Answers to Chapter 12
Questions:
1. The Report of Condition refers to the bank’s balance sheet which presents information about the accumulation of
2. Institutions in CAMELS group 2 are fundamentally sound, but may reflect modest weaknesses correctable in the
6. A repurchase agreement is an asset if bank-1 “purchased” securities from (or sent excess reserves to) some other
9. Core deposits represent demand deposits, NOW accounts, MMDAs, retail CDs, and other accounts that are not
10. The four categories are:
1. loan commitments
12. End-of-year balance sheets reflect the position of the bank at one point in time, while the income statements
14. Both are measures of profitability and, to some extent, efficiency. A bank that is able to generate profitable
15. Although ratio analysis is an imprecise and subjective way to analyze a firm, a few ratios seem to stand out.
17. Ratio analysis allows managers, regulators, analysts, and investors to look at the bank’s overall profitability as a
function of the profit the bank earns per dollar of operating income (operating efficiency) and the dollar of operating
18. Among the problems and opportunities that ratio analysis might not reveal would be impending regulatory
19. The more focused orientation of HBT relative to BOA can best be seen by looking at the composition of the
asset, and particularly the loan, portfolios (ratios 82 through 94) and the liabilities (ratios 32 through 44) of the two
20. Bank size has traditionally affected the financial ratios of commercial banks, resulting in significant differences
across size groups. Large banks’ relatively easy access to purchased funds and capital markets compared to small
banks’ access is a reason for many of these differences. For example, large banks with easier access to capital
Problems:
1. The treasury security offers 7% before tax and 4.9% after tax. This is less than the 5% offered by the municipal.
3. a. Earning assets = investment securities + net loans
= $4,050 + $2,025 + $15,525 – $1,125 = $20,475
4. a. Earning assets = investment securities + net loans
= $3,100 + $1,664 + $9,120 = $13,884
5. During the month, management estimates that an additional $5,200 of loans will not be paid as promised.
Accordingly, the bank records an expense to loan loss provision (which reduces net income and thus retained
earnings and equity of the bank) and increases the allowance for loan losses to $188,200 on the balance sheet (see
Panel B below). Notice that the loan is still listed as an asset on the bank’s balance sheet at this time. After another
month, management feels there is no chance of recovering the loan and writes the $5,200 loan off its books. At this
time, loans are reduced by $5,200 as is the allowance for loan losses (see Panel C below). Notice when the loan is
considered unrecoverable and actually removed from the balance sheet, there is no impact on the bank’s income or
equity value.
Panel A: Beginning of Month 1
Panel B: End of Month 1
6. a. Earning assets = investment securities + net loans
= $6,080 + $2,990 + $20,040 = $29,110
7. a. Earning assets = investment securities + net loans
= $1,800 + $900 + $6,900 – $500 = $9,100
8. Revenues (in thousands) = 22,000 x 0.08 + 12,000 x 0.06 + 80,000 x 0.10 + 4,000 x 0.09 = $10,840
9. Revenues (in thousands) = 29,600 x 0.015 + 15,960 x 0.0115 + 106,400 x 0.0725 = $8,341,540
10. (in millions of dollars)
a. return on equity = 5,000/28,000 = 17.86%
b. return on assets = 5,000/183,000 = 2.73%
11. (in millions of dollars)
a. return on equity = 2,275/(5,000 + 4,000 + 6,125) = 15.04%
b. return on assets = 2,275/137,500 = 1.65%
15. Debt to equity = 1.75 = Total debt / Total equity = Total debt / (Total assets – Total debt)