CHAPTER 5

PROBLEMS
Problem 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):
Balance Sheet
Total assets $4,000
Cash and due from depository institutions 90
Securities 535
Federal funds sold and reverse repurchase agreements 45
Gross loans and leases ?
Loan loss allowance 200
Net loans and leases 2,700
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 5
Common stock 25
McGraw-Hill/Irwin
Surplus 320
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial
Undivided Services, 7/e
profits (Retained Earnings) 70 5-2
 Problem 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):
Balance Sheet
Total assets $4,000.00
a. Gross loans and leases = Net loans and
Cash and due from depository institutions 90.00 leases + Loan loss allowance ($200.00 +
Securities 535.00 $2,700.00)
Federal funds sold and reverse repurchase
agreements 45.00 b. This is the only asset missing and so it is
Gross loans and leases $2,900.00a total assets less all of the rest of the assets
Loan loss allowance 200.00 listed above. ($4,000.00 − $90.00 −
Net loans and leases 2,700.00
Trading account assets 20.00 $535.00 − $45.00 − $2,700.00 − $20.00 −
Bank premises and fixed assets 220.00b $15.00 − $200.00 − $175.00)
Other real estate owned 15.00
Goodwill and other intangibles
c. Total liabilities and capital = Total assets
200.00
All other assets 175.00 ($4,000.00)
Total liabilities and capital 4,000.00c d. Total liabilities = Total liabilities and
Total liabilities 3,580.00d
Total deposits 2,920.00e
capital − Total equity capital ($4,000.00 −
Federal funds purchased and repurchase $420.00)
agreements. 80.00 e. Total deposits = Total liabilities − All of
Trading liabilities 10.00
Other borrowed funds 50.00 the other liabilities ($3,580.00 − $80.00 −
Subordinated debt 480.00 $10.00 − $50.00 − $480.00 − $40.00)
All other liabilities 40.00 f. Total equity capital = Perpetual preferred
Total equity capital 420.00f
Perpetual preferred stock 5.00 stock + Common stock + Surplus +
Common stock 25.00 Undivided profit ($5.00 + $25.00 + $320.00
Surplus 320.00
McGraw-Hill/Irwin
Undivided profits (Retained Earnings)
+ $70.00)
© 2008
70.00 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e 5-3
Problem 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 ?
Total noninterest income 100
Fiduciary activities 20
Service charges on deposit accounts 25
Trading account gains and fees ?
Additional noninterest income 30
Total noninterest expense 125
Salaries and employee benefits ?
Premises and equipment expense 10
Additional noninterest expense 20
Pretax net operating income 15
Securities gains (losses) 5
Applicable income taxes 3
Income before extraordinary items ?
Extraordinary gains—net
McGraw-Hill/Irwin
2
Netand
Bank Management income
Financial Services, 7/e ? Reserved. 5-4
© 2008 The McGraw-Hill Companies, Inc., All Rights
 Problem 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 a. Total interest expense = Total interest
Total interest income $200 income − Net interest income ($200 − $60)
Total interest expense 140a b. Provision for loan and lease losses = Net
Net interest income 60 interest income + Total noninterest income −
Provision for loan and lease losses 20b Total noninterest expense − Pretax net
Total noninterest income 100 operating income (60 + $100 – $125 – $15)
Fiduciary activities 20 c. There are four areas of Total noninterest
Service charges on deposit accounts 25 income and only one is missing and the total
Trading account gains and fees 25c is given. ($100 − $20 − $25 − $30)
Additional noninterest income 30 d. There are three areas of Total noninterest
Total noninterest expense 125 expense and only one is missing and the
Salaries and employee benefits 95d total is given ($125 – $10 – $20)
Premises and equipment expense 10 e. Income before extraordinary items =
Additional noninterest expense 20 Pretax income + Security gains – Taxes ($15
Pretax net operating income 15 + $5 – $3)
Securities gains (losses) 5 f. Net income = Income before
Applicable income taxes 3 extraordinary items + Extraordinary gains—
Income before extraordinary items net ($17 + $2)
17e
Extraordinary gains—net 2
McGraw-Hill/Irwin
NetBank
income
Management and Financial Services, 7/e
© 2008 The
19fMcGraw-Hill Companies, Inc., All Rights Reserved.
5-5
Problem 3
If you know the following figures:
Total interest income $140 Provision for loan losses $5
Total interest expenses 100 Income taxes 4
Total noninterest income 75 Increases in bank’s undivided profits 6
Total noninterest expenses 90

