Chapter 2 

Financial Statements 

 2.1.    Suppose that a bank holds cash in its vault of $1.4 million, short-term government
securities of $12.4 million, privately issued money market instruments of $5.2 million,
deposits at the Federal Reserve banks of $20.1 million, cash items in the process of collection
of $0.6 million, and deposits placed with other banks of $16.4 million. How much in primary
reserves does this bank hold? In secondary reserves? 

The bank holds primary reserves of:

Vault Cash + Deposits at the Fed + Cash Items in Collection + Deposits With Other Banks

= $1.4 mill. + $20.1 mill. + $0.6 mill. + $16.4 mill.

= $38.5 million

The bank has secondary reserves of:

Short-term Government Securities + Private Money-Market Instruments

= $12.4 mill. + $5.2 mill.

= $17.6 million

 
2.2.   Suppose a bank has an allowance for loan losses of $1.25 million at the beginning of the
year, charges current income for a $250,000 provision for loan losses, charges off worthless
loans of $150,000, and recovers $50,000 on loans previously charged off. What will be the
balance in the allowance for loan losses at year-end? 

The balance in the allowance for loan loss (ALL) account at year end will be:

Beginning ALL= $1.25 million

Plus: Annual Provision
for Loan Losses= +0.25
Recoveries on
Loans Previously= +0.05
Charged Off
Minus: Charge
Offs of Worthless= -0.15
Loans

Ending ALL= $1.40 million

 
2.3. Jasper National Bank has just submitted its Report of Condition to the FDIC. Please fill
in the missing items from its statement shown below (all figures in millions of
dollars): 
 
Report of Condition   
Total assets  $2,500 
Cash and due from Depository Institutions   87 
Securities  233 
Federal Funds Sold and Reverse Repurch.  45 
Gross Loans and Leases  ? 
  Loan Loss Allowance  200 
Net Loans and Leases  1700 
Trading Account Assets  20 
Bank Premises and Fixed Assets  ? 
Other Real Estate Owned  15 
Goodwill and Other Intangibles  200 
All Other Assets  175 
Total Liabilities and Capital  ? 
            
Total Liabilities  ?   
Total Deposits  ? 
Federal Funds Purchased and Repurchase Agreements.  80 
Trading Liabilities  10 
Other Borrowed Funds  50 
Subordinated Debt  480 
All Other Liabilities  40 
Total Equity Capital  ? 
            
Perpetual Preferred Stock  2 
Common Stock  24 
Surplus  144 
Undivided Profit  70 
 

 
2.4. Along with the Report of Condition submitted above, Jasper has also prepared a Report
of Income for the FDIC. Please fill in the missing items from its statement shown below (all
figures in millions of dollars): 

Report of Income   
   
Total Interest Income  $120 
Total Interest Expense  ? 
Net Interest Income  40 
Provision for Loan and Lease Losses  ? 
Total Noninterest Income  58 
  Fiduciary Activities  8 
  Service Charges on Deposit
Accounts  6 
  Trading Account Gains and Fees  ? 
  Additional Noninterest Income  30 
Total Noninterest Expense  77 
  Salaries and Benefits  ? 
  Premises and Equipment Expense  10 
  Additional Noninterest Expense  20 
Pretax Net Operating Income  17 
Securities Gains (Losses)  1 
Applicable Income Taxes  5 
Income Before Extraordinary Income  ? 
Extraordinary Gains – Net  2 
Net Income  ? 
 
2.5. If you know the following figures: 
 
Total Interest Income  $140 Provision for Loan Loss  $5 
Total Interest Expenses  100 Income Taxes  5 
Increases in bank’s undivided
Total Noninterest Income  15 profits  6 
Total Noninterest Expenses  35       
 
Please calculate these items: 
Net Interest Income 
Net Noninterest Income 
Pretax net operating income 
Net Income After Taxes 
Total Operating Revenues 
Total Operating Expenses 
Dividends paid to Common Stockholders 
 
2.6.    The Mountain High Bank has Gross Loans of $750 million with an ALL account of
$45 million. Two years ago the bank made a loan for $10 million to finance the Mountain
View Hotel. Two million in principal was repaid before the borrowers defaulted on the
loan. The Loan Committee at Mountain High Bank believes the hotel will sell at auction for
$7 million and they want to charge off the remainder immediately. 
a. Net loans? 
b. After charge-off, Gross Loans, ALL and Net Loans? 
c. If the Mountain View Hotel sells at auction for $8 million, how with the affect the
pertinent balance sheet accounts? 
2.7. You were informed that a bank’s latest income and expense statement contained the
following figures (in $ millions): 
 
Net Interest Income   $700  
Net Noninterest Income  ($300) 
Pretax net operating income  $372  
Security gains  $10 
Increases in bank’s Undivided
Profit  $200  
 
