Analyzing a Bank’s Financial Statements: An Example

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Analyzing a bank’s financial statements means reading them differently from those of a manufacturer or retailer. A bank has no inventory or accounts receivable; its “products” are loans and deposits. Its revenue comes mainly from the spread between what it earns on loans and securities and what it pays depositors and lenders, plus fees. Bank of America’s 2024 annual report, used as the example below, shows each of these pieces at scale.

How Banks Make Money

A bank takes in deposits from consumers and businesses and pays interest on many of them. It then lends that money to households and companies or invests it in securities such as U.S. Treasuries and government agency debt. When the interest earned on those assets exceeds the interest paid on deposits and borrowings, the difference is net interest income. The size of that spread is one of the main determinants of a bank’s profit.

The second source is fees. Banks charge for checking accounts, overdrafts, ATM use, credit cards, loan and mortgage origination, trust services, brokerage and wealth management. Larger banks also earn income from trading operations. All of this is reported as non-interest income.

The split matters for analysis. Net interest income moves with interest rates and loan volume. Fee income depends on customer activity and markets, so a bank with a large fee base can hold up better when spreads narrow. For banks, revenue means net interest income plus non-interest income, not gross interest income.

What a Bank Balance Sheet Looks Like

A bank balance sheet reverses the intuition most people have from their own finances. A customer’s deposit is money the bank owes, so it is a liability. A loan is an asset that produces interest income. A certificate of deposit works the same way: the bank records it as a deposit liability and the interest it pays as interest expense.

A typical bank balance sheet contains:

Assets

• Cash and deposits with other banks, including reserves held at the central bank.
• Securities, usually interest-bearing instruments such as Treasuries and agency debt, held for liquidity and yield.
• Loans and leases, reported net of the allowance for credit losses. This is commonly the largest asset.
• Smaller items such as premises, goodwill and trading assets.

Liabilities

• Deposits: checking, savings and money market accounts, both interest-bearing and non-interest-bearing. This is usually the largest liability.
• Borrowings: short-term funding, such as repurchase agreements, and long-term debt.

Shareholders’ equity, which is small relative to total assets because banking is a leveraged business.

A healthy bank balance sheet funds loans largely with stable deposits rather than short-term wholesale borrowing, keeps a meaningful share of assets in cash and high-quality securities, sizes the allowance for credit losses to the risk in the loan book, and holds equity comfortably above regulatory minimums. Deposits are also the raw material for lending: a bank that loses them has to shrink its loans or replace the funding at a higher cost.

Case Study: Bank of America

Large banks publish a table in their annual report (Form 10-K) that combines balance sheet and income statement data. For each category of earning asset, such as loans or securities, it shows the average balance, the interest income it generated and the resulting yield. For each interest-bearing liability, such as savings or time deposits, it shows the average balance, the interest paid and the rate. Average balances are used instead of year-end figures because interest accrues throughout the year.

In Bank of America’s 2024 version of this table, interest income from loans and investments totaled $147.2 billion and interest paid on deposits was $90.5 billion.

Analyzing the Income Statement

Bank of America’s 2024 income statement reported:

• Net interest income of $56.1 billion. This is the reported spread between interest earned on loans and securities and interest paid on deposits and other funding.
• Non-interest income of $45.8 billion, covering account and service fees, trust income, loan and mortgage fees, brokerage and wealth management income, and trading.
• Net income of $27.1 billion, the profit after expenses, credit loss provisions and taxes.

Adding the first two gives the bank’s revenue. Close to half of Bank of America’s revenue that year came from fees and trading rather than lending spreads, which makes it more diversified than a bank that relies mostly on loans.

Interpreting the Balance Sheet

The 2024 balance sheet showed:

• Cash held as deposits of approximately $290 billion.
• A securities portfolio made up largely of short-term, interest-bearing government and agency instruments.
• Loans of $1.082 trillion, the largest asset category.
• Deposits as the largest liability, including checking, savings and money market accounts.

How Interest Expense Is Treated on a Bank’s Income Statement

At a nonfinancial company, interest expense is a financing cost. It appears below operating income, after the cost of goods sold and operating expenses. At a bank, interest expense is the cost of the raw material. The income statement therefore starts with total interest income, subtracts total interest expense, and reports net interest income as the first major line.

