Problems of Bank Income Statement CH 4

Problem 1 3- Pretax net operating income =

If you know the following figures: Net Interest Income + Net Noninterest
Total Interest Income 290 PLL 10 Income – PLL
Total Interest Expense 205 Income Taxes 15 = 85 + (-13) – 10 = 62
Total Noninterest Income 27
4- Current net income after taxes =
Total Noninterest Expense 40 Dividends 11
Pretax net operating income - Taxes
Please Calculate these items: = 62– 15 = 47
1-Net Interest Income
2-Net Noninterest Income 5- Total Operating Revenues =
3-Pretax net operating income Interest Income + Noninterest Income
4- Current net income after taxes = 290 + 27 = 317
5-Total Operating Revenues
6-Total Operating Expenses 6- Total Operating Expenses =
Interest Expenses + Noninterest Expenses Plus PLL
7- Increases in Undivided Profit
Answer
= 205 + 40+ 10 = 255
1- Net Interest Income = 7- Increases in Undivided Profit
Total Interest Income - Total Interest Expense = Current net income after taxes -Dividends
= 290 -205 = 85 + securities gains
2- Net Noninterest Income = = 47 -11 = 36
Total Noninterest Income - Total Noninterest
Expense
= 27- 40 = -13
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Problem 2 (1) Total Interest Income $84

From the figures below (stated in millions of - (2) Total Interest Expense $43
dollars) of the Georgia State Bank = (3 ) Net Interest Income $41
Total Interest Income $84 Provision for Loan Loss (PLL) $8
Total Interest Expense $43 (4) Total Noninterest Income $8
Provision for Loan Loss $8 (5) Total Noninterest Expenses $16
Total Noninterest Income $8 (6) Net Noninterest Income ($8)
Total Noninterest Expenses $16 (7) Pretax Income or Pretax net
Taxes 30% operating income= ( 3) + (6) - PLL $25
Securities Gains $3 - Taxes Paid (30%) = (7) X 30% ($7.5)
Less Dividends $2 = Current net income after taxes 17.5
- Dividends (2)
Required: = Increases in Undivided or retained
1- Determine the amount of Georgia State Profit/earnings from Current Income 15.5
Bank ’s current net income after taxes + Securities Gains 3
2- Determine the amount of its retained = Increases in Undivided or retained
earnings from current income that it will be Profit/earnings 18.5
able to reinvest in the bank. Note:
1- Current net income after taxes =17.5
Answer 2- Total Net Income OR total bank's Net
Income =
Current net income after taxes + Securities
Gains = 17.5 +3 = 20.5
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3- Increases in Undivided or retained
Profit/earnings =
Required:
Current net income after taxes - Dividends + 1- Determine the amount of Rosebush State
securities gains= 17.5 - 2 + 3 = 18.5 Bank’s current net income after taxes
2- Determine the amount of its retained
Problem 3 earnings from current income that it will be
From the figures below (stated in millions of able to reinvest in the bank.
dollars) of the Rosebush State Bank Answer
Interest and Fees on Loans $75 Interest Income
Interest and Dividends on Govt. Bonds Interest and Fees on Loans 75
and Notes $9 + Interest and Dividends on Govt. Bonds and
Notes 9
Interest Paid on Fed Funds Purchased $9
= ( 1) Total Interest Income 84
Interest Paid to Customers Time and
Interest Expense
Savings Deposits $34
Interest Paid on Fed Funds Purchased 9
Provision for Loan Loss $8
+ Interest Paid to Customers Time and
Service Charges Paid by Depositors $5
Savings Deposits 34
Trust Department Fees $3
= ( 2) Total Interest Expense 43
Employee Wages, Salaries and Benefits $13
( 3) Net Interest Income = ( 1) - ( 2) 41
Overhead Expenses $3
Provision for Loan Loss (PLL) 8
Taxes 30%
Noninterest Income
Securities Gains $3
Service Charges Paid by Depositors 5
Dividends $2
+ Trust Department Fees 3
5 6