Suppose you also were told that the bank’s total interest income is twice as large as its total
interest expense and its noninterest income is three-fourths of its noninterest expense.
Imagine that its provision for loan losses equals 2 percent of its total interest income, while
its taxes generally amount to 30 percent of its net income before income taxes. Calculate the
following items for this bank’s income and expense statement: 
 
Total Interest Income (TII) and Total Interest Expense(TIE): 
Total Noninterest Income (TNI) and Total Noninterest Expense(TNE): 
Provision for Loan Losses  
Taxes 
Dividends 
Chapter 3 Deposits 
 
3.1. A bank determines from an analysis of its cost-accounting figures that for each $500
minimum-balance checking account it sells account processing and other operating costs will
average $4.87 per month and overhead expenses will run an average of $1.21 per month. The
bank hopes to achieve a profit margin over these particular costs of 10 percent of total
monthly costs. What monthly fee should it charge a customer who opens one of these
checking accounts? 

 
3.2. Use the APY formula required by the Truth in Savings Act for the following calculation.
Suppose that a customer holds a savings deposit in a savings bank for a year. The balance in
the account stood at $2,000 for 180 days and $100 for the remaining days in the year. If the
Savings bank paid this depositor $8.50 in interest earnings for the year, what APY did this
customer receive? 
 
3.3. Monica Lane maintains a savings deposit with Monarch Credit Union. This past year
Monica received $10.75 in interest earnings from her savings account. Her savings deposit
had the following average balance each month: 
 
January  $400   July  $350 
February  250   August  425 
March  300   September  550 
April  150   October  600 
May  225   November  625 
June  300   December  300 
 
 
What was the annual percentage yield (APY) earned on Monica’s savings account? 

3.4.  The National Bank of Mayville quotes an APY of 3.5 percent on a one-year money
market CD sold to one of the small businesses in town. The firm posted a balance of $2,500
for the first 90 days of the year, $3,000 over the next 180 days, and $4,500 for the remainder
of the year. How much in total interest earnings did this small business customer receive for
the year? 
 
 

3.5.  Gold Mine Pit Savings Association finds that it can attract the following amounts of
deposits if it offers new depositors and those rolling over their maturing CDs the interest rates
indicated below: 
 
Expected Volume  Rate of Interest 
of New Deposits  Offered Depositors 
$10 million    3.00% 
 15 million  3.25 
 20 million  3.50 
 26 million  3.75 
 28 million  4.00 
 
 
Management anticipates being able to invest any new deposits raised in loans yielding 6.25
percent. How far should this thrift institution go in raising its deposit interest rate in order to
maximize total profits (excluding interest costs)? 
 

Chapter 4 
 
4.1 A lender's cost accounting system reveals that its losses on real estate loans average 0.45
percent of loan volume and its operating expenses from making these loans average 1.85
percent of loan volume.  If the gross yield on real estate loans is currently 8.80 percent, what
is this lender's net yield on these loans?   

 
4.2 Suppose a business borrower projects that it will experience net profits of $2.1 million,
compared to $2.7 million the previous year and will record depreciation and other noncash
expenses amounted of $0.7 million this year versus $0.6 million last year.  What is this firm’s
projected cash flow for this year?  Is the firm’s cash flow rising or falling?  What are the
implications for a lending institution thinking of loaning money to this firm?  Suppose sales
revenue rises by $0.5 million, costs of goods sold decreases by $0.3 million, while cash tax
payments increase by $0.1 million and noncash expenses decrease by $0.2 million.  What
happens to the firm’s cash flow?  What would the lender’s likely reaction to these events? 

4.3 The lending function of depository institutions is highly regulated and this chapter gives
some examples of the structure of these regulations for national banks.  In this problem you
are asked to apply those regulations to Tree Rose National Bank (TRNB).  Tea Rose has the
following sources of funds:  $250 million in capital and surplus, $200 million in demand
deposits, $775 million in time and savings deposits, and $200 million in subordinated debt. 
 

4.4 Aspiration Corporation, seeking renewal of its $12 million credit line, reports the data in
the following table (in millions of dollar) to Hot Springs National Bank’s loan department. 
Please calculate the firm’s cash flow as defined earlier in this chapter.  What trends do you
observe, and what are their implications for the decision to renew or not renew the firm’s line
of credit? 
 

4.5 Crockett Manufacturing and Service Company holds a sizeable inventory of dryers and
washing machines, which it hopes to sell retail dealers over the next six months.  These
appliances have a total estimated market value currently of $25 million.  The firm also reports
accounts receivable currently amounting to $12,650,000.  Under the guidelines for taking
collateral discussed in this chapter, what is the minimum size loan or credit line Crockett is
likely to receive from its principal lender?  What is the maximum size loan or credit line
Crockett is likely to receive? 
 

4.6 Butell Manufacturing has an outstanding $11 million loan with Citicenter Bank for the
current year.  As required in the loan agreement, Butell reports selected data items to the bank
each month.  Based on the following information, is there any indication of a developing
problem loan?  About what dimensions of the firm’s performance should Citicenter Bank be
concerned?