Please calculate these items:

Net interest income Net interest income $40a

Net noninterest income Net noninterest income −15b
Pretax net operating income Pretax net operating income 20c
Net income after taxes Net income after taxes 16d
Total operating revenues Total operating revenues 215e
Total operating expenses Total operating expenses 195f
Dividends paid to common Dividends paid to common
stockholders stockholders 10g

a. Total interest income − Total interest expense ($140 − $100)

b. Total noninterest income − Total noninterest expense ($75 − $90)
c. Net interest income + Net noninterest income − PLL ($40 – $15 − $5)
d. 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)
[Link]-Hill/Irwin
Net income after taxes − increases in bank’s
Bank Management and Financial Services, 7/e
© 2008undivided profits
The McGraw-Hill ($16Inc.,
Companies, − $6)
All Rights Reserved.
5-6
Problem 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 Nondeposit 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 Total assets $405a
Net loans Net loans $285b
Undivided profits Undivided profit $7c
Fed funds sold Fed funds sold $20d
Depreciation Depreciation $5e
Total deposits Total deposits $335f

a. 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 assets
e. Bank premises and equipment, gross – bank premises and equipment, net ($25 – $20)
[Link]-Hill/Irwin 2008 The–McGraw-Hill
Total liabilities less nondeposit borrowings©($375 $40) Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e 5-7
Problem 5
The Sea Level Bank has Gross Loans of $800 million with an 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 _____.

Net Loans = Gross Loans –ALL = $800 − $45 = $755 million

b. 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 million

ALL =$45 million – ($10 million − $7 million) = $42 million
Net Loans = Gross Loans – ALL = $797 − $42 = $755 million

McGraw-Hill/Irwin
© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e 5-8
Problem 6
See if you can determine the amount of Bluebird State Bank’s current net income after taxes from the
figures below (stated in millions of dollars) and the amount of its retained earnings from current income
that it will be able to reinvest in the bank. (Be sure to arrange all the figures given in correct sequence to
derive the bank’s Report of Income.) Bluebird State Bank
Report of Income (in
millions of dollars)
Total interest income
Effective tax rate 28% Interest on loans $90
Int earned on government
Interest on loans $90 bonds and notes $9
Total $99
Employee wages, salaries, and benefits 13
Interest earned on government bonds and notes 9 Total interest expense
Interest paid on federal funds
purchased $5
Provision for loan losses 5 Interest paid to customers time
Overhead expenses 3 and Savings deposits
Total
$40
$45
Service charges paid by depositors 3 Net interest income $54
Security gains/losses –7 Provision for loan loss $5

Interest paid on federal funds purchased 5 Total noninterest income

Service charges paid by
Payment of dividends of $4 per share on 1 million depositors $3
Trust department fees $3
outstanding shares to be made to common Total $6
stockholders Total noninterest expenses
Employee wages, salaries and
Interest paid to customers holding time and savings 40 benefits $13
Overhead expenses $3
deposits Total $16

Trust department fees 3 Net noninterest income ($10)

Pretax income $39

Securities gains/(losses) ($7)
Taxes paid (28%) $9
Net income $23
Less dividends $4
McGraw-Hill/Irwin RetainedCompanies,
earnings from current income $19
© 2008 The McGraw-Hill Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e 5-9