The Financial

Statements of Banks
and Their Principal
Competitors
 5-2

Key Topics
• An Overview of the Balance Sheets and Income
Statements of Banks and Other Financial Firms
• The Balance Sheet or Report of Condition
• Asset Items
• Liability Items
• Recent Expansion of Off-Balance Sheet Items
• The Problem of Book-Value Accounting and
"Window Dressing"
• Components of the Income Statement:
Revenues and Expenses
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 5-3

Bank Financial Statements

• Report of Condition – Balance Sheet

• Report of Income – Income Statement

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 5-4

Report of Condition

• The Balance Sheet of a Bank Showing its

Assets, Liabilities and Net Worth at a given
point in time

• May be viewed as a list of financial inputs

(sources of funds) and outputs (uses of
funds)

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 5-5

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 5-6

C + S + L + MA = D + NDB + EC
C = Cash Assets D = Deposits
S = Security Holdings NDB = Nondeposit Borrowings
L = Loans
MA = Miscellaneous Assets EC = Equity Capital

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 5-7

Cash Assets

• Account is Called Cash and Deposits Due

from Bank
• Includes:
▫ Vault Cash
▫ Deposits with Other Banks (Correspondent
Deposits)
▫ Cash Items in Process of Collection
▫ Reserve Account with the Federal Reserve
• Sometimes Called Primary Reserves
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 5-8

Securities: The Liquid Portion

• Often Called Secondary Reserves

• Include:
▫ Short Term Government Securities
▫ Privately Issued Money Market Securities
 Interest Bearing Time Deposits
 Commercial Paper

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 5-9

Investment Securities

• These are the Income Generating Portion of

Securities
• Taxable Securities
▫ U.S. Government Notes
▫ Government Agency Securities
▫ Corporate Bonds
• Tax-Exempt Securities
▫ Municipal Bonds
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 5-10

Trading Account Assets

• Securities purchased to Provide Short-Term

Profits from Short-Term Price Movements
• When the Bank Acts as a Securities Dealer
• Valued at Market – FASB 115

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 5-11

Federal Funds Sold and Reverse

Repurchase Agreements
• A Type of Loan Account
• Generally Overnight Loans
• Federal Funds Sold - Funds Come from the
Deposits at the Federal Reserve
• Reverse Repurchase Agreements – Bank
Takes Temporary Title to Securities Owned
by Borrower

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 5-12

Loan Accounts
• The Major Asset
• Gross Loans – Sum of All Loans
• Allowance for Possible Loan Losses
▫ Contra Asset Account
▫ For Potential Future Loan Losses
• Net Loans
• Unearned Discount Income
• Nonperforming Loans

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 5-13

Types of Loans
• Commercial and Industrial Loans
• Consumer Loans (Loans to Individuals)
• Real Estate Loans
• Financial Institution Loans
• Foreign Loans
• Agriculture Production Loans
• Security Loans
• Leases

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 5-14

Allowance for Loan Losses

Beginning ALL
+ Provision for Loan Loss (Income Statement)
= Adjusted Allowance for Loan Losses
- Actual Charge-Offs
+ Recoveries from Previous Charge-Offs
= Ending Allowance for Loan Losses

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 5-15

Specific and General Reserves

• Specific Reserves
▫ Set Aside to Cover a Particular Loan
▫ Designate a Portion of ALL or
▫ Add More Reserves to ALL
• General Reserves
▫ Remaining ALL
• Determined by Management But Influenced
by Taxes and Government Regulation
• Loans to Lesser Developed Countries
Require Allocated Transfer Reserves
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 5-16

Miscellaneous Assets

• Bank Premises and Fixed Assets

• Other Real Estate Owned (OREO)

• Goodwill and Other Intangibles

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 5-17

Deposit Accounts

• Non interest-Bearing Demand Deposits

• Savings Deposits
• Now Accounts
• Money Market Deposit Accounts (MMDA)
• Time Deposits

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 5-18

Nondeposit Borrowings
• Fed Funds Purchased
• Securities Sold Under Agreement to
Repurchase (Repurchase Agreements)
• Acceptances Outstanding
• Eurocurrency Borrowings
• Subordinated Debt
• Limited Life Preferred Stock
• Other Liabilities

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 5-19

Equity Capital

• Preferred Stock
• Common Stock
▫ Common Stock Outstanding
▫ Capital Surplus
▫ Retained Earnings (Undivided Profits)
▫ Treasury Stock
▫ Contingency Reserve

