Assignment 2: Financial Statements of Banks
Answer the following questions
1. Norfolk 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
Assets Liabilities and equity
Cash and due from depository 90 Total deposits -----
institutions
Securities 535 Fed funds purchased and 80
RPs
Fed funds sold and reverse RPs 45 Trading liabilities 10
Gross loans and leases ----- Other borrowed funds 50
Loan loss allowance 200 Subordinated debt 480
Net loans and leases 2700 All other liabilities 40
Trading account assets 20 Total Liabilities -----
Bank premises and fixed assets ------ Perpetual preferred stock 5
Other real estate owned 15 Common stock 25
Goodwill and other intangibles 200 Surplus 320
All other assets 175 Undivided profits 70
Total equity capital -----
Total assets 4000 Total liabilities and capital
2. Along with the Report of Condition submitted above, Norfolk 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 $200
Total interest expense -----
Net interest income 60
Provision for loan and lease losses -----
Fiduciary activities 20
Service charges on deposit accounts 25
Trading account gains & fees -----
Additional noninterest income 30
Total noninterest income 100
Salaries and employee benefits -----
Premises and equipment expense 10
Additional noninterest expense 20
Total noninterest expense 125
Pretax net operating income 15
Securities gains (losses) 5
Applicable income taxes 3
Income before extraordinary items -----
Extraordinary gains-net 2
Net income -----
3. If you know the following figures:
Total interest income $140 Provision for loan losses $5
Total interest expenses 100 Income taxes 4
Total non-interest income 75 Increases in bank's undivided profits 6
Total non-interest expenses 90
Please calculate these items:
Net interest income ----- Total operating revenues -----
Net noninterest income ----- Total operating expenses -----
Pretax net operating income ----- Dividends to common stockholders -----
Net income after taxes -----
4. If you know the following figures
Gross loans $300 Trading-account securities $2
Allowance for loan losses 15 Other real estate owned 4
Investment securities 36 Goodwill and other intangibles 3
Common stock 5 Total liabilities 375
Surplus 15 Preferred stock 3
Total equity capital 30 Non-deposit borrowings 40
Cash and due from banks 10 Bank premises and equipment, net 20
Miscellaneous assets 25
Bank premises and equipment, gross 25
`Please calculate these items:
Total assets ----- Fed funds sold -----
Net loans ----- Depreciation -----
Undivided profits ----- Total deposits -----
5. The Sea Level Bank has Gross Loans of $800 million with an allowance for loan loss (ALL) account
of $45 million. Two years ago, the bank made a loan for $12 million to finance the Sunset Hotel.
Two million dollars in principal was repaid before the borrowers defaulted on the loan. The Loan
Committee at Sea Level Bank believes the hotel will sell at auction for $7 million and they want to
charge off the remainder immediately.
a. The dollar figure for Net Loans before the charge-off is ___,
b. After the charge-off, what are the dollar figures for Gross Loans, ALL, and Net Loans
assuming no other transactions? [Ans: 797, 42, 755]
c. If the Sunset Hotel sells at auction for $10 million, how will this affect the pertinent
balance sheet accounts? [Ans: no change]
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.
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.
c. The bank posts the amount of interest earned on the savings account of one of its
customers.
d. Management expects that among a series of real estate loans recently granted the default
rate will probably be close to 3 percent.
e. Mr. and Mrs. Harold Jones just purchased a safety deposit box to hold their stock
certificates and wills.
f. The bank collects $1 million in interest payments from loans it made earlier this year to
Intel Composition Corp.
g. Hal Jones's checking account is charged $30 for two of Hal's checks that were returned
for insufficient funds.
h. The bank earns $5 million in interest on the government securities it has held since the
middle of last year.
i. The bank has to pay its $5,000 monthly utility bill today to the local electric company.
j. A sale of government securities has just netted the bank a $290,000 capital gain (net of
taxes).
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.
b. Arthur Blode deposits his payroll check for $1,000 in the bank, and the bank invests the
funds in a government security.
c. 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.
d. 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.
e. The bank purchases a bulldozer from Ace Manufacturing Company for $750,000 and
leases it to Cespan Construction Company.
f. 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.
g. The bank declares its outstanding loan of $1 million to Deprina Corp. to be uncollectible.
