1. The Financial Statements of Banks and Their Principal Competitors
Chapter Three
The Financial Statements of Banks and Their Principal Competitors

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 Growth of Off-Balance-Sheet Items
Components 部件 of the Income Statement: Revenues and Expenses
Appendix: Sources of Information on the Financial- Services Industry

3. Introduction p. 57
The services each financial firm chooses to offer and the overall size of each financial-service organization are reflected in its financial statements
Financial statements can be viewed as a “road map”
Tells us where a financial firm has been in the past, where it is now, and possibly where it is headed in the future
The two main financial statements that managers, customers, and the regulatory authorities rely upon are
The Balance Sheet (Report of Condition)
The Income Statement (Report of Income)

4. An Overview of Balance Sheets and Income Statements p. 57-59
THE BALANCE SHEET (Report of Condition) Assets (uses of funds) Liabilities and Equity (sources of funds) THE INCOME STATEMENT (Report of Income) Revenues – Use of funds to produce and sell services Expenses – Cost of funds

5. An Overview of Income Statements (cont) p. 57-59
The Income Statement shows the revenues (cash flow) made by selling services to the public, including making loans and servicing customer deposits
It also shows net earnings after all costs are deducted from all revenues, which will be reinvested 再投资 (zài tóuzī) in the financial firm for future growth and some of which will flow to stockholders as dividends

6. TABLE 3–1 Key Items on Bank Financial Statements p. 58

7. The Balance Sheet (Report of Condition) p. 59
A balance sheet lists the assets, liabilities, and equity capital (owners’ funds) held by or invested in a bank or other financial firm on any given date

8. The Balance Sheet p. 59
For banks the assets on the balance sheet are of 4 major types:
Cash in the vault and deposits held at banks. (C)
Government and private interest-bearing securities purchased in the open market (S)
Loans and leases made available to customers (L)
Miscellaneous assets (MA)
Liabilities fall into two principal categories:
Deposits made by and owed to various customers (D)
Nondeposit borrowings of funds in the money and capital markets (NDB)
Equity capital represents long-term funds the owners contribute (EC)

9. The Balance Sheet (Report of Condition)
ASSETS:
Cash assets (C) are to meet the financial firm’s need for liquidity p. 60
Security holdings (S) are also source of liquidity and include investments that provide a source of income p. 60
Loans (L) and leases 租赁 (Zūlìn) are made to supply income p
Miscellaneous 杂项 (záxiàng) assets (MA) are fixed assets (plant and equipment) and investments in subsidiaries (if any)

10. The Balance Sheet (Report of Condition) p. 59
LIABILITIES:
Deposits (D) are the main source of funding for banks p.66
Nondeposit borrowings (NDB) are to add to deposits and provide the additional liquidity that cash assets and securities cannot provide p.67
Equity capital (EC) supplies the long-term, stable base of financial support which the financial firm will need to grow and to cover any extraordinary 非凡 (fēifán) losses it incurs. Comes from shareholders 股 东 (gǔdōng) p

11. The Balance Sheet (Report of Condition) p. 59
One way to view the balance sheet is to note that liabilities and equity capital represent accumulated 积 累 (Jīlěi) sources of funds, which provide needed spending power to acquire, to buy assets
A bank’s assets are its accumulated 积累 Jīlěi uses of funds, which are made to generate income for its stockholders, pay interest to its depositors, and pay its employees for their labor and skill
Thus, the balance sheet identity can be pictured simply as:

12. TABLE 3–2 Highlighted Bank Financial Data ($ million) from the FDIC (December 31, 2009) p. 60

13. TABLE 3–3 Report of Condition (Balance Sheet) for BB&T (Year-End 2008 and 2009) p. 61

14. The Balance Sheet (Report of Condition) (continued) p. 60
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

15. The Balance Sheet (cont) p. 60
Investment Securities - The Liquid Portion
Short Term Government Securities
Privately Issued Money Market Securities
Interest Bearing Time Deposits
Commercial Paper
Often called secondary reserves

16. The Balance Sheet (cont) p.61
Investment Securities - The Income- Generating Portion
Taxable Securities
U.S. Government Notes
Government Agency Securities
Corporate Bonds
Tax-Exempt Securities
Municipal Bonds