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 5-20

Off-Balance-Sheet Items

• Unused Commitments
• Standby Credit Agreements
• Derivative Contracts
▫ Futures Contracts
▫ Options
▫ Swaps
• OBS Transactions Exposure a Firm to
Counterparty Risks

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 5-21

Possible Issues
• The Problem with Book-Value Accounting
▫ Original (historical, book-value) cost
▫ Amortized cost
▫ Market-value
▫ Held-to-maturity and available-for-sale
securities
• Window Dressing
• Auditing Financial Statements
▫ Audit Committees
▫ Sarbanes-Oxley Accounting Standards Act
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 5-22

Comparative
Balance Sheet
Ratios for
Different Size
Banks (FDIC,
2006)

Which accounts are most important on the© 2008

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 5-23

Quick Quiz
• Which are the principal accounts that
appear on a bank’s balance sheet (Report of
Condition)?
• What are primary reserves and secondary
reserves, and what are they supposed to
do?
• What are off-balance-sheet items, and why
are they important to some financial firms?

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 5-24

Report of Income

• The Statement of Revenues, Expenses and Profits

for a Bank Over a Period of Time

• Shows how much it has cost to acquire funds and

to generate revenues from the uses of funds in
Report of Conditions

• Shows the revenues (cash flow) generated by

selling services to the public

• Shows net earnings after all costs are deducted

from the sum of all revenues
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 5-25

Report of
Income for
BB&T
Corporation

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 5-26

Net Interest Income =

Interest Income – Interest Expenses
Interest Income Interest Expenses
• Interest and Fees on Loans • Deposit Interest Costs
• Taxable Securities Revenue • Interest on Short-Term
• Tax-Exempt Securities Debt
Revenue • Interest on Long-Term Debt
• Other Interest Income

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 5-27

Net Noninterest Income =

Noninterest Income – Noninterest Expenses

Noninterest Income Noninterest Expenses

• Fees Earned from Fiduciary • Wages, Salaries, and
Activities Employee Benefits
• Service Charges on Deposit
Accounts • Premises and Equipment
Expense
• Trading Account Gains and
Fees • Other Operating Expenses
• Additional Noninterest
Income

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 5-28

Fees Earned from Fiduciary Activities

• Fees for Managing Protecting a Customer’s

Property
• Fees for Record Keeping for Corporate
Security Transactions and Dispensing
Interest and Dividend Payments
• Fees for Managing Corporate and Individual
Pension and Retirement Plans

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 5-29

Service Charges on Deposit Accounts

• Checking Account Maintenance Fees

• Checking Account Overdraft Fees
• Fees for Writing Excessive Checks
• Savings Account Overdraft Fees
• Fess for Stopping Payment of Checks

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 5-30

Trading Account Gains and Fees

• Net Gains and Losses from Trading Cash

Instruments and Off Balance Sheet
Derivative Contracts That Have Been
Recognized During the Accounting Period

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 5-31

Additional Noninterest Income

• Investment Banking, Advisory, Brokerage
and Underwriting
• Venture Capital Revenue
• Net Servicing Fees
• Net Securitization Income
• Insurance Commission Fees and Income
• Net Gains (Losses) on Sales of Loans
• Net Gains (Losses) on ales of Real Estate
• Net Gains (Losses) on the Sales of Other
Assets
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 5-32

Income Statement

Net Interest Income

- Provision for Loan Loss
Net Income After PLL
+/- Net Noninterest Income
Net Income Before Taxes
Taxes
Net Income
- Dividends
Undivided Profits
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 5-33

Comparative
Income Statement
Ratios for
Different Size
Banks (FDIC,
2006)

What are the most important revenue and

McGraw-Hill/Irwin
expense items on the income statement
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of Bank
a bank?
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 5-34

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 5-35

Quick Quiz
• What accounts make up the Report of Income?
• What is the relationship between the provision
for loan losses on a bank’s Report of Income
and the allowance for loan losses on its Report
of Condition?
• Suppose a bank has an allowance for loan losses of
$1.25 million at the beginning of the year, charges
current income for a $250,000 provision for loan
losses, charges off worthless loans of $150,000,
and recovers $50,000 on loans previously charged
off. What will be the balance in the allowance for
loan losses at year-end?
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 36

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