Problems for Commercial Bank Management 

 
Lecture 1 Overview 
 
1-1. What is a bank? How does a bank differ from most other financial-service providers? 
1-2. Why are some banks reaching out to become one-stop financial-service conglomerates?
Is this a good idea, in your opinion? 
1-3. Which businesses are banking’s closest and toughest competitors? What services do
they offer that compete directly with banks’ services? 
1-4. What is happening to banking’s share of the financial marketplace and why? What kind
of banking and financial system do you foresee for the future if present trends continue? 
1-5. What different kinds of services do banks offer the public today? What services do their
closest competitors offer? 
1-6. How have banking and the financial-services market changed in recent years? What
powerful forces are shaping financial markets and institutions today? Which of these forces do
you think will continue into the future? 
1-7. What do you think the financial-services industry will look like 20 years from now? What
are the implications of your projections for its management today? 
 
Lecture 2 Financial Statements 
 
2.1.   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? 
 
2.2.  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? 
 
2.3. Jasper 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   
Total assets  $2,500 
Cash and due from Depository
Institutions   87 
Securities  233 
Federal Funds Sold and Reverse
Repurch.  45 

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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 
 
 
2.4. Along with the Report of Condition submitted above, Jasper 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 

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  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  ? 
 
2.5. 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
Total Noninterest Income  15 undivided profits  6 
Total Noninterest Expenses  35       
 
Please calculate these items: 
Net Interest Income 40 
Net Noninterest Income -20 
Pretax net operating income 15 
Net Income After Taxes 10 
Total Operating Revenues  
Total Operating Expenses  
Dividends paid to Common Stockholders  
 
2.6.    The Mountain High Bank has Gross Loans of $750 million with an ALL account of
$45 million. Two years ago the bank made a loan for $10 million to finance the Mountain
View Hotel. Two million in principal was repaid before the borrowers defaulted on the
loan. 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 . 
a. Net loans?  705 
b. After charge-off, Gross Loans, ALL and Net Loans? 
c. If the Mountain View Hotel sells at auction for $8 million, how with the affect the
pertinent balance sheet accounts? 
 
2.7. 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 $200  

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Profit 
 
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 2 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: 
k 
Total Interest Income (TII) and Total Interest Expense(TIE): 
Total Noninterest Income (TNI) and Total Noninterest Expense(TNE): 
Provision for Loan Losses  
Taxes 
Dividends 
 
Lecture 3 Deposits 
 
3.1. A bank determines from an analysis of its cost-accounting figures that for each
$500 minimum-balance checking account it sells account processing and other operating
costs will average $4.87 per month and overhead expenses will run an average of $1.21
per month. The bank hopes to achieve a profit margin over these particular costs of 10
percent of total monthly costs. What monthly fee should it charge a customer who opens
one of these checking accounts? 
 
3.2. Use the APY formula required by the Truth in Savings Act for the following
calculation. Suppose that a customer holds a savings deposit in a savings bank for a year.
The balance in the account stood at $2,000 for 180 days and $100 for the remaining days
in the year. If the Savings bank paid this depositor $8.50 in interest earnings for the year,
what APY did this customer receive? 
 
3.3. Monica Lane maintains a savings deposit with Monarch Credit Union. This past
year Monica received $10.75 in interest earnings from her savings account. Her savings
deposit had the following average balance each month: 
 
January  $400   July  $350 
February  250   August  425 
March  300   September  550 
April  150   October  600 
May  225   November  625 
June  300   December  300 
 
What was the annual percentage yield (APY) earned on Monica’s savings account? 
 

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3.4. The National Bank of Mayville quotes an APY of 3.5 percent on a one-year
money market CD sold to one of the small businesses in town. The firm posted a balance
of $2,500 for the first 90 days of the year, $3,000 over the next 180 days, and $4,500 for
the remainder of the year. How much in total interest earnings did this small business
customer receive for the year? 
 
 
3.5. Gold Mine Pit Savings Association finds that it can attract the following amounts
of deposits if it offers new depositors and those rolling over their maturing CDs the
interest rates indicated below: 
 
Expected Volume  Rate of Interest 
of New Deposits  Offered Depositors 
$10 million    3.00% 
 15 million  3.25 
 20 million  3.50 
 26 million  3.75 
 28 million  4.00 
 
Management anticipates being able to invest any new deposits raised in loans yielding
6.25 percent. How far should this thrift institution go in raising its deposit interest rate in
order to maximize total profits (excluding interest costs)? 
 
Lecture 4 
 
4.1 A lender's cost accounting system reveals that its losses on real estate loans
average 0.45 percent of loan volume and its operating expenses from making these loans
average 1.85 percent of loan volume.  If the gross yield on real estate loans is currently
8.80 percent, what is this lender's net yield on these loans?   
 
