CHAPTER 3 ANSWERS

1.
Report of Condition
Total assets $4,000.00
Cash and due from depository institutions 90.00
Securities 535.00
Federal funds sold and reverse repurchase agreements 45.00
Gross loans and leases $2,900.00a
Loan loss allowance 200.00
Net loans and leases 2,700.00
Trading account assets 20.00
Bank premises and fixed assets 220.00b
Other real estate owned 15.00
Goodwill and other intangibles 200.00
All other assets 175.00
Total liabilities and capital 4,000.00c
Total liabilities 3,580.00d
Total deposits 2,920.00e
Federal funds purchased and repurchase agreements. 80.00
Trading liabilities 10.00
Other borrowed funds 50.00
Subordinated debt 480.00
All other liabilities 40.00
Total equity capital 420.00f
Perpetual preferred stock 5.00
Common stock 25.00
Surplus 320.00
Undivided profits 70.00

a. Gross loans and leases = Net loans and leases + Loan loss allowance
($200.00 + $2,700.00)
b. This is the only asset missing and so it is total assets less all of the rest of the assets listed
above. ($4,000.00 − $90.00 − $535.00 − $45.00 − $2,700.00 − $20.00 − $15.00 −
$200.00 − $175.00)
c. Total liabilities and capital = Total assets ($4,000.00)
d. Total liabilities = Total liabilities and capital − Total equity capital ($4,000.00 − $420.00)
e. Total deposits = Total liabilities − All of the other liabilities ($3,580.00 − $80.00 −
$10.00 − $50.00 − $480.00 − $40.00)
f. Total equity capital = Perpetual preferred stock + Common stock + Surplus + Undivided
profit ($5.00 + $25.00 + $320.00 + $70.00)

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2.
Report of Income
Total interest income $200
Total interest expense 140a
Net interest income 60
Provision for loan and lease losses 20b
Total noninterest income 100
Fiduciary activities 20
Service charges on deposit accounts 25
Trading account gains and fees 25c
Additional noninterest income 30
Total noninterest expense 125
Salaries and employee benefits 95d
Premises and equipment expense 10
Additional noninterest expense 20
Pretax net operating income 15
Securities gains (losses) 5
Applicable income taxes 3
Income before extraordinary items 17e
Extraordinary gains—net 2
Net income 19f
a. Total interest expense = Total interest income − Net interest income ($200 − $60)
b. Provision for loan and lease losses = Net interest income + Total noninterest income −
Total noninterest expense − Pretax net operating income (60 + $100 – $125 – $15)
c. There are four areas of Total noninterest income and only one is missing and the total is
given. ($100 − $20 − $25 − $30)
d. There are three areas of Total noninterest expense and only one is missing and the total is
given ($125 – $10 – $20)
e. Income before extraordinary items = Pretax income + Security gains – Taxes ($15 + $5 –
$3)
f. Net income = Income before extraordinary items + Extraordinary gains—net ($17 + $2)

3.
Net interest income $40a
Net noninterest income −15b
Pretax net operating income 20c
Net income after taxes 16d
Total operating revenues 215e
Total operating expenses 195f
Dividends paid to common stockholders 10g

a. Total interest income − Total interest expense ($140 − $100)

b. Total noninterest income − Total noninterest expense ($75 − $90)
c. Net interest income + Net noninterest income − PLL ($40 – $15 − $5)
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d. Pretax net operating income − Taxes ($20 − $4)
e. Interest income + Noninterest income ($140 + $75)
f. Interest expenses + noninterest expenses + Provision for loan losses ($100 + $90 + $5)
g. Net income after taxes − increases in bank’s undivided profits ($16 − $6)

4.
Total assets $405a
Net loans $285b
Undivided profit $7c
Fed funds sold $20d
Depreciation $5e
Total deposits $335f

a. Total liabilities + Total equity capital ($30 + $375)

b. Gross loans − Allowance for loan losses ($300 – $15)
c. Total equity capital – Preferred stock – Common stock – Surplus ($30 – $15 – $5 – $3)
d. This is the only asset missing so subtract all other assets from total assets
e. Bank premises and equipment, gross – bank premises and equipment, net ($25 – $20)
f. Total liabilities less nondeposit borrowings ($375 – $40)

5. a. The dollar figure for Net Loans before the charge-off is _____.

Net Loans = Gross Loans –ALL = $800 − $45 = $755 million

b. After the charge-off, what are the dollar figures for Gross Loans, ALL and Net Loans
assuming no other transactions?

Gross Loans = $800 million – ($10 million − $7 million) = $797 million

ALL =$45 million – ($12 million− $2 million − $7 million) = $42 million (The amount
of the loan that is bad)

Net Loans = Gross Loans – ALL = $797 − $42 = $755 million

c. If the Sunset Hotel sells at auction for $10 million, how will this affect the pertinent
balance sheet accounts?

Gross loans and ALL would not change as the bank would recover all the money invested
earlier.

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6. For each of the following transactions, which items on a bank’s statement of income and
expenses (Report of Income) would be affected?
a. Office supplies are purchased so the bank will have enough deposit slips and other
necessary forms for customer and employee use next week.

This would be part of Additional noninterest expense and part of Total noninterest
expense.

b. The bank sets aside funds to be contributed through its monthly payroll to the employee
pension plan in the name of all its eligible employees.