= (4) Total Noninterest Income 8 Current net income after taxes + Securities
Noninterest Expenses Gains = 17.5 +3 = 20.5
Employee Wages, Salaries and Benefits 13
+ Overhead Expenses $3 3- Increases in Undivided or retained
= (5) Total Noninterest Expenses 16 Profit/earnings =
(6) Net Noninterest Income = ( 4) - (5) (8) Current net income after taxes -Dividends +
(7) Pretax Income or Pretax net operating securities gains= 17.5 - 2 + 3 = 18.5
income= ( 3) + (6) - PLL 25 Problem (4 )
- Taxes Paid (30%) = (7) X 30% 7.5
= Current net income after taxes 17.5 You know the following information in
- Dividends 2 Millions about the Davis National Bank
= Increases in Undivided or retained Total Non Interest Expenses 150 Taxes 80
Profit/earnings from Current Income 15.5 Total Interest Income 800 Dividends 40
+ Securities Gains 3 Total Non Interest Income 100 PLL 100
= Increases in Undivided or retained Total Interest Expenses 500
Profit/earnings 18.5 Securities Gains 50
1 - What is the bank’s Total Operating
Note: Revenues?
1- Current net income after taxes =17.5 Total Operating Revenues =
Total Interest Income +Total Noninterest
2- Total Net Income OR total bank's Net Income = 800 +100 = 900
Income =

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2- What is this bank’s Net Interest Income? 5- What is the current net income after taxes?
Net Interest Income = Current net income after taxes =
Total Interest Income - Total Interest Expense Pretax net operating income - Taxes
= 800 -500 = 300 = 150– 80 = 70

3- What is this bank’s Net Non Interest 6- What is the Total Net Income OR bank's
Income? Net Income?
Net Noninterest Income =
Total Noninterest Income - Total Total Net Income OR bank's Net Income =
Noninterest Expense Current net income after taxes + Securities
= 100- 150 = -50 Gains = 70 +50 =120

7- What is the bank’s Increase in Undivided

4- What is this bank’s Pretax Net Operating Profits?
Income (or Net Income before Extraordinary Increases in Undivided Profit
Items)? = Current net income after taxes -Dividends
+ securities gains= 70 - 40 + 50 = 80
Pretax net operating income =
Net Interest Income + Net Noninterest
Income – PLL
= 300 + (-50) – 100 = 150

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Problems on Ch3 Bank balance sheet Federal Funds Purchased and

Problem 1
Jasper National Bank has just submitted its Repurchase Agree. 81
Report of Condition to the FDIC. Please fill Trading Liabilities 0
in the missing items from its statement Other Borrowed Funds 25
shown below (all figures in millions of Subordinated Debt ?
dollars: All Other Liabilities 42
Cash and due from Depository Total Liabilities ?
Institutions 87
Securities ? Perpetual Preferred Stock 0
Federal Funds Sold and Reverse Common Stock 3
Repurch. 24 Surplus ?
Gross Loans and Leases 1131 Undivided Profit 62
Loan Loss Allowance ? Total Equity Capital 138
Net Loans and Leases 1131 Total Liabilities and Capital 1400
Trading Account Assets 2 Answer
Bank Premises and Fixed Assets 12
Other Real Estate Owned 2 Securities = 70
Goodwill and Other Intangibles 5 *This is the only asset missing and so is
All Other Assets 67 total assets less all of the rest of the
Total Assets 1400 assets listed here

