Question: As a loan officer for Starship 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 other audio-video equipment. USF has just filed a request for renewal of its $10 million line of credit, which will cover approximately 10 1/2 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 have 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? What decision should the bank make under the foregoing assumptions? If you decide to turn down this request, under what assumptions regarding revenues, expenses, and customer deposit balances would you be willing to make this loan?