8. You were informed that a bank's latest income and expense statement contained the following
figures (in$ millions):
Net interest income $800
Net non-interest income -500
Pretax net operating income 372
Security gains 100
Increases in bank's undivided profits 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. Imagine that its
provision for loan losses equals 3 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 -------
Total interest expenses -------
Total noninterest income -------
Total noninterest expenses -------
Provision for loan losses -------
Income taxes -------
Dividends paid to common stockholders -------
9. An investor holds the stock of Last-But-Not-Least Financials and expects to receive a dividend of
$4. 75 per share at the end of the year. Stock analysts recently predicted that the bank's dividends
will grow at approximately 3 percent a year indefinitely into the future. If this is true, and if the
appropriate risk-adjusted cost of capital ( discount rate) for the bank is 14 percent, what should be
the current price per share of Last-But-Not-Least Financials' stock?
10. Suppose that stockbrokers have projected that Jamestown Savings will pay a dividend of $2.50 per
share on its common stock at the end of the year; a dividend of $3.25 per share is expected for the
next year, and $4.00 per share in the following two years. The risk-adjusted cost of capital for banks
in Jamestown's risk class is 15 percent. If an investor holding Jamestown's stock plans to hold that
stock for only four years and hopes to sell it at a price of $50 per share, what should the value of
the bank's stock be in today's market?
11. Oriole Savings Association has a ratio of equity capital to total assets of9 percent. In contrast,
Cardinal Savings reports an equity-capital-to-asset ratio of 7 percent. What is the value of the equity
multiplier for each of these institutions? Suppose that both institutions have an ROA of 0.67 percent.
What must each institution's return on equity capital be? What do your calculations tell you about
the benefits of having as little equity capital as regulations or the marketplace will allow?
12. The latest report of condition and income and expense statement for Smiling Merchants National
Bank are as shown in the following tables:
Income and Expense Statement (Report of Income)
Interest and fees on loans $50
Interest and dividends on securities 6
Total interest income
Interest paid on deposits 40
Interest paid on non-deposit borrowings 6
Total interest expense
Net interest income
Provision for loan losses 5
Non-interest income and fees 20
Non-interest expenses:
Salaries and employee benefits 10
Overhead expenses 5
Other noninterest expenses 2
Total non-interest expenses
Pretax operating income
Securities gains (or losses) 2
Pretax net operating income
Taxes 2
Net operating income
Net extraordinary items (-1)
Net income
Report of Condition
Assets Liabilities
Cash and deposits due from $100 Demand deposits $190
banks
Investment securities 150 Savings deposits 180
Federal funds sold 10 Time deposits 470
Net loans 700 Federal funds 80
purchased
(Allowance for loan losses = 251) Total liabilities 900
(Unearned income on loans = 51) Equity capital
Net Fixed Assets 50 Common stock 20
Total assets 980 Surplus 35
Retained earnings 35
Total earning assets 860 Total capital 80
Interest-bearing 650
deposits
Fill in the missing items on the income and expense statement. Using these statements, calculate the
following performance measures:
ROE Asset utilization
ROA Equity multiplier
Net interest margin Tax management efficiency
Net non-interest margin Expense control efficiency
Net operating margin Asset management efficiency
Earnings spread Funds management efficiency
Net profit margin Operating efficiency ratio
What strengths and weaknesses are you able to detect in Happy Merchants' performance?
13. The following information is for Rainbow National Bank:
Interest income $ 2,250.00
Interest expense 1,500.00
Total assets 45,000.00
Security losses or gains 21.00
Earning assets 40,000.00
Total liabilities 38,000.00
Taxes paid 16.00
Shares of common stock 5,000
outstanding
Non-interest income $ 800.00
Non-interest expense 900.00
Provision for loan losses 250.00
Please calculate:
ROE, ROA, Net interest margin, Earnings per share, Net noninterest margin, Net operating
margin.
