Financial Statements of Banks Chapter 5

Financial Statements of Banks and Their Principal Competitors

• Financial statements reflect the services each financial firm chooses to offer and the overall size of each financial-service organization.
• Financial statements can be viewed as a "road map" that tells us where a financial firm has been in the past, where it is now, and possibly where it is headed in the future.

Balance Sheets and Income Statements

• The two main financial statements are the balance sheet (Report of Condition) and the income statement (Report of Income).
• The balance sheet shows the amount and composition of funds sources and how much has been allocated to loans, securities, and other funds uses at any given point in time.
• The income statement shows how much it has cost to acquire funds and to generate revenues from the uses of funds in the Report of Condition.

Balance Sheet Components

• Deposits (D) are typically the main source of funding for banks.
• Nondeposit borrowings (NDB) are carried out mainly to supplement deposits and provide the additional liquidity that cash assets and securities cannot provide.
• Equity capital (EC) supplies the long-term, relatively stable base of financial support upon which the financial firm will rely to grow and to cover any extraordinary losses it incurs.
• Cash assets include:
  • Vault Cash
  • Deposits with Other Banks (Correspondent Deposits)
  • Cash Items in Process of Collection
  • Reserve Account with the Federal Reserve
• Investment securities can be divided into:
  • Liquid Portion (short-term government securities, privately issued money market securities, interest-bearing time deposits, and commercial paper)
  • Income-Generating Portion (all the securities held for their rate of return)
• Trading account assets are securities purchased to provide short-term profits from short-term price movements.
• Federal Funds are temporary loans made to other depository institutions, often with funds from reserves on deposit with the Federal Reserve Bank.
• Loan accounts are the major asset item, usually accounting for half to three-quarters of the total value of all bank assets, and can be divided by:
  • Purpose for borrowing money
  • Maturity
  • Collateral
  • Pricing terms

Income Statement

• Indicates the amounts of revenues and expenses 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 Condition.
• 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.
• Major source of revenues:
  • Interest income generated by earning assets (loans and investments)
  • Fees charged for specific services
• Major components of expenses:
  • Interest paid out to depositors
  • Interest owed on non-deposit borrowings
  • Cost of equity capital
  • Salaries and wages
  • Benefits paid to employees
  • Overhead expenses associated with the physical plant
  • Funds set aside for possible loan losses
  • Taxes owed

This quiz is about financial statements of banks and their competitors, specifically focusing on Chapter Five of a finance textbook.