This would be part of Salaries and Benefits and part of Total noninterest expenses.

c. The bank posts the amount of interest earned on the savings account of one of its
customers.

This would be part of Total interest expenses.

d. Management expects that among a series of real estate loans recently granted the default
rate will probably be close to 3 percent.

This would be part of Provision for loans and losses to go into reserves for future bad
debts.

e. Mr. and Mrs. Harold Jones just purchased a safety deposit box to hold their stock
certificates and wills.

This would be part of Additional noninterest income and part of Total noninterest
income.

f. The bank collects $1 million in interest payments from loans it made earlier this year to
Intel Composition Corp.

This would be part of Total interest income.

g. Hal Jones’s checking account is charged $30 for two of Hal’s checks that were returned
for insufficient funds.

This would be part of Service charges on Deposit accounts and then part of Total
noninterest income.

h. The bank earns $5 million in interest on the government securities it has held since the
middle of last year.

This would be part of Total interest income.

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i. The bank has to pay its $5,000 monthly utility bill today to the local electric company.

This would be part of Premises and equipment expenses and part of Total noninterest
expenses.

j. A sale of government securities has just netted the bank a $290,000 capital gain (net of
taxes). This would be part of Security gains (losses).

7. For each of the transactions described here, which of at least two accounts on a bank’s balance
sheet (Report of Condition) would be affected by each transaction?

a. Sally Mayfield has just opened a time deposit in the amount of $6,000, and these funds
are immediately loaned to Robert Jones to purchase a used car.

Gross loans + $6,000 Total deposits + $6,000

b. Arthur Blode deposits his payroll check for $1,000 in the bank, and the bank invests the
funds in a government security.

Government securities + $1,000 Total deposits + $1,000

c. The bank sells a new issue of common stock for $100,000 to investors living in its
community, and the proceeds of that sale are spent on the installation of new ATMs.

Bank premises & equipment, gross + Common stock/surplus + $100,000

$100,000

d. Jane Gavel withdraws her checking account balance of $2,500 from the bank and moves
her deposit to a credit union; the bank employs the funds received from Mr. Alan James,
who has just paid off his home equity loan, to provide Ms. Gavel with the funds she
withdrew.

Gross Loans − $2,500 Total Deposits − $2,500

e. The bank purchases a bulldozer from Ace Manufacturing Company for $750,000 and
leases it to Cespan Construction Company.

Cash and Due from Bank − $750,000 Gross Loans and Leases + 750,000

f. Signet National Bank makes a loan of reserves in the amount of $5 million to Quesan
State Bank and the funds are returned the next day.

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On the day the funds are loaned the accounts are affected in the following manner:
Cash and Due from Bank − $5,000,000 Federal Funds Sold +$5,000,000

When the funds are returned the next day, the process is reversed.

g. The bank declares its outstanding loan of $1 million to Deprina Corp. to be uncollectible.

Gross Loans −$1,000,000 ALL −$1,000,000

8.
Off-balance-sheet items for John Wayne Bank (in millions of $)

Total unused commitments $8,000

Standby letters of credit and foreign office
guarantees 1,350
(Amount conveyed to others) −50
Commercial letters of credit 60
Securities lent 2,200
Derivatives (total) 100,000
Notional amount of credit derivatives 22,000
Interest rate contracts 54,000

Foreign exchange rate contracts 22,800a

Contracts on other commodities and
equities 1,200
All other off - balance -sheet liabilities 49
Total off-balance-sheet items 111,609b
Total assets (on-balance sheet) 12,000
Off-balance-sheet assets ÷ on-balance-sheet
assets 9.30%

a. Total derivatives − All other derivatives [100,000 – (22,000 + 54,000 + 1200)]

b. The sum of all of the off-balance sheet items

The Off-balance-sheet-assets of John Wayne Bank are in proportion with other banks of the
same size.

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9.
Bluebird State Bank
Report of Income (in millions of dollars)

Total interest income

Interest on loans $90
Int earned on government bonds and
notes $9
Total $99

Total interest expense

Interest paid on federal funds
purchased $5
Interest paid to customers time and
Savings deposits $40
Total $45

Net interest income $54

Provision for loan loss $5

Total noninterest income

Service charges paid by depositors $3
Trust department fees $3
Total $6

Total noninterest expenses

Employee wages, salaries and
benefits $13
Overhead expenses $3
Total $16

Net noninterest income ($10)

Pretax income $39

Taxes paid (28%) $11
Securities gains/(losses) ($7)

Net income $21

Less dividends $4 Pa
Retained Earnings from Current Income $17 ge
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10. The items which would normally appear on a bank's balance sheet are:

Federal funds sold Deposits due to bank

Credit card loans Leases of business equipment
to customers
Vault cash Savings deposit
Allowance for loan losses Undivided profits
Commercial and Industrial Mortgage owed on the bank’s
Loans buildings
Repayments of credit card Other real estate owned
loans
Common stock Additions to undivided profits
Federal funds purchased

The items which would normally appear on a bank’s income statement are:

Interest received on credit card Provision for loan losses

loans
Depreciation on premises and Service charges on
equipment deposits
Interest paid on money market
deposits
Securities gains or losses
Utility expense

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