The Balance Sheet (Report of Condition) (continued) 5-1 The Balance Sheet (Report of Condition) (continued) Liabilities of the Banking Firm Deposits Non interest-Bearing Demand Deposits Savings Deposits Now Accounts Money Market Deposit Accounts (MMDA) Time Deposits Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Balance Sheet (Report of Condition) (continued) 5-2 The Balance Sheet (Report of Condition) (continued) Liabilities of the Banking Firm 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 Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Balance Sheet (Report of Condition) (continued) 5-3 The Balance Sheet (Report of Condition) (continued) Equity Capital of the Banking Firm Preferred Stock Common Stock Common Stock Outstanding Capital Surplus Retained Earnings (Undivided Profits) Treasury Stock Contingency Reserve Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

5-4 TABLE 5-4 The Composition of Bank Balance Sheets (Percentage Mix of Sources and Uses of Funds for (Year-End 2009) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Balance Sheet (Report of Condition) (continued) 5-5 The Balance Sheet (Report of Condition) (continued) Recent Expansion of Off-Balance-Sheet (OBS) Items in Banking Unused Commitments Standby Credit Agreements Derivative Contracts Futures Contracts Options Swaps OBS transactions expose a firm to counterparty risks OBS items have grown so rapidly that, for the banking industry as a whole, they exceed total bank assets many times over Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

5-6 TABLE 5–5 Examples of Off-Balance-Sheet Items Reported by FDIC-Insured Banks Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

The Balance Sheet (Report of Condition) (continued) 5-7 The Balance Sheet (Report of Condition) (continued) 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 Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Components of the Income Statement (Report of Income) 5-8 Components of the Income Statement (Report of Income) Indicates the amount of revenue received and expenses incurred over a specific period of time Shows how much it has cost to acquire funds and to generate revenues from the uses of funds in the 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 Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Components of the Income Statement (Report of Income) (continued) 5-9 Components of the Income Statement (Report of Income) (continued) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Components of the Income Statement (Report of Income) (continued) 5-10 Components of the Income Statement (Report of Income) (continued) Income statements are a record of financial flows over time Therefore, we can represent the income statement as a report of financial outflows (expenses) and financial inflows (revenues) Four main sections Interest income Interest expenses Noninterest income Noninterest expenses Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

TABLE 5–6 Report of Income (Income Statement) for BB&T (2008 and 2009) 5-11 TABLE 5–6 Report of Income (Income Statement) for BB&T (2008 and 2009) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Components of the Income Statement (Report of Income) (continued) 5-12 Components of the Income Statement (Report of Income) (continued) Net Interest Income = Interest Income – Interest Expenses Interest Income Sources Interest and Fees on Loans Taxable Securities Revenue Tax-Exempt Securities Revenue Other Interest Income Interest Expense Sources Deposit Interest Costs Interest on Short-Term Debt Interest on Long-Term Debt Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

Components of the Income Statement (Report of Income) (continued) 5-13 Components of the Income Statement (Report of Income) (continued) Net Noninterest Income = Noninterest Income – Noninterest Expenses Noninterest Income Sources Fees Earned from Fiduciary Activities Service Charges on Deposit Accounts Trading Account Gains and Fees Additional Noninterest Income Noninterest Expense Sources Wages, Salaries, and Employee Benefits Premises and Equipment Expense Other Operating Expenses Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

5-14 The Financial Statements of Leading Nonbank Financial Firms: A Comparison to Bank Statements The financial statements of nonbank financial firms have, in recent years, come closer and closer to what we see on bank statements Especially true of thrift institutions Thrifts’ balance sheet are dominated by loans, deposits from customers, and borrowings in the money market Thrifts’ income statements are heavily tilted toward revenue from loans and by the interest they must pay on deposits and money market borrowings Other groups in the financial-service industries such as finance companies, life and property/casualty insurers, mutual funds, and security brokers and dealers Their financial statements include sources and uses of funds unique to the functions of these industries Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

5-15 TABLE 5–7 The Composition of Bank Income Statements (Percentage of Total Assets Measured as of Year-End 2009) Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

5-16 An Overview of Key Features of Financial Statements and Their Consequences Table 5–8 provides a useful overview of the key features of the financial statements of financial institutions and their consequences for the managers of financial firms and for the public Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

5-17 TABLE 5–8 Features and Consequences of the Financial Statements of Banks and Similar Financial Firms Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

5-18 Quick Quiz What are the principal accounts that appear on a bank’s balance sheet (Report of Condition)? Which accounts are most important and which are least important on the asset side of a bank’s balance sheet? What accounts are most important on the liability side of a balance sheet? What are primary reserves and secondary reserves, and what are they supposed to do? What accounts make up the Report of Income (income statement of a bank)? 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? What are the key features or characteristics of the financial statements of banks and similar financial firms? Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.