CHAPTER FOUR The Financial Statements of

Banks and Some of Their Closest Competitors

The purpose of this chapter is to acquaint the reader with the content,structure and purpose of bank financial statements and to help managers understand how information from bank financial statements can be used as tools to reveal how well their banks are performing.

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Bank Financial Statements

Report of Condition – Balance Sheet

Report of Income – Income Statement

Sources and Uses of Funds Statement

Statement of Stockholders’ Equity

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Report of Condition

The Balance Sheet of a Bank Showing its Assets, Liabilities and Net Worth

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C + S + L + MA = D + NDB + CA

C = Cash Assets

S = Security Holdings

L = Loans

MA = Miscellaneous Assets

D = Deposits

NDB = Nondeposit Borrowings

CA = Capital Accounts

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Cash Assets

Account is Called Cash and Deposits Due from BankIncludes:

Vault CashDeposits with Other BanksCash Items in Process of CollectionReserve Account with the Federal Reserve

Sometimes Called Primary Reserves

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Security Holdings

Money Market Securities – Secondary Reserves

Investment SecuritiesTaxable Securities

Nontaxable Securities

Trading Account SecuritiesHeld for Resale Only

Valued at Market Value

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Loan Accounts

Gross Loans – Sum of All Loans

Allowance for Possible Loan LossesContra Asset Account

For Potential Future Loan Losses

Net Loans

Nonperforming Loans

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Types of Loans

Commercial and Industrial LoansConsumer LoansReal Estate LoansFinancial Institution LoansForeign LoansAgriculture Production LoansSecurity LoansLeases

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Miscellaneous Assets

Fed Funds Sold

Securities Purchased Under Agreement to Resell (Repurchase Agreements)

Customers’ Liabilities on Acceptances

Net Premises and Equipment

Other Miscellaneous Assets

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Deposit Accounts

Non interest-Bearing Demand DepositsSavings DepositsNow AccountsMoney Market Deposit Accounts (MMDA)Time Deposits

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Nondeposit Borrowings

Fed Funds Purchased

Securities Sold Under Agreement to Repurchase (Repurchase Agreements)

Acceptances Outstanding

Eurocurrency Borrowings

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Capital Accounts

Subordinated Notes and DebenturesPreferred StockCommon Stock

Common Stock OutstandingCapital SurplusRetained Earnings (Undivided Profits)Treasury StockContingency Reserve

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Composition of Bank Balance Statements(Percentage Mix of Bank Sources and Uses of Funds for 2001)

All Banks %

Bank < $100 Million

%

Banks Between

$100 Mill. - $1 Bill. %

Banks > $1 Billion %

Cash and Deposits Due from Banks 5.95 5.72 4.64 6.16

Investment Securities 17.96 24.00 22.65 17.02

Fed Funds Sold and Repos. 4.84 5.60 3.57 4.99

Total Loans and Leases (Net) 58.20 60.22 64.04 57.25

Commercial and Industrial 25.20 17.18 17.76 26.77

Consumer 16.19 12.44 10.95 17.21

Real Estate 46.26 58.64 66.10 42.47

To Depository Institutions 3.01 0.00 0.28 3.58

To Foreign Governments 0.19 0.00 0.12 0.23

Agriculture 1.23 10.32 2.96 0.56

Other Loans 3.56 1.03 1.12 4.05

Leases 4.36 0.39 0.71 5.13

Assets Held in Trading Accounts 4.62 0.00 0.00 5.48

Bank Premises and FA (Net) 1.17 1.88 1.81 1.04

Other Assets 7.26 2.58 3.29 8.06

Total Assets 100.00 100.00 100.00 100.00

Interest Bearing Deposits 53.55 71.69 68.77 50.57

Noninterest Bearing Deposits 13.30 13.00 12.80 13.34

Fed Funds Purchased and Repos. 7.66 0.91 2.70 8.66

Other Liabilities 16.40 3.50 6.05 18.44

Total Equity Capital 9.09 10.90 9.68 8.94

Total Liabilities and Equity 100.00 100.00 100.00 100.00

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Off-Balance-Sheet Items

Standby Credit AgreementsInterest Rate SwapsFinancial Futures and Options Interest-Rate ContractsLoan CommitmentsForeign Exchange Rate Contracts

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Report of Income

The Statement of Revenues, Expenses and Profits for a Bank

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Net Interest Income = Interest Income – Interest Expenses

Interest and Fees on LoansTaxable Securities RevenueTax-Exempt Securities RevenueOther Interest Income

Deposit Interest Costs

Interest on Short-Term Debt

Interest on Long-Term Debt

Interest Income Interest Expenses

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Net Noninterest Income = Noninterest Income – Noninterest Expenses

Service Charges on Customers Deposits

Trust Department Income

Other Operating Income

Wages and Salaries

Other Personnel Expenses

Net Occupancy Expenses

Other Operating Expenses

Noninterest Income Noninterest Expenses

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Income Statement

Net Interest Income- Provision for Loan Loss

Net Income After PLL+/- Net Noninterest IncomeNet Income Before Taxes

TaxesNet Income- Dividends

Undivided Profits

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Provisions for Possible Loan Loss (PLL)

Experience Method

Specific Charge-Off Method

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Tax Reform Act 1986

All Large Banks – Greater than $500 Million in Assets

Must Use Specific Charge-Off Method

Small Banks – Less than $500 Million in AssetsSpecific Charge-Off Method

Experience Method

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Sources and Uses of Funds Statement

Also Known as the Funds-Flows Statement

It asks Two Questions

Where Do Funds Come From?

How Were Those Funds Utilized?

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Sources and Uses of Funds

Net Income

Noncash Expenses

Decrease in Assets

Increase in Liabilities

Increase in Capital Accounts

Net LossDividendsIncrease in AssetsDecrease in LiabilitiesDecrease in Capital Accounts

Sources Uses

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Statement of Stockholders’ Equity

Report Showing the Changes in the Make Up of the Bank’s Capital Account

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Statement of Stockholders’ Equity

Beginning Capital Account Balance+/- Net Income for Period

- Preferred Stock Dividends- Common Stock Dividends

+ New Shares of Stock Issued- Purchases of Treasury Stock

Ending Capital Account Balance

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Ethics in Banking

“Window Dressing” or “Creative Accounting”Manipulation of Financial Statements to Look Stronger and More Successful