CHAPTER 5 THE FINANCIAL FINA NCIAL STATEMENTS STATEMENTS OF BANKS AND THEIR PRINCIPAL PRIN CIPAL COMPETITORS
1. What are are primary primary reer!e" reer!e" a#$ e%&#$ary e%&#$ary reer!e reer!e a#$ a#$ 'hat are are they they (pp&e$ (pp&e$ t& $&)
Primary reserves consist of cash, including a bank's vault cash and checkable deposits held with other banks or any other funds such as reserves with the Federal Reserve that are accessible immediately to meet demands for liquidity made against the bank. Secondary reserves consist of assets that pay some interest though usually pay returns that are much lower than earned on other assets, such as loans! but their principal feature is ready marketability. marketability. "ost Secondary reserves are marketable securities such as short term government securities and private securities such as commercial paper. #oth primary and secondary reserves are held to keep the bank in readiness to meet demands for cash liquidity! from whatever source those demands may arise.
*. S(pp&e that a +a#, h&-$ h&-$ %ah i# it !a(-t !a(-t & /1.0 /1.0 mi--i&#" mi--i&#" h&rtterm h&rtterm 2&!er#me#t 2&!er#me#t e%(ritie & /1*.0 mi--i&#" pri!ate-y i(e$ m&#ey mar,et i#tr(me#t & /5.* mi--i&#" $ep&it at the Fe$era- Reer!e +a#, & /*3.1 mi--i&#" %ah item i# the pr&%e & %&--e%ti&# & /3.4 mi--i&#" a#$ $ep&it p-a%e$ 'ith &ther +a#, & /14.0 mi--i&#. H&' m(%h i# primary reer!e $&e thi +a#, h&-$) I# e%&#$ary reer!e)
$he bank holds primary reserves of% &ault &ault ash ( )eposits )e posits at the Fed ( ash *tems in ollection ( )eposits with +ther #anks -./ mill. ( -01. mill. ( -1.2 mill. ( -2./ mill. -34.5 million $he bank has secondary reserves of% Short6term 7overnment Securities ( Private "oney6"arket *nstruments -0./ mill. ( -5.0 mill. -8.2 million
. Whi%h a%%&(#t are m&t imp&rta#t a#$ 'hi%h are -eat imp&rta#t &# the aet i$e & a +a#,6 +a-a#%e heet)
$he principal bank asset items from most important to least important are%% Rank +rder 0 3 /
9ssets ash *nvestment Securities :oans "iscellaneous 9ssets
0. What a%%&(#t are m&t imp&rta#t &# the -ia+i-ity i$e & a +a-a#%e heet)
$he principal bank liability items from most important to least important are% Rank +rder 0 3 /
:iabilities and ;quity apital )eposits
5. What are the ee#tia- $iere#%e am $ema#$ $ep&it" a!i#2 $ep&it" a#$ time $ep&it)
)emand deposits are regular checking accounts against which a customer can write checks or make any number of personal withdrawals. Regular checking accounts do not bear interest under current =.S. law and regulation. Savings deposits bear interest normally, they carry the lowest rate paid on bank deposits! but may be withdrawn at will though a bank usually will reserve the right to require advance notice of a planned withdrawal!. $ime deposits carry a fi>ed maturity and the bank may impose a penalty if the customer withdraws funds before the maturity date is reached. $he interest rate posted on time deposits is negotiated between the bank and its deposit customer and may be either fi>ed or floating. 9 <+? account combines features of a savings account and a checking account, while a money market deposit account encompasses transactional powers similar to a regular checking account though usually with limitations on the number of checks or drafts that may be written against the account! but also resembles a time deposit with an interest rate fi>ed for a brief period such as weekly! but then becomes changeable over longer periods to reflect current market conditions. 4. I# ra#, &r$er" 'hat are the m&t imp&rta#t re!e#(e a#$ e7pe#e item &# a Rep&rt & I#%&me)
#y dollar volume in most recent years the rank order of the revenue and e>pense items on a bank's Report of *ncome is% Rank +rder 0 3 /
Revenue *tems :oan *ncome Security *ncome Service harges on )eposits and +ther )eposit Fees +ther +perating Revenues
;>pense *tems )eposit *nterest *nterest on
penses
8. What are &+a-a#%eheet item a#$ 'hy are they imp&rta#t t& &me i#a#%iairm)
+ff6balance6sheet items are usually transactions that generate fee income for a bank such as standby credit guarantees! or help hedge against risk such as financial futures contracts!. $hey are important as a supplement to income from loans and to help a bank reduce its e>posure to interest6rate and other types of risk.