Total Deposits 904

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 Loan Loss Allowance = 0 Problem 2
If you know the following figures:
*Net Loans =
Gross Loans - Loan Loss Allowance Gross Loans 300 Trading Account 2
Or Securities
Loan Loss Allowance = ALL 15 Other Real Estate 4
Gross loans - Net Loans Owned
= 1131 – 1131 = 0 Federal Funds 26 Goodwill and other 3
Sold Intangibles
Subordinated Debt = 210 Common Stock 12 Total Liabilities 380
*Subordinated Debt = Surplus 19 Preferred Stock 3
Total Liabilties - All of the Other Total Equity 49 Nondeposit 20
Liabilities Capital Borrowings
Cash and Due 9 Bank Premises and 29
*Total Liabilities = 1262
from Banks Equipment, Net
= Total Assets - Total Equity Capital
Miscellaneous 38 Bank Premises and 34
= 1400 – 138 = 1262
Assets Equipment, Gross
Required : calculate the following items:
*Surplus = 73
1- Total Assets 2- Net Loans
Surplus = Total Equity Capital - the Rest
3- Undivided Profit 4- Investment Securities
of the Equity Accounts =
5- Depreciation 6- Total Deposits
138 – (0 + 3+62) = 138 – 65 = 73
Answer

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Total Assets = Problem 3

Total Liabilities + Total Equity Capital NewBank started its first day of operations
= 380 + 49 = 429 with $6 million in capital. $100 million in
checkable deposits is received. The bank
Net Loans = Gross Loans - ALL issues a $25 million commercial loan and
= 300 -285 = 285 another $25 million in mortgages.
If required reserves are 8%, what does the
Undivided Profit = bank balance sheets look like?
Total Equity Capital – (PS + CS + Surplus) Answer
= 49 – (3+12 + 19 ) = 15
Assets in millions Liabilities & Equity
Investment Securities = 429 – (285 + 26+ in millions
9+ 38 + 2 + 4 + 3 + 29 ) = 429 – 396 = 33 Required 8 Checkable 100
*This is the only asset missing so subtract all Reserves Deposits
other assets from total assets Excess Reserves 48 Bank Capital 6
Loans 50
Depreciation = Total assets 106 Total Liabilities 106
Gross Bank Premises and Equipment- & Equity
Net Bank Premises and Equipment
= 34 – 29 =5
Total Deposits =
Total Liabilities - Nondeposit Borrowings
= 380 – 20 = 360
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Problem 4 Problem 5

NewBank decides to invest $45 million in On the 3rd day of operations, deposits fall by
30-day T-bills. The T-bills are currently $5 million. What does the balance sheet
trading at $4,986.70 (including look like? Are there any problems?
commissions) for a $5,000 face value Solution:
instrument. How many do they purchase? The cash leaving bank comes from reserves,
What does the balance sheet look like? first excess and then required. Following
Solution: the outflow, the balance sheet is:
The bank can purchase
Assets in millions Liabilities in millions
$45 M/$4,986.70 = 9,024 T-bills.
Required Reserves 6 Checkable Deposits 95
T-bills 45 Bank Capital 6
After the transaction, the balance sheet is:
Loans 50
Assets in millions Liabilities in millions Total assets 101 Total Liabilities & 101
Required 8 Checkable 100 Equity
Reserves Deposits With $95 million in deposits, the required
Excess Reserves 3 Bank Capital 6 in reserves = 0.08  $95 M = $7.6 M
T-bills 45 Shortage = actual reserve – required
Loans 50 reserve= 6 – 7.6 = 1.6 M
Total assets 106 Total Liabilities 106 The bank is short $1.6 million.
& Equity

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Problem 6 Problem 7

To meet any shortfall in the previous Suppose that London bank holds cash in its
question, NewBank will borrow the cash in vault of $1.4 million, short-term government
the fed funds market. Management decides securities of $12.4 million, privately issued
to borrow the needed funds for the money market instruments of $5.2 million,
remainder of the month (now 29 days). deposits at the Federal Reserve banks of
The required yield on a discount basis is $20.1 million, cash items in the process of
2.9%. What does the balance sheet look collection of $0.6 million, and deposits
like after this transaction? placed with other banks of $16.4 million.
Solution
How much in primary reserves does this
bank hold? In secondary reserves?
Assets in millions Liabilities in millions Answer

Required 7.6 Checkable 95 The bank holds primary reserves of:

Reserves Deposits Vault Cash + Deposits at the Fed + Cash Items
T-bills 45 Fed Funds 1.6 in Collection + Deposits With Other Banks
Borrowed = $1.4 mill. + $20.1 mill. + $0.6 mill. +
$16.4 mill. = $38.5 million
Loans 50 Bank Capital 6
The bank has secondary reserves of:
Total assets 102.6 Total Liabilities 102.6 Short-term Government Securities +
& Equity
Private Money-Market Instruments
= $12.4 mill. + $5.2 mill.= $17.6 million

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 The reserve shortage =
Problem 8
Outstanding reserves after deposit outflow -
Angus Bank holds no excess reserves, but the required reserves after the deposit
complies with the reserve requirement. outflow
The required reserves ratio is 9% and 22 ‒ (295 × 0.09) = ‒ 4.55
reserves are currently $27 million.
1- Determine the amount of deposits 3- The cost of the reserve shortage
2- Determine the reserve shortage created Angus Bank has to borrow $4.55 million.
by a deposit outflow of $5 million Borrowing from the Fed .
3- Determine the cost of the reserve
shortage if Angus Bank borrows in the Cost of the reserve shortage =
federal funds market (assume the federal 4.5 M X 0.0025 = $11,250 dollars.
funds rate is 0.25%).
Problem 9
Solution:
Suppose a bank has an allowance for loan
1- Deposits = 27/0.09 = 300. losses of $1.25 million at the beginning of
the year, charges current income for a
2- The reserve shortage is calculated as $250,000 provision for loan losses, charges
follows: off worthless loans of $150,000, and
Outstanding reserves after deposit outflow = recovers $50,000 on loans previously
Current reserves before deposit outflow - charged off. What will be the balance in the
Deposit outflow
bank's ALL at year-end?
Answer
27 – 5 = 22 M

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The balance in the allowance for loan loss Problem 10

(ALL) account at year end will be: Hokie High Bank has Gross Loans of $550
Beginning ALL = $1.25 M million with an ALL account of $30 million.
Plus: Two years ago the bank made a loan for $10
Annual Provision for Loan Losses = + 0.25 million to finance the Hokie Hotel. One
Recoveries on Loans Previously Charged Off = million dollars in principal was repaid before
+0.05 the borrowers defaulted on the loan. The
Minus: Loan Committee at Hokie High Bank
Charge Offs of Worthless Loans = 0.15 believes the hotel will sell at auction for $7
million and they want to charge-off the
Ending ALL = $1.40 million remainder immediately.
1- What is the dollar figure for Net Loans
before the charge-off is ?

Net Loans = Gross Loans –ALL =

$550 - $30 = $520 M

2- After the charge-off, what are the dollar

figures for Gross Loans, ALL and Net
Loans assuming no other transactions.

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 Gross Loans = $550 - $9 = $541 M Deposits 390 Miscellaneous Assets 50
*assuming the $1 in principal has been ALL 50 Total Equity 50
recognized on the balance sheet yet Surplus 5 Non Deposit Borrowings 60
Net Premises 40
ALL = $30 - $2 = $28 M Investment Securities 150
* 2 M is the amount of the loan that is bad Common Stock Par 5
Gross Loans 300
Net Loans = Gross Loans – ALL Total Assets 500
= $541 -$28 = $513
Gross Premises 70
3- If the Hokie Hotel sells at auction for A - what is this bank’s Net Loans?
$8 million, how with the affect the Net Loans = Gross Loans - ALL
pertinent balance sheet accounts? = 300 – 50 = 250
Gross loans would not change but ALL B- what is this bank’s Total Liabilities?
would be $29 because only $1 million Total assets =
would be bad and net loans would go Total liabilities + Capital or Total Equity
down by $1 million 500 = Total liabilities + 50
Total liabilities = 500 -50 = 450

Problem (11) C- what is this bank’s Undivided Profits?

In this problem
You know the following information about
the Miller State Bank in millions
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Total Equity = Common Stock Par +

Surplus + Undivided or retained Profits
50 = 5 + 5 + Undivided or retained Profits
Undivided or retained Profits = 50 – 10 = 40
D- what is this bank’s Depreciation?
Depreciation =
Gross Bank Premises - Net Bank Premises
= 70 – 40 =30

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