The statement then follows this order:

1. Net interest income
2. Plus non-interest income, giving total revenue
3. Minus the provision for credit losses
4. Minus non-interest expense (salaries, occupancy, technology, marketing)
5. Equals pre-tax income, then taxes and net income

Key Ratios for Bank Profitability Analysis

Standard metrics like gross margin don’t apply to banks. Analysts use a different set:

• Net interest margin (NIM) = net interest income ÷ average earning assets. It measures how profitably the bank deploys its interest-earning balance sheet.
• Efficiency ratio = non-interest expense ÷ total revenue. Lower means less cost per dollar of revenue.
• Return on assets (ROA) and return on equity (ROE), both using net income. Because banks are leveraged, ROE is much higher than ROA.
• Loan-to-deposit ratio = loans ÷ deposits. It shows how much of the deposit base is lent out.
• Capital ratios, such as Common Equity Tier 1 (CET1) to risk-weighted assets, which regulators use to judge loss-absorbing capacity.
• Net charge-offs and nonperforming loans as a share of total loans, which track credit quality.

Hypothetical example (illustrative figures, not any bank’s results): a bank has $100 billion in average earning assets, $5 billion of interest income and $2 billion of interest expense.

• Net interest income = $3 billion
• NIM = $3 billion ÷ $100 billion = 3.0%
• Add $1 billion of non-interest income, and revenue is $4 billion.
• With $2.4 billion of non-interest expense, the efficiency ratio is 60%.
• After a $0.3 billion provision for credit losses, pre-tax income is $4 billion − $2.4 billion − $0.3 billion = $1.3 billion.

Loan growth matters because it shows whether the bank is putting deposits to work at a favorable yield. Growth that outpaces deposits, or comes with rising charge-offs, can signal risk.

Interest Rate Risk

Interest rate risk is the chance that the spread between what a bank earns and what it pays changes as rates move. Deposits are short-term and reprice quickly. Many loans, especially fixed-rate mortgages, are locked in for years.

When rates rise, a bank can charge more on variable-rate loans such as credit cards and on new fixed-rate loans, so interest income tends to increase. Deposit costs also rise, however, and fixed-rate securities lose market value. When rates fall, interest income on variable-rate assets declines, and the spread can compress.

Rate changes also affect fee income. Residential mortgage originations typically slow as rates climb, which reduces origination fees. Many banks disclose a sensitivity analysis estimating how net interest income would change under parallel rate shifts.

Credit Risk and Loan Loss Allowances

Credit risk is the possibility that a borrower defaults on a loan or lease, and the bank loses both the expected interest and the principal. Banks hold an allowance for loan and lease losses, now generally called the allowance for credit losses. It is a reserve set aside to absorb estimated losses in the loan portfolio and appears as a deduction from gross loans on the balance sheet.

The provision for credit losses on the income statement is the expense that builds or tops up that allowance. Under the current expected credit loss (CECL) standard in U.S. accounting, banks estimate expected losses over the life of their loans rather than waiting until losses are probable. As a result, provisions can rise sharply when economic forecasts darken, before actual defaults increase. When a loan is written off, it is charged against the allowance. A rising provision with stable charge-offs usually reflects a more cautious outlook. A rising provision alongside rising charge-offs reflects losses already showing up.

Who Regulates Banks?

Because banks operate with thin equity relative to assets, regulators set minimum capital and liquidity levels. In the U.S., the main federal regulators are:

• The Federal Reserve System, which supervises bank holding companies and state member banks.
• The Office of the Comptroller of the Currency (OCC), which charters and supervises national banks and federal savings associations.
• The Federal Deposit Insurance Corporation (FDIC), which insures deposits and supervises state banks that are not Fed members.

Where to Find a Bank’s Financial Statements

Publicly traded U.S. banks file annual (10-K) and quarterly (10-Q) reports with the SEC. Most large banks also post earnings releases and supplemental data on their investor relations sites, often with more detailed loan, deposit and credit tables. Nearly every U.S. bank, public or not, files quarterly Call Reports with federal regulators, and these are publicly accessible. Banks outside the U.S. follow local formats, so line names and ordering differ.

The cash flow statement adds less for banks than for other companies, because lending and deposit flows dominate it. To value bank shares, analysts commonly start from price-to-book and price-to-earnings multiples, covered in business valuation.

The Bottom Line

Investors and analysts reading bank filings need a different toolkit than they use for manufacturers or retailers. Start with net interest income and non-interest income, then judge the bank with net interest margin, the efficiency ratio, capital ratios and charge-offs. A healthy bank funds loans with stable deposits, holds cash and high-quality securities, reserves for the risk in its loan book and keeps equity well above regulatory minimums.