Many financial institutions experience dramatic changes in profits from one period to the next, both absolutely and relative to what stock analysts expect (Rose & Hudgins, 2013). In many cases, profits are lower because of unanticipated loan losses. Commercial banks facilitate the flow of funds from surplus spending units (savers) to deficit spending units (borrowers). Their financial characteristics largely reflect government-imposed operating restrictions and peculiar features of the specific markets served. Several unique characteristics stand out, and each presents special opportunities and risks to the bank manager. While most formal bank failures involve small and medium-sized banks, many of the largest banks in the U.S. and globally either failed or were propped up by governments because of asset-quality problems and inadequate capital (Rose & Hudgins, 2013).

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A bank’s balance sheet presents financial information comparing what a bank owns with what it owes, and showing the ownership interest of stockholders. Assets indicate what the bank owns; liabilities represent what the bank owes; and equity refers to the owners’ interest, such that: Assets = Liabilities + Equity. Balance sheet figures are stock values calculated for a particular day or point in time. As such, values on the balance sheet represent the balance of cash, loans, investments, and property owned by the bank on a particular day. Regulators require that banks report balance sheet and income statement data quarterly, so figures are available publicly for the periods ending in March, June, September, and December each year (Rose & Hudgins, 2013).

A depository institution’s income statement reflects the financial nature of banking, as interest on loans and investments represents the bulk of revenue (Rose & Hudgins, 2013). The income statement format starts with interest income, and then subtracts interest expenses to produce net interest income. The other major source of revenue is noninterest income. After adding noninterest income, banks subtract noninterest expenses, or overhead costs. Although depository institutions constantly try to increase their noninterest income and reduce noninterest expenses, total noninterest expenses usually exceed noninterest income, such that the difference is labeled as the bank’s burden. The next step is to subtract provisions for loan and lease losses. The resulting figure essentially represents operating income before securities transactions and taxes. Next, realized securities gains or losses from the sale of securities are added to produce pretax net operating income. Subtracting applicable income taxes, tax-equivalent adjustments, and any extraordinary items yields net income.

The balance sheet and income statement are interrelated. The composition of assets and liabilities and the relationships among different interest rates determine net interest income (Rose & Hudgins, 2013). The mix of deposits between consumer and commercial customers affects the services provided and, thus, the magnitude of noninterest income and noninterest expenses. The ownership of nonbank subsidiaries increases fee income, but often raises noninterest expenses.

Rose, P., & Hudgins, S. (2013). Bank management and financial services (9th ed.). New York, NY: McGraw-Hill.

Option #1: Creating Financial Statements

In this assignment, you will create a Balance Sheet and Income Statement for a bank. Below are the accounts and balances for 2014 year-end for ABC Bank, Inc. Note that the Retained Earnings account has not yet been adjusted for 2014 net income and dividends, so you will have to compute the year-end balance in Retained Earnings for the Balance Sheet.

In $000’s

Cash and due from banks


Common stock


Dividends paid [2]


Employee expenses


Fed. funds and reverse repurchases


Fee income


Gain from securities trading


Goodwill and other assets


Gross loans and leases


Income tax expenses


Interest expenses


Interest income


Loan loss allowance


Long-term bonds payable


Miscellaneous other income


Other borrowed funds


Other expenses


Other liabilities


Preferred stock


Provision for loan losses


Retained earnings [1]






Total deposits


  1. Prepare a formal Income Statement (Report of Income) and Balance Sheet (Report of Condition) for the bank using an Excel spreadsheet. You do not need to break down assets or liabilities into subsections. Note that all values are in thousands of dollars. You can skip adding the zeroes if you note the values correctly.
  2. Go to and click on “Filings”; you will see a drop-down box. Click on “Company Filings Search.” In the Fast Search box (right side), type in ALL to get the SEC filings for Allstate Corporation (primarily an insurance company). Find the most recently filed 10K (interactive data); then click on “financial statements,” and open the firm’s Consolidated Balance Sheet and the Consolidated Statement of Income. Observe the differences between the statements of an insurance company and those of a bank.

Write a short essay commenting on those differences. Do Part 1 in an Excel spreadsheet; then put your essay on a new page in the same file so there is only one file submitted for this assignment.

Your essay must meet the following requirements:

  • It must be 3-4 paragraphs in length, not including the cover and reference pages.
  • Follow the CSU-Global Guide to Writing and APA. Your essay should include an introduction, a body with at least two fully developed paragraphs, and a conclusion.
  • Write clearly, using excellent grammar and style techniques. Be concise and logical. You are being graded, in part, on the quality of your writing. If you need assistance with your writing style, start with Tools for Effective Writing at the CSU-Global Library, which is accessible from the Library’s homepage.

Refer to the Critical Thinking Assignment rubric in the Module 3 Folder for more information on the expectations for this assignment.

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