How will the roe for ok state bank change if total

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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
Total assets	$4,000.00
Cash and due from depository institutions	90.00
Securities	535.00
Federal funds sold and reverse repurchase agreements	45.00
Gross loans and leases	_____
Loan loss allowance	200.00
Net loans and leases	2,700.00
Trading account assets	20.00
Bank premises and fixed assets	_____
Other real estate owned	15.00
Goodwill and other intangibles	200.00
All other assets	175.00
Total liabilities and capital	_____
Total liabilities	_____
Total deposits	_____
Federal funds purchased and repurchase agreements.	80.00
Trading liabilities	10.00
Other borrowed funds	50.00
Subordinated debt	480.00
All other liabilities	40.00
Total equity capital	_____
Perpetual preferred stock	5.00
Common stock	25.00
Surplus	320.00
Undivided profits	70.00

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	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 noninterest income	75	Increases in bank's undivided profits	6
Total noninterest expenses	90

Please calculate these items:

Net interest income ____
Net noninterest income _____
Pretax net operating income ____
Net income after taxes _____
Total operating revenues ____
Total operating expenses _____
Dividends paid to common stockholders

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 ____
Net loans____
Undivided profits ____
Fed funds sold ____
Depreciation ____
Total deposits ____

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 _____.

b. After the charge-off, what are the dollar figures for Gross Loans, ALL and Net Loans assuming no other transactions?

c. If the Sunset Hotel sells at auction for $10 million, how will this affect the pertinent balance sheet accounts?

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. The John Wayne Bank is developing a list of off-balance-sheet items for its call report. Please fill in the missing items from its statement shown below. Using Table 5-5, describe how John Wayne compares with other banks in the same size category regarding its off-balance sheet activities.

Off-balance-sheet items for John Wayne Bank (in millions of $)
Total unused commitments		$8,000
Standby letters of credit and foreign office guarantees		1,350
(Amount conveyed to others)		-50
Commercial letters of credit		60
Securities lent		2,200
Derivatives (total)		100,000
	Notional amount of credit derivatives		22,000
	Interest rate contracts		54,000
	Foreign exchange rate contracts
Contracts on other commodities and equities		$1,200
All other off - balance -sheet liabilities		49
Total off-balance-sheet items
Total assets (on-balance sheet)		$12,000
Off-balance-sheet assets ÷ on-balance-sheet assets

The Off-balance-sheet-assets of John Wayne Bank are in proportion with other banks of the same size.

9. 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.)

Effective tax rate	28%
Interest on loans	$90
Employee wages, salaries, and benefits	13
Interest earned on government bonds and notes	9
Provision for loan losses	5
Overhead expenses	3
Service charges paid by depositors	3
Security gains/losses	-7
Interest paid on federal funds purchased	5
Payment of dividends of $4 per share on 1 million outstanding shares to be made to common stockholders
Interest paid to customers holding time and savings deposits	40
Trust department fees	3

10. Which of these account items or entries would normally occur on a bank's balance sheet (Report of Condition) and which on a bank's income and expense statement (Report of Income)?

11. You were informed that a bank's latest income and expense statement contained the following figures (in $ millions):

Net interest income	$800
Net noninterest income	(500)
Pretax net operating income	372
Security gains	100
Increases in bank's undivided profits	200

12. Why do the financial statements issued by banks and by nonbank financial-service providers look increasingly similar today? Which nonbank financial firms have balance sheets and income statements that closely resemble those of commercial banks (especially community banks)?

13. What principal types of assets and funds sources do nonbank thrifts (including savings banks, savings and loans, and credit unions) draw upon? Where does the bulk of their revenue come from, and what are their principal expense items?

14. How are the balance sheets and income statements of finance companies, insurers, and securities firms similar to those of banks, and in what ways are they different? What might explain the differences you observe?

15. The Report of Condition has information about the sources and uses of funds. Go to SDI (www2.fdic.gov/sdi/) and pull up the Assets and Liabilities for the Bank of Amer¬ica's most recent year-end. Access the bank holding company information.

a. Using the link for Other Real Estate Owned (OREO), identify and describe the dollar composition of this item.

b. Using the link for Goodwill and Other Intangibles, identify and describe the dollar composition of this item.

16. The Report of Income has information about revenues and expenses. Net interest income is the difference between the Interest revenue and Interest expense. Using SDI (www2.fdic.gov/sdi/) pull up the annual Income and Expense for the most recent year¬end for Bank of America-the bank holding company.

a. Using the link for Total interest income, identify and describe the dollar composi¬tion of this item.

b. Using the link for Total interest expense, identify and describe the dollar composition of this item.

17. Noninterest income and Expenses are detailed in the Report of Income. Using SDI (nw2.fdicegovisdi/) pull up the annual Income and Expense for Bank of America's most recent year-end.

a. What components are combined to create the dollar amount of Noninterest income? You will need to use the links for Trading account gains and fees and Addi-tional noninterest income to describe the dollar composition of this item.

b. What components are combined to create the dollar amount of Noninterest expense? You will need to use the link for Additional noninterest expense to describe the dollar composition of this item.

18. An investor holds the stock of Last-But-Not-Least Financialsand 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?

19. 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?

20. Oriole Savings Association has a ratio of equity capital to total assets of 9 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?

21. The latest report of condition and income and expense statement for Smiling Merchants National Bank are as shown in the following tables:

Smiling Merchants National Bank (complete)

Income and Expense Statement (Report of Income)
Interest and fees on loans	$50
Interest and dividends on securities	6
Total interest income	56
Interest paid on deposits	40
Interest on nondeposit borrowings	6
Total interest expense	46

Net interest income	10
Provision for loan losses	5
Noninterest income and fees	20
Noninterest expenses:
Salaries and employee benefits	10*
Overhead expenses	5
Other noninterest expenses	2
Total noninterest expenses	17
Net noninterest income	-2
Pretax operating income	8
Securities gains (or losses)	2
Pretax net operating income	10
Taxes	2
Net operating income	8
Net extraordinary income	-1
Net income	7

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 noninterest 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 Smiling Merchants' performance?

22. The following information is for Rainbow National Bank:

Interest income	$2,250.00
Interest expense	1,500.00
Total assets	45,000.00
Securities losses or gains	21.00
Earning assets	40,000.00
Total liabilities	38,000.00
Taxes paid	16.00
Shares of common stock outstanding	5,000
Noninterest income	$800.00
Noninterest expense	900.00
Provision for loan losses	250.00

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?

23. 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?

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 0.95percent 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?

24. 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?

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?

25. 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?

26. 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