple to establish and the control is shared. Partners are legally liable for all debts of the partnership. Corporation a business organization that is a separate legal entity owned by stockholders. A corporation is relatively easier to raise funds and transfer ownership. Corporate stockholders are not legally liable for all debts of the corporation. 5 5

Decision Makers: The Users of Accounting Information Individuals that have an interest in the ongoing activities of he business are the users of the accounting information. Internal users includes departmental personnel, management, Board of Directors. Questions asked by internal users include: o Is profitability sufficient to pay bonuses? o Is cash sufficient to pay the bills? o Which products or services are profitable? o What is the value of investments owned by the business? o Have facilities expenses increased from last year? Accounting information that may be provided to internal users are projections of income of services or products, income and expense variance analysis, and forecasts of cash needs. External users include investors, creditors, regulatory agencies, taxing authorities, customers. Questions asked by external users include: o Is the bank complying with regulatory capital requirements? o Is the business complying with tax rules? o Is the business profitable? o Does the bank appear to be sustainable? 6 6

Introduction of Financial Statements: Balance Sheet 7 7

Introduction of Financial Statements: Balance Sheet, Income Statement, Statement of Cash Flows 8 8

Accounting Equation Balance sheet reports assets and claims to the assets at a specific point in time. Assets must be balanced by the claims to the assets. Claims of creditors are liabilities. Claims of owners are stockholders equity. Stockholders equity consists of common stock and retained earnings. Accounting Equation Assets = Liabilities + Stockholders Equity Economic events to be recorded in the financial statements is accounting transactions. An accounting transaction occurs when assets, liabilities, or stockholders equity change as a result of an economic event. The accounting equation must always balance. Each transaction has a dual or double sided effect on the equation. For example, if an asset is increased, there must be a decrease in another asset, or increase in a liability, or increase in stockholders equity. 9 9

Accounting Equation Accounting Equation Assets = Liabilities + Stockholders Equity Example ~ On March 5, 2015, purchase of supplies on credit for $4,500. Basic Analysis: Supplies is increased for $4,500. Accounts payable is increased for $4,500. Acctg Equation: Assets = Liabilities + Stockholders Equity Supplies = Accounts Payable $4,500 = $4,500 Example ~ On March 15, 2015, paid employee salaries of $8,100. Basic Analysis: Cash is decreased $8,100. Salaries expense is increased $8,100. Acctg Equation: Assets = Liabilities + Stockholders Equity Cash = Salaries Expense ($8,100) = ($8,100) 10 10

Generally Accepted Accounting Principles Preparing financial statements is based on certain assumptions and generally accepted accounting principles ( GAAP ). Assumptions Monetary unit only those transactions or events that can be expressed in money are reflected in the accounting records. Economic entity every economic entity can be identified and accounted for. Time period the life of a business can be reported in time periods and reports covering those periods may be produced. Going concern assumption that the business will remain in operation for the foreseeable future. Otherwise, assets would be valued on balance sheet at liquidation value. Principles Cost principle assets are recorded at cost. Full disclosure principle all circumstances and events that would make a difference to financial statement users should be disclosed. Revenue recognition revenue should be recognized in the period in which it is earned. In a service company, revenue is earned in the period in which it is earned. Matching expenses should be recorded in the time period in which efforts were expended to generate the revenue. 11 11

Introduction of Financial Statements: Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows Balance Sheet As of a point in time, assets owed by the business and monies owed (liabilities). Income Statement Revenue (interest income, noninterest income) earned and expenses (interest expense, noninterest expense, provision for loan losses) incurred for a period of time. Statement of Retained Earnings Dividends distributed to owners and capital retained in business for future growth. Statement of Cash Flows sources and uses of cash for a period of time. Interrelationships of Financial Statements 12 12

Introduction of Financial Statements: Balance Sheet 13 13

Introduction of Financial Statements: Balance Sheet, Income Statement, Statement of Cash Flows 14 14

Introduction of Financial Statements: Income Stmt 15 15

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Introduction of Financial Statements: Stmt of Comprehensive Income 17 17

Introduction of Financial Statements: Consolidated Stmt of Stockholders Equity 18 18

