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CHAPTER FIVE

(Three) The Financial Statements of

Banks and Their Principal

Competitors

The purpose of this chapter is to acquaint the

students 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

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Reflect services offered

Overall size

Analysis of performance
Important 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
Accounting Equation: Assets=Liabilities +Equity Capital

(1)

Assets= Resources with future benefits that are

owned and controlled by a company
Examples: cash, supplies, equipment and land
Liabilities= What a company owes to its nonowners
(creditors)
Examples: debt to a bank in the form of a note
payable, accounts payable to supplies
Equity= owners claim on assets (Owners equity)
Accounting System: What a company owns and what it owes
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1-4

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

(2)

Accumulated uses of bank funds=

Accumulated sources of bank funds

(3)

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

= Cash Assets

S = Security Holdings
L = Loans
MA = Miscellaneous
Assets

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D = Deposits
NDB = Nondeposit
Borrowings
EC = Equity Capital

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Cash Assets (C)

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Account is Called Cash and Deposits Due

from Bank
Includes:

Vault Cash
Deposits with Other Banks
Cash Items in Process of Collection(uncollected
checks)
Reserve Account with the Federal Reserve/BB

Sometimes Called Primary Reserves

Objective is to keep the size of this account as small
as possible as they earn little or no interest income

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Security Holdings (S)

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Money Market Securities Secondary

Reserves:short-term govt. securities, interestbearing time deposit held with other banks etc.
Investment Securities
Taxable Securities: Govt. or corporate bonds and
notes
Nontaxable Securities: tax-exempt bonds and notes
>>>Recorded in the BS at lower of cost or market

Trading Account Securities

>Held for Resale Only
>Valued at Market Value

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Loan Accounts

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Loans Sum of All Loans

Allowance for Possible Loan Losses
Gross

Contra Asset Account

For Potential Future Loan Losses

Net

Loans
Nonperforming Loans: Due more than
90 days
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Miscellaneous Assets

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Fed

Funds Sold: Reserve sold

Securities Purchased Under
Agreement to Resell (Repurchase
Agreements)
Customers Liabilities on Acceptances
Net Premises and Equipment
Other Miscellaneous Assets: Goodwill
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Deposit Accounts

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Non interest-Bearing Demand Deposits

Savings Deposits: Bear the lowest rate of
interest
Money Market Deposit Accounts (MMDA):
>limited check>interest>notice for withdrawal
Time Deposits (Certificate of Deposits [CDs])
>fixed maturity>higher interest rates>

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Nondeposit Borrowings

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Fed

Funds Purchased: Reserve

loaned to it by other banks
Securities Sold Under Agreement to
Repurchase (Repurchase
Agreements)

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Equity Capital (EC)

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Preferred Stock
Common Stock

Common Stock Outstanding

Capital Surplus
Retained Earnings (Undivided Profits)
Treasury Stock (Retired stock)
Contingency Reserve (Unforeseen losses)

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Composition of Bank Balance Statements

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(Percentage Mix of Bank Sources and Uses of Funds)

Banks
Bank <
Between
$100 Million $100 Mill. All Banks %
%
$1 Bill. %
Cash and Deposits Due from Banks
5.95
5.72
4.64
Investment Securities
17.96
24.00
22.65
Fed Funds Sold and Repos.
4.84
5.60
3.57
Total Loans and Leases (Net)
58.20
60.22
64.04
Commercial and Industrial
25.20
17.18
17.76
Consumer
16.19
12.44
10.95
Real Estate
46.26
58.64
66.10
To Depository Institutions
3.01
0.00
0.28
To Foreign Governments
0.19
0.00
0.12
Agriculture
1.23
10.32
2.96
Other Loans
3.56
1.03
1.12
Leases
4.36
0.39
0.71
Assets Held in Trading Accounts
4.62
0.00
0.00
Bank Premises and FA (Net)
1.17
1.88
1.81
Other Assets
7.26
2.58
3.29
Total Assets
100.00
100.00
100.00
Interest Bearing Deposits
53.55
71.69
68.77
Noninterest Bearing Deposits
13.30
13.00
12.80
Fed Funds Purchased and Repos.
7.66
0.91
2.70
Other Liabilities
16.40
3.50
6.05
Total Equity Capital
9.09
10.90
9.68
Total Liabilities and Equity
100.00
100.00
100.00

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Banks > $1
Billion %
6.16
17.02
4.99
57.25
26.77
17.21
42.47
3.58
0.23
0.56
4.05
5.13
5.48
1.04
8.06
100.00
50.57
13.34
8.66
18.44
8.94
100.00

