William Chittenden edited and updated the PowerPoint slides for this edition.
FINANCIAL
STATEMENTS OF BANKS
Chapter 2
Key topics
1. 1. Overview of the Balance sheets and Income
statements of banks
2. 2. Balance sheet or Report of condition
1. Asset items
2. Liability items
3. 3. Recent expansion of off-balance sheet items
4. 4. Components of the Income statement: Revenues
and Expenses
5. 5. Financial statement manipulation
Bank financial statements

Report of condition – Balance sheet

Report of income – Income statement
5-4
Report of condition - Balance sheet

The Balance sheet of a bank showing its Assets,
Liabilities and Net worth at a given point in time
Assets = Liabilities + Equity

May be viewed as a list of financial inputs (sources
of funds) and outputs (uses of funds)
C + S + L + MA = D + NDB + EC
C = Cash assets
S = Security holdings

prepaid expenses, other real estate owned, and
customers' liability to the bank
Balance Sheet (assets): PNC and Community National Bank
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)
5-9
Securities: the liquid portion

Often called secondary reserves, include:

Short term government securities

Privately issued money market securities

Interest bearing time deposits

Commercial paper
5-10


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
5-13
Bank investments and FASB 115

Following FASB 115, a bank, at purchase, must designate the
objective behind buying investment securities as either:

Held-to-maturity securities are recorded on the balance sheet at
amortized cost.

Trading account securities are actively bought and sold, so the
bank marks the securities to market (reports them at current
market value) on the balance sheet and reports all gains and
losses on the income statement.

Available-for-sale, all other investment securities, are recorded
at market value on the balance sheet with a corresponding
change to stockholders’ equity as unrealized gains and losses
on securities holdings; no income statement impact.
Bank investments and FASB 115
amortized cost, market value (fair value)
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Financial institution loans

Foreign loans

Agriculture production loans

Security loans

Leases
5-17
Adjustments to total loans
…three adjustments are made to obtain a net loan
figure.
1. Leases are included in gross loans.
2. Unearned income is deducted from gross
interest received.
3. Gross loans are reduced by the dollar
magnitude of a bank's loan-loss reserve,
which exists in recognition that some loans
will not be repaid.
Specific and general reserves

Specific reserves

Set aside to cover a particular loan

Designate a portion of ALL or

Add more reserves to ALL



Other real estate owned (OREO)

Goodwill and other intangibles
5-23
Bank liabilities

Non interest-bearing demand deposits

Transactions accounts that pay no interest

Negotiable orders of withdrawal (NOWs) and
automatic transfers from savings (ATS) accounts

Pay interest set by each bank without federal
restrictions

Money market deposit accounts (MMDAs)

Pay market rates, but a customer is limited to no more
than six checks or automatic transfers each month

Savings and time deposits represent the bulk of
interest-bearing liabilities at banks.
Bank liabilities (cont.)

Two general time deposits categories exist:

Time deposits in excess of $100,000, labeled
jumbo certificates of deposit (CDs).