Introduction of Financial Statements: Consolidated Stmt of Cash Flows 19 19

Introduction of Financial Statements: Consolidated Stmt of Cash Flows 20 20

The following consolidated statement of income, balance sheet, and changes in stockholders equity were downloaded from investor.shreholder.com for JP Morgan Chase & Co. 21 21

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Recording Financial Transactions: Double Entry System of Debits and Credits Accounting information systems use accounts. An account is an individual accounting record of increases and decreases to a specific asset, liability, stockholders equity, income, or expense item. An account consists of the title of the account, left or debit side, and right or credit side. Because the alignment of these items resemble a T, it is referred to as a T account. Debit (Dr.) means left. Credit (Cr.) means right. These terms do not mean increase and decrease. Debit and credit are used in the recording process to indicate where entries are made in accounts. Entering an amount on the left side of an account is called debiting the account and entering an amount on the right side of an account is called crediting the account. When comparing the totals of the debit (left) side and credit (right) side, the account will have a debit balance if the total debits exceed the total credits. Conversely, an account will have a credit balance if the total credits exceed the total debits. 25 25

Recording Financial Transactions: Double Entry System of Debits and Credits Normal Balances: Assets Liabilities Debit Credit Debit Credit Increase Decrease Decrease Increase Normal Balance Normal Balance Contra-Asset (Allow for Loan Losses) Retained Earnings Debit Credit Debit Credit Decrease Increase Decrease Increase Normal Balance Normal Balance 26 26

Recording Financial Transactions: Double Entry System of Debits and Credits Normal Balances: Retained Earnings Debit Decrease Credit Increase Normal Balance Income) Expenses(incl Interest Exp, Provision, Noninterest Exp) Revenue (Interest Income, Noninterest Debit Credit Debit Credit Increase Decrease Decrease Increase Normal Balance Normal Balance 27 27

Recording Financial Transactions: Double Entry System of Debits and Credits Would Common Stock be increased by debit or credit? What is its normal balance? Common Stock Debit Credit Would Dividends be increased by debit or credit? What is its normal balance? Dividends Debit Credit 28 28

Recording Financial Transactions: Double Entry System of Debits and Credits For the Bank, what is the normal balance for Accumulated Depreciation? Accumulated Depreciation Depreciation Expense Debit Credit Debit Credit For the Bank, what is the normal balance for deposits? Deposits Debit Credit 29 29

Recording Financial Transactions: Double Entry System of Debits and Credits Example ~ Transaction: Purchase of US Treasury for $10,000. Basic Analysis: US Treasury (Investments) is increased for $10,000. Cash is decreased for $10,000. What is the impact on the Acctg equation? Acctg Equation: Assets = Liabilities + Stockholders Equity How should the transaction be recorded in the T accounts? What accounts should the transaction be recorded to? Account Account Debit Credit Debit Credit 30 30

Recording Financial Transactions: Double Entry System of Debits and Credits Example ~ SOLUTION Transaction: Purchase of US Treasury for $10,000. Basic Analysis: US Treasury (Investments) is increased for $10,000. Cash is decreased for $10,000. Acctg Equation: Assets = Liabilities + Stockholders Equity Investments = $10,000 = Cash = ($10,000) = $0 = $0 Dr/Cr Analysis: Debit increases investments. Credit decreases cash. T Accounts: Investments Cash Debit Credit Debit Credit $10,000 $10,000 31 31

Recording Financial Transactions: Double Entry System of Debits and Credits Example ~ Transaction: Purchase of workmans compensation insurance on Jun 1, 2015 expiring Aug 31, 2015. Basic Analysis: Acctg Equation: Assets = Liabilities + Stockholders Equity Dr/Cr Analysis: T Accounts: Account Account Debit Credit Debit Credit 32 32

Recording Financial Transactions: Double Entry System of Debits and Credits Example ~ SOLUTION Transaction: Purchase of workmans compensation insurance for $6,000 on Jun 1, 2015 expiring Aug 31, 2015. Basic Analysis: Workmans compensation insurance increases $6,000. Cash decreases $6,000. Acctg Equation: Assets = Liabilities + Stockholders Equity Prepaid Insurance = $6,000 = Cash = ($6,000) = $0 = $0 Dr/Cr Analysis: Debit increases prepaid insurance. Credit decreases cash. T Accounts: Prepaid Insurance Cash Debit Credit Debit Credit $6,000 $6,000 33 33