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Off-Balance-Sheet Items

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Fee generating services not fully disclosed in the

balance sheet:
Unused Commitments: Bank received a fee to lend
up to a certain amount
Standby Credit Agreements: Bank promises to
guarantee repayment of a customers loan taken
from a third party
Derivative Contracts: financial institution has the
possibility to incur profit or loss

Make the bank more risky than

appeared in the financial statements
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Report of Income

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The Statement of Revenues, Expenses

and Profits for a Bank

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Net Interest Income =

Interest Income Interest Expenses
Interest Income

Interest and Fees on

Loans
Taxable Securities
Revenue
Tax-Exempt Securities
Revenue
Other Interest Income

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Interest Expenses

Deposit Interest Costs

Interest on Short-Term
Debt
Interest on Long-Term
Debt

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Net Noninterest Income =

Noninterest Income Noninterest Expenses

Noninterest Income

Service Charges on
Customers Deposits
Trust Department
Income
Other Operating
Income

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Noninterest Expenses

Wages and Salaries

Other Personnel
Expenses
Net Occupancy
Expenses
Other Operating
Expenses

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Income Statement

Net Interest Income

-Provision for Loan Loss
Net Income After PLL
+/- Net Noninterest Income
Net Operating Income
+/- Security Gain (loss)
Net Income Before Taxes
-Taxes
Net Income
-Dividends
Undivided Profits
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Provisions for Possible Loan Loss (PLL)

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Experience Method
Specific Charge-Off Method

Example: Suppose a bank anticipated loan losses this year of

$10,000 and held $100 thousand already in the ALL account.
Beg. Bal. Allowance for Loan Losses (ALL)

$ 100,000

+ This years Provision for Loan losses (PLL)

$ 10,000

Adjusted Allowance for Loan Losses (ALL)

$110,000

-Actual Charge-offs for worthless loans

$ 5000

Net Allowance for Loan Losses

$105,000

+Recoveries from Previously Charged-off Loans =

$ 3,000

End. Bal. in the Allow. for Loan Loss Ac.(ALL) =

$108,000

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Statement of Stockholders Equity

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Report Showing the Changes in the

Make Up of the Banks Capital Account

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Statement of Stockholders Equity

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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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Sources and Uses of Funds Statement

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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

Sources

Net Income
Noncash Expenses
Decrease in Assets
Increase in
Liabilities
Increase in Capital
Accounts

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Uses

Net Loss
Dividends
Increase in Assets
Decrease in
Liabilities
Decrease in Capital
Accounts

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Financial Statements of Bangladeshi

Banks

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Bank Companies Act, 1991 Section 38

Format of Financial Statements

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1-25

The Financial Statements of Nonbank Financial Firms

The financial statements of other financial institutions,

in recent years, come closer to bank statements

Finance Company:
USE: Loan> Receivables:
BS is dominated by loans> Called Accounts
Receivable>Business receivables, consumer
receivables, real estate receivables> reflecting
loans made to these customers
SOURCE: Deposit>Borrowings:
Borrowings from the money market>Borrowings
from banks etc.
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1-26

Life/Property Insurance Company:

USE:Loan> Loans to the business sector
Holding of bonds, stocks and mortgages
SOURCE: Deposit>Premium

Premium payment, Borrowings in the money and

capital markets
Mutual Funds:
USE:Loan>
Corporate stocks, bonds, asset backed securities
SOURCE:
Selling of fund shares
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1-27

Problem of Book Value

Accounting

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Discussion Case: Limitations of the Balance Sheet

Historical Cost versus Current Market Value Accounting

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Balance sheet figures are based on historical costs instead of current

market values.

This comes from the cost principle of accounting which states that,
values on the balance sheet should be recorded on their original
cost.

>For example, if an equipment is purchased for $5,000, it should be recorded

as $5,000. No matter whether the equipment is actually worth more or
less than the amount purchased. This may mislead the investors or
creditors regarding the true value of the firms assets and also will cause
trouble in replacement of the assets.

In order to solve this problem, on October 1979 the Financial

Accounting Standard Boards (FASB) issued a ruling that required
large companies to disclose inflation-adjusted accounting data in
addition to their traditional historical cost data. However, with the
fall in the inflation rate this rule is no longer in force.

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1-29

Problem of Book Value Accounting

in Banks/FIs

Assumes that all balance sheet items will be held to

maturity
Does not show the impact of changing interest rates
and default risk etc.

Auditors do not guarantee the accuracy of earnings,

but only that statements are a fair financial
representation
EPS for a company is not a precise figure that is
readily comparable over time or between companies

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Ethics in Banking

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Window Dressing or Creative

Accounting
Manipulation of Financial Statements
to Look Stronger and More Successful

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