Problems for Commercial Bank Management

Chapter 2

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.

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= $38.5 million

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- The bank has secondary reserves of:

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Short-term Government Securities + Private Money-Market Instruments

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= $12.4 mill. + $5.2 mill.
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= $17.6 million.

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

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

Beginning ALL= $1.25 million

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Plus: Annual Provision

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for Loan Losses= +0.25

Recoveries on
Loans Previously= +0.05
Charged Off
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Minus: Charge
Offs of Worthless= -0.15
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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

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 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

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Other Borrowed Funds 50

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Subordinated Debt 480

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All Other Liabilities 40
Total Equity Capital ?

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Perpetual Preferred Stock
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Common Stock 24
Surplus 144
Undivided Profit 70
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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):
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Report of Income
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Total Interest Income $120

Total Interest Expense ?
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Net Interest Income 40

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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

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 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:

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Net Interest Income

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Net Noninterest Income

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Pretax net operating income

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Net Income After Taxes

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Total Operating Revenues rs e
Total Operating Expenses
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Dividends paid to Common Stockholders

2.6. The Mountain High Bank has Gross Loans of $750 million with an ALL account of $45
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million. Two years ago the bank made a loan for $10 million to finance the Mountain View
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Hotel. Two million in principal was repaid before the borrowers defaulted on the loan. The
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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?
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b. After charge-off, Gross Loans, ALL and Net Loans?

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c. If the Mountain View Hotel sells at auction for $8 million, how with the affect the
pertinent balance sheet accounts?
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2.7. You were informed that a bank’s latest income and expense statement contained the
following figures (in $ millions):
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Net Interest Income $700

($300
Net Noninterest Income )
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.

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 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

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.

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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

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checking accounts?

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3.2. Use the APY formula required by the Truth in Savings Act for the following
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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
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did this customer receive?

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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:
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January $400 July $350

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February 250 August 425

March 300 September 550
April 150 October 600
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May 225 November 625

June 300 December 300
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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?

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 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)?

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Chapter 4

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4.1. Suppose a customer purchases a $1 million, 90-day CD, carrying a promised 6
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percent annualized yield. How much in interest income will the customer earn when this 90-
day instrument matures? What total volume of funds will be available to the depositor at
the end of 90 days?
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4.2. Suppose J.P. Morgan Chase Bank of New York discovers that projected new loan
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demand next week should total $325 million and customers holding confirmed credit lines
plan to draw down $510 million in funds to cover their cash needs next week, while new
deposits next week are projected to equal $680 million. The bank also plans to acquire
$420 million in corporate and government bonds next week. What is the bank's projected
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available funds gap?

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4.3. Rockfish Corporation purchases a 60-day negotiable CD with a $5 million

denomination from Bait Bank and Trust, bearing a 3.75 percent annual yield. How much in
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interest will the bank have to pay when this CD matures? What amount in total will the
bank have to pay back to Rockfish at the end of 60 days?
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4.4. Lost Valley Bank borrows $125 million overnight through a repurchase agreement
(RP) collateralized by Treasury bills. The current RP rate is 2.75 percent. How much will the
bank pay in interest cost due to this borrowing?

4.5. Rosemary Bank of New York expects new deposit inflows next month of $375
million and deposit withdrawals of $500 million. The bank's economics department has
projected that new loan demand will reach $460 million and customers with approved credit
lines will need $175 million in cash. The bank will sell $480 million in securities, but plans to
add $85 million in new securities to its portfolio. What is the projected available funds gap?

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 4.6. Clear Skies Bank of Florida issues a 3-month (90-day) negotiable CD in the amount of
$25 million to ABC Insurance Company at a negotiated annual interest rate of 3.25 percent
(360 day basis). Calculate the value of this CD account on the day it matures and the
amount of interest income ABC will earn. What interest return will ABC Insurance earn in a
365 day year?

4.7. Banks and other lending affiliates within the holding company of Goodtimes Financial
are reporting heavy loan demand this week from companies in the southeastern United
States that are planning a significant expansion of inventories and facilities before the
beginning of the fall season. The holding company plans to raise $850 million in short-term
funds this week, of which about $835 million will be used to meet these new loan requests.
Fed funds are currently trading at 2.25 percent, negotiable CDs are trading in New York at
2.40 percent, and Eurodollar borrowings are available in London at all maturities under one
year at 2.30 percent. One-month maturities of directly placed commercial paper carry
market rates of 2.35 percent, while the primary credit discount rate of the Federal Reserve
Bank of Richmond is currently set at 3.25 percent a source that Interstate has used in each of

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the past two weeks. Noninterest costs are estimated at 0.25 percent for Fed funds, discount
window borrowings, and CDs; 0.35 percent for Eurodollar borrowings; and 0.50 percent for

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commercial paper. Calculate the effective cost rate of each of these sources of funds for
Interstate and make a management decision on what sources to use. Be prepared to defend

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your decision.
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