Recording Financial Transactions: Recording and Posting Transactions Steps to recording transactions: 1. Analyze the transaction. 2. Enter the transaction into a journal. Companies use different journals based on the nature of the transaction. Though each business has a general journal. Transactions are entered into a journal before they are transferred to the accounts. The journal discloses the complete transaction, provides a chronological record of transactions, and helps to locate errors because the journal allows to readily see the debits and credits. 3. Transfer the journal information to the appropriate accounts in the general ledger. 34 34

Bank General Journal 2015 Date Account Titles and Explanations Debit Credit Jul 01 Cash Common Stock Cash invested in Bank by investors $100,000 $100,000 Jul 03 Investments Cash Purchase of investments $20,000 $20,000 Jul 05 Supplies Cash Purchase of supplies $11,000 $11,000 Jul 07 Cash Other Liability Received deposit in advance from commercial customer $3,000 $3,000 35 35

Bank General Ledger Account Account No Cash 1000 Date 2015 Account Titles and Explanations Debit Credit Balance $125,000 Jul 01 Cash invested in business $100,000 Jul 03 Purchase of investments $20,000 Jul 05 Purchase of supplies $11,000 Jul 07 Received customer deposit in advance $3,000 Jul 15 Purchase of equipment $150,000 Jul 15 Jul 31 Payment of salaries $22,000 $25,000 Loans 1200 Jul 31 $130,000 Supplies 1300 $129,000 Jul 05 Purchase of supplies $11,000 Jul 31 $140,000 Equipment 1500 $250,000 Jul 15 Purchase of equipment $150,000 Jul 31 $400,000 Land 3000 Jul 31 $300,000 Building 3100 Jul 31 $480,000 36 36

Recording Financial Transactions: Recording and Posting Transactions Example ~ Transaction: Purchase of workmans compensation insurance for $6,000 on Jun 1, 2015 expiring Aug 31, 2015. Basic Analysis: Workmans compensation insurance increases $6,000. Cash decreases $6,000. Journal Entry: Jun 1 Prepaid Insurance $6,000 Cash $6,000 Purchase of workmans comp prepaid insurance. Posting to Accounts in General Ledger: Prepaid Insurance Cash Jun 1 $6,000 Jun 1 $6,000 37 37

Recording Financial Transactions: Recording and Posting Transactions Example ~ Transaction: Purchase of US Treasury for $10,000. Basic Analysis: US Treasury (Investments) is increased for $10,000. Cash is decreased for $10,000. Journal Entry: Jun 1 Investments $10,000 Cash $10,000 Purchase of US Treasury investment. Posting to Accounts in General Ledger: Investments Cash Jun 1 $10,000 Jun 1 $10,000 38 38

Measuring Financial Income: Accrual Accounting Accrual Basis Accounting - Transactions that change a business financial statements are recorded in the period in which the event occurs and not the period in which the business receives or pays cash. Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Accounting revenue is recorded when cash is received. Expenses are recorded when cash is paid. Example ~ Received payment of $14,000 in May 2015 for interest income due as of April 2015. What is the impact on the income statement under cash basis? April 2015 May 2015 Interest Income $14,000 increase Expense 0 Net Income $14,000 increase In which month does the cash get recorded? What is the impact on the balance sheet for April and May 2015? April 2015 May 2015 Assets (Cash) $14,000 increase 39 39

Measuring Financial Income: Accrual Accounting Accrual Basis Accounting - Transactions that change a business financial statements are recorded in the period in which the event occurs and not the period in which the business receives or pays cash. Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Accounting revenue is recorded when cash is received. Expenses are recorded when cash is paid. Example ~ Received payment of $14,000 in May 2015 for interest income due as of April 2015. What is the impact on the income statement under accrual basis? April 2015 May 2015 Interest Income Expense Net Income $14,000 increase $14,000 increase In which month does the cash get recorded? What is the impact on the balance sheet for April and May 2015? April 2015 May 2015 Assets (Accrued Int Receiv)$14,000 increase Assets (Cash) Assets (Accrued Int Receivable) $14,000 increase $14,000 decrease 40 40

