CHAPTER 3 ANSWERS
1.
Report of Condition
Total assets
Cash and due from depository institutions
Securities
Federal funds sold and reverse repurchase agreements
Gross loans and leases
Loan loss allowance
Net loans and leases
Trading account assets
Bank premises and fixed assets
Other real estate owned
Goodwill and other intangibles
All other assets
Total liabilities and capital
Total liabilities
Total deposits
Federal funds purchased and repurchase agreements.
Trading liabilities
Other borrowed funds
Subordinated debt
All other liabilities
Total equity capital
Perpetual preferred stock
Common stock
Surplus
Undivided profits
a.
b.
c.
d.
e.
f.
$4,000.00
90.00
535.00
45.00
$2,900.00a
200.00
2,700.00
20.00
220.00b
15.00
200.00
175.00
4,000.00c
3,580.00d
2,920.00e
80.00
10.00
50.00
480.00
40.00
420.00f
5.00
25.00
320.00
70.00
Gross loans and leases = Net loans and leases + Loan loss allowance
($200.00 + $2,700.00)
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)
Total liabilities and capital = Total assets ($4,000.00)
Total liabilities = Total liabilities and capital − Total equity capital ($4,000.00 − $420.00)
Total deposits = Total liabilities − All of the other liabilities ($3,580.00 − $80.00 −
$10.00 − $50.00 − $480.00 − $40.00)
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
Net noninterest income
Pretax net operating income
Net income after taxes
Total operating revenues
Total operating expenses
Dividends paid to common stockholders
a.
b.
c.
$40a
−15b
20c
16d
215e
195f
10g
Total interest income − Total interest expense ($140 − $100)
Total noninterest income − Total noninterest expense ($75 − $90)
Net interest income + Net noninterest income − PLL ($40 – $15 − $5)
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d.
e.
f.
g.
Pretax net operating income − Taxes ($20 − $4)
Interest income + Noninterest income ($140 + $75)
Interest expenses + noninterest expenses + Provision for loan losses ($100 + $90 + $5)
Net income after taxes − increases in bank’s undivided profits ($16 − $6)
4.
Total assets
Net loans
Undivided profit
Fed funds sold
Depreciation
Total deposits
$405a
$285b
$7c
$20d
$5e
$335f
a.
b.
c.
d.
e.
f.
Total liabilities + Total equity capital ($30 + $375)
Gross loans − Allowance for loan losses ($300 – $15)
Total equity capital – Preferred stock – Common stock – Surplus ($30 – $15 – $5 – $3)
This is the only asset missing so subtract all other assets from total assets
Bank premises and equipment, gross – bank premises and equipment, net ($25 – $20)
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
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
c.
Total Deposits − $2,500
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
f.
Common stock/surplus + $100,000
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
e.
Total deposits + $1,000
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
+$100,000
d.
Total deposits + $6,000
Gross Loans and Leases + 750,000
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
Standby letters of credit and foreign office
guarantees
(Amount conveyed to others)
Commercial letters of credit
Securities lent
Derivatives (total)
Notional amount of credit derivatives
Interest rate contracts
Foreign exchange rate contracts
Contracts on other commodities and
equities
All other off - balance -sheet liabilities
Total off-balance-sheet items
Total assets (on-balance sheet)
Off-balance-sheet assets ÷ on-balance-sheet
assets
a.
b.
$8,000
1,350
−50
60
2,200
100,000
22,000
54,000
22,800a
1,200
49
111,609b
12,000
9.30%
Total derivatives − All other derivatives [100,000 – (22,000 + 54,000 + 1200)]
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
Int earned on government bonds and
notes
Total
$90
$9
$99
Total interest expense
Interest paid on federal funds purchased
Interest paid to customers time and
Savings deposits
Total
$40
$45
Net interest income
Provision for loan loss
$54
$5
$5
Total noninterest income
Service charges paid by depositors
Trust department fees
Total
$3
$3
$6
Total noninterest expenses
Employee wages, salaries and benefits
Overhead expenses
Total
$13
$3
$16
Net noninterest income
($10)
Pretax income
Taxes paid (28%)
Securities gains/(losses)
$39
$11
($7)
Net income
Less dividends $4
Retained Earnings from Current Income $17
$21
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7
10. The items which would normally appear on a bank's balance sheet are:
Federal funds sold
Credit card loans
Vault cash
Allowance for loan losses
Commercial and Industrial
Loans
Repayments of credit card
loans
Common stock
Federal funds purchased
Deposits due to bank
Leases of business equipment
to customers
Savings deposit
Undivided profits
Mortgage owed on the bank’s
buildings
Other real estate owned
Additions to undivided profits
The items which would normally appear on a bank’s income statement are:
Interest received on credit card
loans
Depreciation on premises and
equipment
Interest paid on money market
deposits
Securities gains or losses
Utility expense
Provision for loan losses
Service charges on
deposits
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