4.2 Suppose a business borrower projects that it will experience net profits of $2.1
million, compared to $2.7 million the previous year and will record depreciation and
other noncash expenses amounted of $0.7 million this year versus $0.6 million last year. 
What is this firm’s projected cash flow for this year?  Is the firm’s cash flow rising or
falling?  What are the implications for a lending institution thinking of loaning money to
this firm?  Suppose sales revenue rises by $0.5 million, costs of goods sold decreases by
$0.3 million, while cash tax payments increase by $0.1 million and noncash expenses
decrease by $0.2 million.  What happens to the firm’s cash flow?  What would the
lender’s likely reaction to these events? 
 
4.3 The lending function of depository institutions is highly regulated and this chapter
gives some examples of the structure of these regulations for national banks.  In this
problem you are asked to apply those regulations to Tree Rose National Bank (TRNB). 

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Tea Rose has the following sources of funds:  $250 million in capital and surplus, $200
million in demand deposits, $775 million in time and savings deposits, and $200 million
in subordinated debt. 
 
4.4 Aspiration Corporation, seeking renewal of its $12 million credit line, reports the
data in the following table (in millions of dollar) to Hot Springs National Bank’s loan
department.  Please calculate the firm’s cash flow as defined earlier in this chapter. 
What trends do you observe, and what are their implications for the decision to renew or
not renew the firm’s line of credit? 
 
Next
   20X1  20X2  20X3  20X4  Year 
Costs of Goods
Sold   $5.1  $5.5  $5.7  $6.0  $6.4 
Selling and Admin
Exp.  $8.0  $8.2  $8.3  $8.6  $8.9 
Sales Revenue  $7.9  $8.4  $8.8  $9.5  $9.9 
Depreciation and
other noncash
expenses  $11.2  $11.2  $11.1  $11.0  $10.9 
Taxes Paid in Cash  $4.4  $4.6  $4.9  $4.1  $3.6 
 
 
4.5 Crockett Manufacturing and Service Company holds a sizeable inventory of
dryers and washing machines, which it hopes to sell retail dealers over the next six
months.  These appliances have a total estimated market value currently of $25 million. 
The firm also reports accounts receivable currently amounting to $12,650,000.  Under
the guidelines for taking collateral discussed in this chapter, what is the minimum size
loan or credit line Crockett is likely to receive from its principal lender?  What is the
maximum size loan or credit line Crockett is likely to receive? 
 
4.6 Butell Manufacturing has an outstanding $11 million loan with Citicenter Bank
for the current year.  As required in the loan agreement, Butell reports selected data
items to the bank each month.  Based on the following information, is there any
indication of a developing problem loan?  About what dimensions of the firm’s
performance should Citicenter Bank be concerned? 
 

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Lecture 5 
5.1 From the descriptions below please identify what type of business loan is
involved. 
a. A temporary credit supports construction of homes, apartments, office buildings, and
other permanent structures. 
b. A loan is made to an automobile dealer to support the shipment of new cars. 
c. Credit extended on the basis of a business’s accounts receivable. 
d. The term of an inventory loan is being set to match the length of time needed to
generate cash to repay the loan. 
e. Credit extended up to one year to purchase raw materials and cover a seasonal need
for cash. 
f. A security dealer requires credit to add new government bonds to his security
portfolio. 
g. Credit granted for more than a year to support purchases of plant and equipment. 
h. A group of investors wishes to take over a firm using mainly debt financing. 
i. A business firm receives a three-year line of credit against which it can borrow, repay,
and borrow again if necessary during the loan’s term. 
j. Credit extended to support the construction of a toll road. 
5.2 From the data given in the following table, please construct as many of the financial
ratios discussed in this chapter as you can and then indicate the dimension of a business
firm’s performance each ratio represents. 
 

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* Annual principal payments on bonds and notes payable total $55. The firm’s marginal
tax rate is 35 percent. 
 
5.3 Pecon Corporation has placed a term loan request with its lender and submitted
the following balance sheet entries for the year just concluded and the pro forma balance
sheet expected by the end of the current year. Construct a pro forma Statement of Cash
Flows for the current year using the consecutive balance sheets and some additional
needed information. The forecast net income for the current year is $225 million with
$50 million being paid out in dividends. The depreciation expense for the year will be
$100 million and planned expansions will require the acquisition of $300 million in fixed
assets at the end of the current year. As you examine the pro forma Statement of Cash
Flows, do you detect any changes that might be of concern either to the lender’s credit
analyst, loan officer, or both? 
 