Measuring Financial Income: Accrual Accounting Accrual Basis Accounting - Transactions that change a business financial statements are recorded in the period in which the event occurs and not the period in which the business receives or pays cash. Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Accounting revenue is recorded when cash is received. Expenses are recorded when cash is paid. Example ~ Bank owes deposit customers total of $200,000 interest for month of April. Interest is credited to customer statements 5 th day of following month. What is the impact on the income statement under cash basis? April 2015 May 2015 Expense Net Income $200,000 increase $200,000 decrease In which month does the cash get recorded? What is the impact on the balance sheet for April and May 2015? April 2015 May 2015 Assets (Cash) $200,000 decrease 41 41

Measuring Financial Income: Accrual Accounting Accrual Basis Accounting - Transactions that change a business financial statements are recorded in the period in which the event occurs and not the period in which the business receives or pays cash. Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Accounting revenue is recorded when cash is received. Expenses are recorded when cash is paid. Example ~ Bank owes deposit customers total of $200,000 interest for month of April. Interest is credited to customer statements 5 th day of following month. What is the impact on the income statement under accrual basis? April 2015 May 2015 Interest Income Expense Net Income $200,000 increase $200,000 decrease In which month does the cash get recorded? What is the impact on the balance sheet for April and May 2015? April 2015 May 2015 Liabs (Accrued Int Pay)$200,000 increase Assets 2016 Crowe (Cash) Horwath LLP Assets (Accrued Int Pay) $200,000 decrease $200,000 decrease 42 42

Measuring Financial Income: Accrual Accounting Accrual Basis Accounting - Transactions that change a business financial statements are recorded in the period in which the event occurs and not the period in which the business receives or pays cash. Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Accounting revenue is recorded when cash is received. Expenses are recorded when cash is paid. Example ~ Paid employee compensation of $23,000 on May 1, 2015 for work performed in April 2015. What is the impact on the income statement under cash basis? April 2015 May 2015 Revenue Expense Net Income $23,000 increase $23,000 decrease In which month does the cash get recorded? What is the impact on the balance sheet for April and May 2015? April 2015 May 2015 Assets (Cash) $23,000 decrease 43 43

Measuring Financial Income: Accrual Accounting Accrual Basis Accounting - Transactions that change a business financial statements are recorded in the period in which the event occurs and not the period in which the business receives or pays cash. Revenues are recognized when earned and expenses are recognized when incurred. Cash Basis Accounting revenue is recorded when cash is received. Expenses are recorded when cash is paid. Example ~ Paid employee compensation of $23,000 on May 1, 2015 for work performed in April 2015. What is the impact on the income statement under accrual basis? Revenue Expense $23,000 increase Net Income ($23,000) April 2015 May 2015 In which month does the cash get recorded? What is the impact on the balance sheet for April and May 2015? April 2015 May 2015 Liabilities (Accrued Compensation)$23,000 increase Assets (Cash) $23,000 decrease Liabilities (Accrued Compensation) $23,000 decrease 44 44

Problem from Transaction Analysis to Posting to General Ledger Example ~ Transaction: On Jul 1, 2015, received invoice from Ad Agency for ad placed in magazine on May 16, 2015 to advertise new Bank product. Basic Analysis: Acctg Equation: Assets = Liabilities + Stockholders Equity Dr/Cr Analysis: T Accounts: 45 45

Problem from Transaction Analysis to Posting to General Ledger Example ~ Transaction: On Jul 1, 2015, received invoice from Ad Agency for ad placed in magazine on May 16, 2015. Journal Entry: Posting: 46 46

Problem from Transaction Analysis to Posting to General Ledger - Solution Example ~ SOLUTION Transaction: On Jul 1, 2015, received invoice from Ad Agency for ad placed in magazine on May 16, 2015 for $2,600 to advertise Bank s new product. Basic Analysis: Owe for advertising invoice $2,600. Acctg Equation: Assets = Liabilities + Stockholders Equity = Accounts Payable + $2,600 Advertising expense ($2,600) $0 = $0 Dr/Cr Analysis: Debit increases advertising expense. Credit increases accounts payable. T Accounts: Advertising expense Accounts payable Debit Credit Debit Credit $2,600 $2,600 47 47

