PROBLEM CHAPTER III1. 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? 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? 3. Big Bang 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 Big Bang Bank 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 ? 5.4. Along with the Report of Condition submitted above. 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 . c. The dollar figure for Net Loans before the charge-off is ? b. ALL and Net Loans assuming no other transactions? c. Net 29 Miscellaneous Assets 38 Bank Premises and Equipment. For each of the following transactions. Two years ago the bank made a loan for $10 million to finance the Mountain View Hotel. 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. After the charge-off. If you know the following figures: Gross Loans $275 Trading Account Securities $2 Allowance for Loan Losses 5 Other Real Estate Owned 4 Investment Securities 36 Goodwill and other Intangibles 3 Common Stock 5 Total Liabilities 375 Surplus 19 Preferred Stock 3 Total Equity Capital 39 Nondeposit Borrowings 20 Cash and Due from Banks 9 Bank Premises and Equipment. Management expects that among a series of real estate loans recently granted the default rate will probably be close to 3 percent. Gross 34 Please calculate these items: Total Assets Net Loans Undivided Profit Fed funds sold Depreciation Total Deposits 7. Two million in principal was repaid before the borrowers defaulted on the loan.6. a. If the Mountain View Hotel sells at auction for $8 million. 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. 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. The bank posts the amount of interest earned on the savings account of one of its customers. b. how with the affect the pertinent balance sheet accounts? 8. . d. The Mountain High Bank has Gross Loans of $750 million with an ALL account of $45 million. what are the dollar figures for Gross Loans. Gavel with the funds she withdrew. Mr. and the proceeds of that sale are spent on the installation of new ATMs. g. And Mrs. A sale of government securities has just netted the bank a $290. d. f. Arthur Blode deposits his payroll check for $1000 in the bank and the bank invests the funds in a government security. Imagine that its provision for loan . Harold Jones just purchased a safety deposit box to hold their stock certificates and wills. f. j. 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. For each of the transactions described here.500 from the bank and moves her deposit to a credit union. to be uncollectible. h. 10.000 to investors living in its community. e. c. Sally Mayfield has just opened a time deposit in the amount of $6. g. i. b. the bank employs the funds received from Mr. The bank declares its outstanding loan of $1 million from the Deprina Corp. Jane Gavel withdraws her checking account balance of $2. Alan James. The bank purchases a bulldozer from Ace Manufacturing Company for $750.000 and leases it to Cespan Construction Company. The bank sells a new issue of common stock for $100. Hal Jones’s checking account is charged $30 for two of Hal’s checks that were returned for insufficient funds. The bank has to pay its $5. who just paid off his home equity loan.000 monthly utility bill today to the local electric company. to provide Ms. The bank colleges $1 million in interest payments from loans it made earlier this year to Intel Composition Corp. 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. The bank earns $5 million in interest on government securities it has held since the middle of last year.000 and these funds are immediately loaned to Robert Jones to purchase a used car.000 capital gain (net of taxes). 9. e. which of at least two accounts on a bank’s balance sheet (Report of Condition) would be affected by each transaction? a. To test your understanding of the basic bank financial statements presented in this chapter.563 Applicable income taxes $878. 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 11.021 Additional noninterest income $2.779 Premises and equipment expense $564.976 Provision for loan and lease losses $681.678 Other borrowed funds $33.620 All other assets $7. All figures are in thousands of dollars. consider the account entries listed here in random order.345 Trading account gains & fees $67.936. and benefits 13 Interest earned on government bonds and notes 9 Provision for loan losses 2 Overhead expenses 3 Service charges paid by depositors 3 Security gains/losses -7 Interest paid on federal funds purchased 5 Payment of dividends of $4 per share on 1 million outstanding shares to be made to common stockholders Interest paid to customers holding time and savings 34 deposits Trust department fees 3 12.261.705 Securities gains (losses) $6.164 Total interest expense $3.675 Trading account assets $504. See if you can use these to create a balance sheet and income statement for this bank.123. See if you can determine the amount of Cardinal State Bank’s current net income after taxes from the figures below (stated in millions of dollars) and the amount of its retained earnings from current income that it will be able to reinvest in the bank.378. salaries.098.losses equals 2 percent of its total interest income. while its taxes generally amount to 30 percent of its net income before income taxes.234 Securities $10.542. (Be sure to arrange all the figures given in correct sequence to derive the bank’s Report of Income.043.822.598 Additional noninterest expense $1.398 Service charges on deposit accounts $507.717 .045 Loan loss allowance $2. Cash and due from depository institutions $4.) Effective tax rate 28% Interest on loans $86 Employee wages. 905.000 Surplus $5. Common stock $300.268.024 Unearned income $9.221 Bank premises and fixed assets $863.705.181 Fiduciary activities $372.791 Goodwill and other intangibles $1.000 13.397 Undivided profits $5. What item is clearly missing from the above accounts that you need to add in so that the bank’s balance sheet will be fully in balance? Municipal bonds 12 Time deposit 25 Federal funds sold and securities purchased under repurchase 5 agreements Subordinated debts 20 Leases of assets to business customers 3 Automobile loans 21 Loans to commercial and industrial firms 64 Demand deposit 55 U.207.036.142 Gross loans & leases $113.458 Total interest income $7.666.291 Other real estate owned $114. See if you can construct a simple balance sheet for River’s Edge National Bank from the following information (all figures in millions of dollars) for the yea-end date just concluded.099 All other liabilities $5.839.130 Federal funds purchased & repurchase agreements $8.346.737.543.164 Subordinated debt $2.354 Total deposits $79.541.986 Pre-tax net operating income $2.875.S Treasury bills 10 Cash 13 Credit card loans 22 Deposits due from other banks 25 Saving deposits 15 Bank building and equipment 7 Money market deposits 31 Federal funds purchased 34 Mortgage against the bank’s building 26 Real estate loans 42 Deposits due to other banks 5 Securities sold under repurchase agreements 4 .942 Federal funds sold & reverse repurchase agreements $3.777 Salaries and employee benefits $2. You know the following information about the Miller State Bank a. What is this firm's Total Liabilities? d.14. What is this firm's Net Interest Income? b. You know the following information about the Davis National Bank a. What is this firm's Undivided Profits? e. What is this firm's Net Non Interest Income? c. What is this firm's Pretax Net Operating Income (or Net Income before Extraordinary Items)? d. What is this firm's Total Liabilities Plus Equity? 15. What is this firm's Depreciation? c. What is this firm's Increase in Undivided Profits? f. What is this firm's Total Revenues? . What is this firm's Net Income? e. What is this firm's Net Loans? b.