Alternative scenarios:
a. Suppose interest income, interest expenses, noninterest income, and noninterest expenses
each increase by 3 percent while all other revenue and expense items shown in the preceding
table remain unchanged. What will happen to Rainbow ROE, ROA, and earnings per share?
b. On the other hand, suppose Rainbow interest income and expenses as well as its noninterest
income and expenses decline by 3 percent, again with all other factors held constant. How
would the bank's ROE, ROA, and per-share earnings change?
14. Zebra Group holds total assets of $25 billion and equity capital of $2 billion and has just posted an
ROA of 0.95 percent. What is the financial firm's ROE?
Alternative scenarios:
a. Suppose Zebra Group finds its ROA climbing by 25 percent, with assets and equity capital
unchanged. What will happen to its ROE? Why?
b. On the other hand, suppose the bank's ROA drops by 25 percent. If total assets and equity
capital hold their present positions, what change will occur in ROE?
c. If ROA at Zebra Group remains fixed at 0.95 percent but both total assets and equity double,
how does ROE change? Why?
d. How would a decline in total assets and equity by half ( with ROA still at 0.95 percent) affect
the bank's ROE?
15. OK State Bank reports total operating revenues of $150 million, with total operating expenses of$
125 million, and owes taxes of $5 million. It has total assets of$ 1.00 billion and total liabilities of
$850 million. What is the bank's ROE?
Alternative scenarios:
a. How will the ROE for OK State Bank change if total operating expenses, taxes, and total
operating revenues each grow by 10 percent while assets and liabilities remain fixed?
b. Suppose OK State's total assets and total liabilities increase by 10 percent, but its revenues and
expenses (including taxes) are unchanged. How will the bank's ROE change?
c. Can you determine what will happen to ROE if both operating revenues and expenses
(including taxes) decline by 10 percent, with the bank's total assets and liabilities held constant?
d. What does ROE become if OK State's assets and liabilities decrease by 10 percent, while its
operating revenues, taxes, and operating expenses do not change?
16. Suppose a stockholder-owned thrift institution is projected to achieve a 0.90 percent ROA during
the coming year. What must its ratio of total assets to equity capital be if it is to achieve its target
ROE of 12 percent? If ROA unexpectedly falls to 0.80 percent, what assets-to-capital ratio must it
then have to reach a 12 percent ROE?
17. Conway County National Bank presents us with these figures for the year just concluded. Please
determine the net profit margin, equity multiplier, asset utilization ratio, and ROE.
Net income $ 30.00
Total operating revenues 135.00
Total assets 1,750.00
Total equity capital accounts 170.00
18. Runnals National Bank has experienced the following trends over the past five years (all figures in
millions of dollars):
Year Net Income Total Operating Total Assets Total Liabilities
After-Tax Revenues
1 $2.65 $26.50 $300.00 $273.00
2 2.75 30.10 315.00 288.00
3 3.25 39.80 331.00 301 .00
4 3.65 47.50 347.00 314.00
5 4.0 55.9 365.00 329.00
Determine the figures for ROE, profit margin, asset utilization, and equity multiplier for this bank.
Are any adverse trends evident? Where would you recommend that management look to deal with
the bank's emerging problem(s)?
19. Paintbrush Valley State Bank has just submitted its Report of Condition and Report of Income to
its principal supervisory agency. The bank reported net income before taxes and securities
transactions of $37 million and taxes of $8 million. If its total operating revenues were $950 million,
its total assets $2. 7 billion, and its equity capital $250 million, determine the following for
Paintbrush Valley:
a. Tax management efficiency ratio.
b. Expense control efficiency ratio.
c. Asset management efficiency ratio.
d. Funds management efficiency ratio.
e. ROE.
Alternative scenarios:
a. Suppose Paintbrush Valley State Bank experienced a 20 percent rise in net before-tax income,
with its tax obligation, operating revenues, assets, and equity unchanged. What would happen
to ROE and its components?
b. If total assets climb by 20 percent, what will happen to Paintbrush's efficiency ratio and ROE?
c. What effect would a 20 percent higher level of equity capital have upon Paintbrush's ROE
and its components?