Problem from Transaction Analysis to Posting to General Ledger - Solution Example ~ SOLUTION Transaction: On Jul 1, 2015, received invoice from Ad Agency for ad placed in magazine on May 16, 2015. Journal Entry: Jul 01 Advertising expense $2,600 Accounts payable $2,600 Receipt of invoice for ad. Posting to Accounts in General Ledger: Advertising expense Accounts payable Jul 01 $2,600 Jul 01 $2,600 48 48

Problem from Transaction Analysis to Posting to General Ledger Example ~ Transaction: On Jul 18, 2015, a customer deposited $1,050 at the Bank. For the Bank, what is the transaction? Basic Analysis: Acctg Equation: Assets = Liabilities + Stockholders Equity Dr/Cr Analysis: T Accounts: 49 49

Problem from Transaction Analysis to Posting to General Ledger Example ~ Transaction: On Jul 18, 2015, a customer deposited $1,050 at the Bank in a money market account. For the Bank, what is the transaction? Journal Entry: Posting to Accounts in General Ledger: 50 50

Problem from Transaction Analysis to Posting to General Ledger - Solution Example ~ Solution Transaction: On Jul 18, 2015, a customer deposited $1,050 at the Bank in a money market. For the Bank, what is the transaction? Basic Analysis: Bank received cash. Cash increased. Bank owes the customer the money back at some point. Acctg Equation: Assets = Liabilities + Stockholders Equity Cash = Deposits $1,050=$1,050 Dr/Cr Analysis: Debit increases cash. Credit increases liabilities (deposits). T Accounts: Cash Deposits (MMA) Debit Credit Debit Credit $1,050 $1,050 51 51

Journal Entries Example Transaction: On Jul 18, 2015, a customer withdrew $3,100 from their savings account. For the Bank, what is the transaction? Journal Entry: Jul 18 Example Transaction: On Jul 31, 2015, a customer closed their NOW account. Balance was $2,200. $.92 interest owed. For the Bank, what is the transaction? Journal Entry: Jul 31 52 52

Journal Entries - Solution Example Transaction: On Jul 18, 2015, a customer withdrew $3,100 from their savings account. For the Bank, what is the transaction? Journal Entry: Jul 18 Deposits (Sav) $3,100 Cash $3,100 Withdrew funds from Savings account. Example Transaction: On Jul 31, 2015, a customer closed their NOW account. Balance was $2,200. $.92 interest owed. For the Bank, what is the transaction? Journal Entry: Jul 31 Deposits (NOW) $2,200 Interest Pay $.92 Cash $2,200.92 Withdrew funds from Savings account. Jul 31 Interest Exp (NOW) $.92 Interest Pay $.92 System auto accrues interest. 53 53

Basics of Financial Statements: Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition Three basic tools to analyzing financial statements is: 1. Horizontal analysis 2. Vertical analysis 3. Ratio analysis Horizontal analysis evaluate financial statement data over period of time. The purpose is to determine the increase or decrease as a percentage of dollars or percentage. Percentage Change = (Current year amount Base year amount) / (Base year amount) Vertical analysis evaluate financial statement data that expresses each item in a financial statement as a percent of a base amount. Total assets (and total liabilities and equity) is stated as 100% and other data items are compared to total assets (total liabilities and equity). 54 54

Basics of Financial Statements: Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition Horizontal Analysis Bank Balance Sheet Horizontal Analysis 2015 2014 Increase (Decrease) Amount % Cash 12473 12615-142 -1% Int bearing deposits 751 116 635 547% Int bearing time deposits 250 250 0 0% Avail for sale securities 170630 184586-13956 -8% Loans, net of allow for loan losses 356194 329924 26270 8% Premises and equipment 4800 5124 FHLB Stock 5425 5425 Foreclosed assets 50 436 Accrued interest receivable 1673 1788 Bank owned life insurance 8289 8025 Mortgage servicing rights 505 506 Deferred income taxes 2249 2059 Other 379 489 Total Assets 563668 551343 Deposits Demand 17173 16705 Savings, NOW 150759 132638 Certificates of deposit 208051 219675 Brokered certif of deps 39561 35575 Repurchase agreements 4024 2324 FHLB advances 58000 56750 Advances from borrowers for taxes and ins 955 997 Accrued post retirement benefit obligation 2654 2387 Accrued interest pay 65 96 Other 1990 2110 Total Liabilities 483232 469257 Common Stock 41 44 Addl paid in capital 47009 46689 Unearned ESOP -3079-3272 Retained earnings 35466 37544 Accum other comprehensive income, net of tax 999 1081 Total Stockholders Equity 80436 82086 Total Liabs and Stockholders Equity 563668 551343 55 55