17. The Balance Sheet p. 62
Federal Funds Sold and Reverse Repurchase Agreements
Includes mainly temporary loans (usually extended overnight, with the funds returned the next day) made to other depository institutions, securities dealers, or major industrial corporations
The funds for these temporary loans often come from the reserves a bank has on deposit with the Federal Reserve Bank in its district. These are “Fed Funds”

18. The Balance Sheet (cont) p.62-65
Loan Accounts
The Major Asset
Gross Loans – Sum of All Loans
Allowance for Possible Loan Loss
Net Loans
Unearned Income
Nonperforming (bad) Loans

19. The Balance Sheet (cont) p. 62-65
Types of Loans
Commercial and industrial (or business) loans
Consumer (or household) loans
Real estate (or property-based) loans
Financial institutions loans
Foreign (or international) loans
Agricultural production loans
Security loans
Leases 租赁 (zūlìn)

20. The Balance Sheet (continued)
Loan Losses
Beginning Allowance for Loan Losses
+ This Year’s Provision for Loan Loss
= Adjusted Allowance for Loan Losses
- Actual Charge-Offs 冲销 (chōngxiāo) of bad Loans + Recoveries 复原 (fùyuán) from Previous Charge-Offs
= Ending Allowance for Loan Losses

21. The Balance Sheet (cont) p.64
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

22. The Balance Sheet (continued) p.66
Miscellaneous Assets
Bank Premises and Fixed Assets
Other Real Estate Owned (OREO)
Goodwill and Other Intangibles (extra)

23. The Balance Sheet (Report of Condition) (continued) p. 66-67
Liabilities of the Banking Firm
Deposits
Non interest-Bearing Demand Deposits
Savings Deposits
Now Accounts
Money Market Deposit Accounts (MMDA)
Time Deposits

24. The Balance Sheet (Report of Condition) (continued) p. 67
Liabilities of the Banking Firm
Nondeposit Borrowings
Fed Funds Purchased
Securities Sold Under Agreement to Repurchase (Repurchase Agreements are borrowed funds from another bank)
Eurocurrency Borrowings from banks that are in many countries.
Subordinated Debt like Preferred Stock
Other Liabilities

25. The Balance Sheet (Report of Condition) (continued) p. 67-68
Equity Capital of the Banking Firm
Preferred Stock
Common Stock
Common Stock Outstanding
Capital Surplus
Retained Earnings (Undivided Profits)
Treasury Stock
Contingency 偶然性 (ouránxìng) Reserve as a protection against losses

26. The Balance Sheet (Report of Condition) (continued) p. 68-70
Recent Growth and Expansion of Off-Balance-Sheet (OBS) Items in Banking
Unused Loan 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

27. TABLE 3–5 Examples of Off-Balance-Sheet Items Reported by FDIC-Insured Banks p. 69

28. Components of the Income Statement (Report of Income) p. 72-73
Indicates the amount of revenue received and expenses incurred 招致 (zhāozhì) over a period of time
Shows how much it has cost to get funds and to generate revenues from the uses of funds in the Balance Sheet
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

29. Components of the Income Statement (Report of Income) (continued) p. 73

30. Components of the Income Statement (Report of Income) (continued) p
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

31. TABLE 3–6 Report of Income (Income Statement) for BB&T (2008 and 2009) p. 74

32. Components of the Income Statement (Report of Income) (continued) p. 74
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

33. Components of the Income Statement (Report of Income) (continued) p. 75
Net Noninterest Income (mainly fee income) = Noninterest Income – Noninterest Expenses
Noninterest Income Sources
Fees Earned from Trust Activities (managing customers money)
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

34. CHAPTER SUMMARY
This chapter presents an overview 概观 (gàiguān) of bank financial statements, which gives us important information managers and investors use to assess performance.
The 2 most important statements are the Balance Sheet or Report of Condition and the Income Statement, Report of Income.
Balance sheet reports value of assets, liabilities and stockholders’equity. These include cash, investments and loans.

35. CHAPTER SUMMARY (continued)
The Income Statement includes sources of income and operating expenses.
Revenue includes loan and investment income and fees.
Operating expenses include interest payments on borrowed funds, employee wages, salaries and benefits, taxes.

36. PROBLEMS AND PROJECTS to be done in class and homework p. 82-85
Each group will do the project for their group number. For example, group 1 complete problem 1 on page 82 and group 2, problem 2 on page 82 and so on.
Once you complete a problem do the next one. For example group 1 will also do group 2 and so on.