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5.4 As a loan officer for Sun Flower National Bank, you have been responsible for the
bank’s relationship with USF Corporation, a major producer of remote-control devices
for activating television sets, DVDs, and another audio-video equipment. USF has just
filed a request for renewal of its $10 million line of credit, which will cover
approximately nine months. USF also regularly uses several other services sold by the
bank. Applying customer profitability analysis (CPA) and using the most recent year as a
guide, you estimate that the expected revenues from this commercial loan customer and
the expected costs of serving this customer will consist of the following: 

  
The bank’s credit analysts estimated the customer probably will keep an average
deposit balance of $2,125,000 for the year the line is active. What is the expected net rate
of return from this proposed loan renewal if the customer actually draws down the full
amount of the requested line for nine months? What decision should the bank make under
the foregoing assumptions? If you decide to turn down this request, under what

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assumptions regarding revenues, expenses, and customer deposit balances would you be
willing to make this loan? 
 
5.5 In order to help fund a loan request of $10 million for one year from one of its
best customers, Lone Star Bank sold negotiable CDs to its business customers in the
amount of $6 million at a promised annual yield of 3.50 percent and borrowed $4 million
in the Federal funds market from other banks at today’s prevailing interest rate of 3.25
percent. 
Credit investigation and recordkeeping costs to process this loan application were
an estimated $25,000. The Credit Analysis Division recommends a minimal 1 percent
risk premium on this loan and a minimal profit margin of one-fourth of a percentage
point. The bank prefers using cost-plus loan pricing in this case. What loan rate would it
charge? 
 
Lecture 6 
 
6.1 Mr. and Mrs. Napper are interested in funding their children's college education
by taking out a home equity loan in the amount of $24,000.  Eldridge National Bank is
willing to extend a loan, using the Napper's home as collateral.  Their home has been
appraised at $110,000, and Eldridge permits a customer to use no more than 70 percent
of the appraised value of the home as a borrowing base. The Nappers still owe $60,000
on the first mortgage against their home.  Is there enough residual value left in the
Nappers’ home to support their loan request? How could the lender help them meet their
credit needs? 
 
6.2 Ben James has just been informed by a finance company that he can access a line
of credit of no more than $75,000 based upon the equity value in his home.  James still
owes $125,000 on a first mortgage against his home and $25,000 on a second mortgage
claim against the home, which was incurred last year to repair the roof and driveway. If
the appraised value of James’s residence is $300,000, what percentage of the home's
estimated market value is the lender using to determine James’s maximum available line
of credit? 
 
6.3 Jamestown Savings Bank, in renewing its credit card customers finds that of those
customers scoring 40 points or less on its credit-scoring system, 35 percent (or a total of
10,615 credit customers) turned out to be delinquent credits resulting in total losses. 
This group of bad credit card loans averaged $6,800 in size per customer account. 
Examining its successful credit accounts Jamestown finds that 12% of its good customers
(or a total of 3,640 customers) scored 40 points or less on the bank’s scoring system. 
These low scoring but good accounts generated about $1,700 in revenues each.  If
Jamestown’s credit card division follows the decision rule of granting credit cards only
to those customers scoring more than 40 points and future credit accounts generate

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about the same average revenues and losses, about how much can the bank expect to
save in net losses. 
 
6.4 The Lathrop family needs some extra funds to put their two children through
college starting this coming fall and to buy a new computer system for a part-time home
business.  They are not sure of the current market value of their home, though
comparable 4-bedroom homes are selling for about $410,000 in the neighborhood.  The
Monarch University Credit Union will loan 75 percent of the property’s appraised value,
but the Lathrops still owe $265,000 on their home mortgage and home improvement loan
combined.  What maximum amount of credit is available to this family should it elect to
seek a home equity credit line? 
 
6.5 The Crockett family has asked for a 30-year mortgage in the amount of $325,000
to purchase a home. At a 7 percent loan rate, what is the required monthly payment? 
 
6.6 The Watson family has been planning a vacation to Europe for the past two
years.  Gratton Savings agrees to advance a loan of $7,200 to finance the trip provided
the Watsons pay the loan back in 12 equals monthly installments.  Gratton will charge
an add-on loan rate of 6%.  How much in interest will the Watsons pay under the add-on
loan rate method?  What is the amount of each required monthly payment?  What is the
effective loan rate in this case? 
 
6.7 Jane Zahrley’s request for a four-year automobile loan for $33,000 has been
approved.  Reston Center Bank will require equal monthly installment payments for 48
months.  The bank tells Jane that she must pay a total of $5,500 in finance charges. 
What is the loan’s APR? 
 
;/;’’

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6.8 Mary Cantrary is offered a $1,600 loan for a year to be paid back in equal
quarterly installments of $400 each.  If Mary is offered the loan at 8 percent simple
interest, how much in total interest charges will she pay?  Would Mary be better off (in
terms of lower interest cost) if she were offered the $1,600 at 6 percent simple interest
with only one principal payment when the loan reaches maturity?  What advantage
would this second set of loan terms have over the first set of loan terms? 

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