Basics of Financial Statements: Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition Horizontal Analysis - Solution Bank Balance Sheet Horizontal Analysis 2015 2014 Increase (Decrease) Amount % Cash 12473 12615-142 -1% Int bearing deposits 751 116 635 547% Int bearing time deposits 250 250 0 0% Avail for sale securities 170630 184586-13956 -8% Loans, net of allow for loan losses 356194 329924 26270 8% Premises and equipment 4800 5124-324 -6% FHLB Stock 5425 5425 0 0% Foreclosed assets 50 436-386 -89% Accrued interest receivable 1673 1788-115 -6% Bank owned life insurance 8289 8025 264 3% Mortgage servicing rights 505 506-1 0% Deferred income taxes 2249 2059 190 9% Other 379 489-110 -22% Total Assets 563668 551343 12325 2% Deposits Demand 17173 16705 468 3% Savings, NOW 150759 132638 18121 14% Certificates of deposit 208051 219675-11624 -5% Brokered certif of deps 39561 35575 3986 11% Repurchase agreements 4024 2324 1700 73% FHLB advances 58000 56750 1250 2% Advances from borrowers for taxes and ins 955 997-42 -4% Accrued post retirement benefit obligation 2654 2387 267 11% Accrued interest pay 65 96-31 -32% Other 1990 2110-120 -6% Total Liabilities 483232 469257 13975 3% Common Stock 41 44-3 -7% Addl paid in capital 47009 46689 320 1% Unearned ESOP -3079-3272 193-6% Retained earnings 35466 37544-2078 -6% Accum other comprehensive income, net of tax 999 1081-82 -8% Total Stockholders Equity 80436 82086-1650 -2% Total Liabs and Stockholders Equity 563668 551343 12325 2% 56 56

Basics of Financial Statements: Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition Vertical Analysis Bank Balance Sheet Vertical Analysis 2015 2014 Amount % Amount % Cash 12473 2% 12615 Int bearing deposits 751 0% 116 Int bearing time deposits 250 0% 250 Avail for sale securities 170630 30% 184586 Loans, net of allow for loan losses 356194 63% 329924 Premises and equipment 4800 1% 5124 FHLB Stock 5425 1% 5425 Foreclosed assets 50 0% 436 Accrued interest receivable 1673 0% 1788 Bank owned life insurance 8289 1% 8025 Mortgage servicing rights 505 0% 506 Deferred income taxes 2249 0% 2059 Other 379 0% 489 Total Assets 563668 100.00% 551343 Deposits Demand 17173 3% 16705 Savings, NOW 150759 27% 132638 Certificates of deposit 208051 37% 219675 Brokered certif of deps 39561 7% 35575 Total Deposits 415544 74% 404593 Repurchase agreements 4024 1% 2324 FHLB advances 58000 12% 56750 Advances from borrowers for taxes and ins 955 0% 997 Accrued post retirement benefit obligation 2654 1% 2387 Accrued interest pay 65 0% 96 Other 1990 0% 2110 Total Liabilities 483232 86% 469257 Common Stock 41 0% 44 Addl paid in capital 47009 8% 46689 Unearned ESOP -3079-1% -3272 Retained earnings 35466 6% 37544 Accum other comprehensive income, net of tax 999 0% 1081 Total Stockholders Equity 80436 14% 82086 Total Liabs and Stockholders Equity 563668 100% 551343 57 57