9. :aper Nati&#a- Ba#, ha ;(t (+mitte$ it Rep&rt & C&#$iti&# t& the FDIC. P-eae i-- i# the mii#2 item r&m it tateme#t h&'# +e-&' Rep&rt & C&#$iti&# T&ta- aet ash and due from )epository *nstitutions Securities Federal Funds Sold and Reverse Repurch. 7ross :oans and :eases :oan :oss 9llowance
#ank Premises and Fi>ed 9ssets +ther Real ;state +wned 7oodwill and +ther *ntangibles 9ll +ther 9ssets T&ta- Lia+i-itie a#$ CapitaT&ta- Lia+i-itie
$otal )eposits Federal Funds Purchased and Repurchase 9greements. $rading :iabilities
/*"533 48 033 /5 @ 011 811 01
@ 5 011 85 @ @ @ 41 1
,A11 B 7ross :oans and :eases
B$his is the only asset missing and so is total assets 05 less all of the rest of the assets listed here
0,511 B$otal :iabilities and apital $otal assets B $otal :iabilities $otal :iabilities and apital6 0,021 $otal ;quity apital B$otal )eposits $otal :iabilities :ess 9ll of the ,211 +ther :iabilities
+ther #orrowed Funds Subordinated )ebt 9ll +ther :iabilities
51 /41 /1 @
T&ta- E?(ity Capita-
Perpetual Preferred Stock ommon Stock Surplus =ndivided Profit
$otal ;quity apital Perpetual Preferred Stock 0/1 (ommon Stock(Surplus(=ndivided Profit
0 0/ // 81
@. A- 'ith the Rep&rt & C&#$iti&# (+mitte$ a+&!e" :aper ha a-& prepare$ a Rep&rt & I#%&me &r the FDIC. P-eae i-- i# the mii#2 item r&m it tateme#t h&'# +e-&' Rep&rt & I#%&me
$otal *nterest *ncome $otal *nterest ;>pense
Provision for :oan and :ease :osses $otal
$rading 9ccount 7ains and Fees 9dditional pense
Salaries and #enefits Premises and ;quipment ;>pense 9dditional pense Preta>
-01 @ 41 /1
@/ 54 4
B $otal *nterest ;>pense $otal *nterest *ncome 6 pense 6 Preta>
2
@ 31 88
@ 1 01 8
B $here are four areas of $otal
B$here are three areas of $otal pense and only one is missing and the total /8 is given
Securities 7ains :osses! 9pplicable *ncome $a>es
5
*ncome #efore ;>traordinary *ncome ;>traordinary 7ains C
@ 0
@
BPreta> *ncome Plus Security 7ains :ess $a>es is income before e>traordinary 3 income B traordinary *ncome ( ;>traordinary 5 7ains C
13. I y&( ,#&' the &--&'i#2 i2(re>
$otal *nterest *ncome $otal *nterest ;>penses $otal penses
-/1 Provision for :oan :oss 11 *ncome $a>es *ncreases in bankDs undivided 5 profits 35
-5 5 2
Please calculate these items% net operating income es $otal +perating Revenues $otal +perating ;>penses
/1 B$otal *nterest *ncome :ess $otal *nterest ;>pense 601 B$otal pense 5B net operating income less P:: less $a>es 55 B*nterest *ncome Plus penses Plus penses Plus P:: es :ess *ncreases in bankDs undivided )ividends paid to ommon Stockholders / profits
11. I y&( ,#&' the &--&'i#2 i2(re>
7ross :oans 9llowance for :oan :osses *nvestment Securities ommon Stock Surplus $otal ;quity apital ash and )ue from #anks "iscellaneous 9ssets #ank Premises and ;quipment, 7ross
-085 $rading 9ccount Securities 5 +ther Real ;state +wned 32 7oodwill and other *ntangibles 5 $otal :iabilities A Preferred Stock 3A
-0 / 3 385 3 01 0A
Please calculate these items% $otal 9ssets
)epreciation $otal )eposits
//B$otal :iabilities Plus $otal ;quity apital 081 B7ross :oans :ess 9:: B$otal ;quity apital less PS less S :ess 0 Surplus B$his is the only asset missing so subtract all 03 other assets from total assets B #ank Premises and ;quipment, 7ross less 5 #ank Premises and ;quipment,
S(pp-eme#tary
0. The M&(#tai# Hi2h Ba#, ha r& L&a# & /853 mi--i&# 'ith a# ALL a%%&(#t & /05 mi--i&#. T'& year a2& the +a#, ma$e a -&a# &r /13 mi--i&# t& i#a#%e the M&(#tai# ie' H&te-. T'& mi--i&# i# pri#%ipa- 'a repai$ +e&re the +&rr&'er $ea(-te$ &# the -&a#. The L&a# C&mmittee at M&(#tai# Hi2h Ba#, +e-ie!e the h&te- 'i-- e-- at a(%ti&# &r /8 mi--i&# a#$ they 'a#t t& %har2e & the remai#$er imme$iate-y . a. $he dollar figure for
B$he amount of the loan that is bad
1. F&r ea%h & the &--&'i#2 tra#a%ti&#" 'hi%h item &# a +a#, tateme#t & i#%&me a#$ e7pe#e
net operating income Security gains *ncreases in bankDs =ndivided Profit
-811 -311 ! -380 -1 -011
Suppose you also were told that the bankDs total interest income is twice as large as its total interest e>pense and its noninterest income is three6fourths of its noninterest e>pense. *magine that its provision for loan losses equals 0 percent of its total interest income, while its ta>es generally amount to 31 percent of its net income before income ta>es. alculate the following items for this bankDs income and e>pense statement% $otal *nterest *ncome $**! and $otal *nterest ;>pense$*;!% $** 0$*; and pense$<;!% $<* .85$<; and es Pre6$a> es .3B Pre6$a> es
