Business at Sias



CHAPTER 3 ANSWERS1.Report of ConditionTotal assets$4,000.00 Cash and due from depository institutions 90.00Securities535.00Federal funds sold and reverse repurchase agreements45.00Gross loans and leases$2,900.00aLoan loss allowance200.00 Net loans and leases2,700.00 Trading account assets20.00 Bank premises and fixed assets220.00bOther real estate owned15.00 Goodwill and other intangibles200.00 All other assets175.00 Total liabilities and capital4,000.00cTotal liabilities3,580.00d Total deposits2,920.00eFederal funds purchased and repurchase agreements.80.00 Trading liabilities10.00 Other borrowed funds50.00 Subordinated debt480.00 All other liabilities40.00 Total equity capital420.00fPerpetual preferred stock5.00 Common stock25.00 Surplus320.00 Undivided profits70.00 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)Page 12. Report of IncomeTotal interest income$200Total interest expense140aNet interest income60Provision for loan and lease losses20bTotal noninterest income100Fiduciary activities20Service charges on deposit accounts25Trading account gains and fees25cAdditional noninterest income30Total noninterest expense125Salaries and employee benefits95dPremises and equipment expense10Additional noninterest expense20Pretax net operating income15Securities gains (losses)5Applicable income taxes3Income before extraordinary items17eExtraordinary gains—net2Net income19fa.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) income = Income before extraordinary items + Extraordinary gains—net ($17 + $2)3. Net interest income$40aNet noninterest income?15bPretax net operating income20cNet income after taxes16dTotal operating revenues215eTotal operating expenses195fDividends paid to common stockholders10ga.Total interest income ? Total interest expense ($140 ? $100)b.Total noninterest income ? Total noninterest expense ($75 ? $90) interest income + Net noninterest income ? PLL ($40 – $15 ? $5)Page 2d.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) income after taxes ? increases in bank’s undivided profits ($16 ? $6)4. Total assets$405aNet loans$285bUndivided profit$7cFed funds sold$20dDepreciation$5eTotal deposits$335fa.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 assetse.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 millionb.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 millionALL =$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 millionc.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.Page 36. 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.Page 4i.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 + $6,000Total deposits + $6,000b.Arthur Blode deposits his payroll check for $1,000 in the bank, and the bank invests the funds in a government ernment securities + $1,000Total deposits + $1,000c.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 +$100,000Common stock/surplus + $100,000d.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 ? $2,500Total Deposits ? $2,500e.The bank purchases a bulldozer from Ace Manufacturing Company for $750,000 and leases it to Cespan Construction Company.Cash and Due from Bank ? $750,000Gross Loans and Leases + 750,000f.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.Page 5On the day the funds are loaned the accounts are affected in the following manner:Cash and Due from Bank ? $5,000,000Federal Funds Sold +$5,000,000When 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 ?$1,000,000ALL ?$1,000,0008. Off-balance-sheet items for John Wayne Bank (in millions of $)Total unused commitments$8,000 Standby letters of credit and foreign office guarantees1,350 (Amount conveyed to others)?50Commercial letters of credit60 Securities lent2,200 Derivatives (total)100,000 Notional amount of credit derivatives22,000 Interest rate contracts54,000Foreign exchange rate contracts22,800aContracts on other commodities and equities1,200 All other off - balance -sheet liabilities49 Total off-balance-sheet items111,609bTotal assets (on-balance sheet)12,000 Off-balance-sheet assets ÷ on-balance-sheet assets9.30%a.Total derivatives ? All other derivatives [100,000 – (22,000 + 54,000 + 1200)]b.The sum of all of the off-balance sheet itemsThe Off-balance-sheet-assets of John Wayne Bank are in proportion with other banks of the same size.Page 69. Bluebird State BankReport of Income (in millions of dollars)Total interest incomeInterest on loans$90 Int earned on government bonds and notes$9 Total$99 Total interest expenseInterest 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 incomeService charges paid by depositors$3 Trust department fees$3 Total$6 Total noninterest expensesEmployee 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 $4Retained Earnings from Current Income $17 Page 710. The items which would normally appear on a bank's balance sheet are:Federal funds soldDeposits due to bankCredit card loansLeases of business equipment to customersVault cashSavings depositAllowance for loan lossesUndivided profitsCommercial and Industrial LoansMortgage owed on the bank’s buildingsRepayments of credit card loansOther real estate ownedCommon stockAdditions to undivided profits Federal funds purchasedThe items which would normally appear on a bank’s income statement are:Interest received on credit card loansProvision for loan losses Depreciation on premises and equipmentService charges on depositsInterest paid on money market depositsSecurities gains or lossesUtility expensePage 8 ................
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