Basics of Financial Statements: Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition Vertical Analysis - Solution Bank Balance Sheet Vertical Analysis 2015 2014 Amount % Amount % Cash 12473 2% 12615 2% Int bearing deposits 751 0% 116 0% Int bearing time deposits 250 0% 250 0% Avail for sale securities 170630 30% 184586 33% Loans, net of allow for loan losses 356194 63% 329924 60% Premises and equipment 4800 1% 5124 1% FHLB Stock 5425 1% 5425 1% Foreclosed assets 50 0% 436 0% Accrued interest receivable 1673 0% 1788 0% Bank owned life insurance 8289 1% 8025 1% Mortgage servicing rights 505 0% 506 0% Deferred income taxes 2249 0% 2059 0% Other 379 0% 489 0% Total Assets 563668 100.00% 551343 100.00% Deposits Demand 17173 3% 16705 3% Savings, NOW 150759 27% 132638 24% Certificates of deposit 208051 37% 219675 40% Brokered certif of deps 39561 7% 35575 6% Total Deposits 415544 74% 404593 73% Repurchase agreements 4024 1% 2324 0% FHLB advances 58000 12% 56750 12% Advances from borrowers for taxes and ins 955 0% 997 0% Accrued post retirement benefit obligation 2654 1% 2387 1% Accrued interest pay 65 0% 96 0% Other 1990 0% 2110 0% Total Liabilities 483232 86% 469257 85% Common Stock 41 0% 44 0% Addl paid in capital 47009 8% 46689 8% Unearned ESOP -3079-1% -3272-1% Retained earnings 35466 6% 37544 7% Accum other comprehensive income, net of tax 999 0% 1081 0% Total Stockholders Equity 80436 14% 82086 15% Total Liabs and Stockholders Equity 563668 100% 551343 100% 58 58

Basics of Financial Statements: Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition Ratio Analysis Ratio analysis includes liquidity, solvency, and profitability ratios. Liquidity ratios measure the business short term ability to pay its obligations as due and meet unexpected needs for cash. Current ratio: Current assets/current Liabilities Current cash debt coverage ratio: Cash provided by operations/avg current liabilities 59 59

Basics of Financial Statements: Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition Ratio Analysis Compute each liquidity ratio for Bank for 2015. Current ratio: Current assets/current Liabilities Current cash debt coverage ratio: Cash provided by operations/avg current liabilities Assume cash provided by operations = $ 296,000 60 60

Basics of Financial Statements: Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition Ratio Analysis - Solution Compute each liquidity ratio for Bank for 2015 Current ratio: Current assets/current Liabilities (Cash+Int bearing deposits+avail for sale securities) = $12,473+751+170,630= $183,854 Current liabilities (Demand, savings/now, advances from borrowers, accrued payables) = $17,173+955+2,654+65+150,759 = $171,606 Current ratio = 1.07 Current cash debt coverage ratio: Cash provided by operations/avg current liabilities Assume cash provided by operations = $ 296,000 Avg current liabilities = ($20,847+20,185)/2 = $171,606 Current cash debt coverage = 1.72 61 61

Basics of Financial Statements: Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition Ratio Analysis Ratio analysis includes liquidity, solvency, and profitability ratios. Solvency ratios measure the business ability to survive over a long period of time. Debt to total assets ratio: Total debt/total assets Cash debt coverage ratio: Cash provided by operations/avg total liabilities Free cash flow ratio: Cash provided by operations Capital expenditures Dividends paid 62 62

Basics of Financial Statements: Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition Ratio Analysis - Solution Compute each solvency ratio for Bank for 2015 Solvency ratios measure the business ability to survive over a long period of time. Debt to total assets ratio: Total debt/total assets $483,232/$563,668 =.86 Cash debt coverage ratio: Cash provided by operations/avg total liabilities Assume cash provided by operations = $ 296,000 $296,000/(($483,232+469257)/2) =.62 Free cash flow ratio: Cash provided by operations Capital expenditures Dividends paid Assume cash provided by operations = $ 296,000 Assume dividends paid and capital expenditures = $0 $296,000 63 63

Basics of Financial Statements: Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition Ratio Analysis Compute each profitability ratio for the Bank for 2015. Profitability ratios measure the income or success of a business for a period of time. Return on Assets: Net Income/Avg Assets Return on Equity: Net Income/Avg Equity 64 64

Basics of Financial Statements: Basic Techniques to Analyzing the Financial Statements and Evaluating the Financial Condition Ratio Analysis - Solution Compute each profitability ratio for the Bank for 2015. Profitability ratios measure the income or success of a business for a period of time. Return on Assets: Net Income/Avg Assets $3,274/(($563,668+$551,343)/2) =.0059 Return on Equity: Net Income/Avg Equity $3,274/(($80,436+82,086)/2)=.04 65 65

Questions? Thank YOU for your attendance and participation!! 66 66