978-1133494683 Chapter 4 Solution Manual

Answers to End of Chapter Questions

1. Unmonitored expenses can become excessively high. If a bank has not had a plan to

control expenses, then cost cung is appropriate and will help the bank be more

2. The primary sources of non-interest income for a community bank are generally

deposit fees, trust fees, mortgage fees, fees and commissions and fees from

3. Non-interest expense consists of personnel expense, occupancy expense (including

4. The e&ciency ratio is measured as non-interest expense divided by the sum of net

interest income and non-interest income (total operating revenue). As such, it

measures how much it costs in overhead to generate $1 of revenue. A lower figure

5. The assets per employee ratio suggests that pacific Rail Bank (PRB) is more

productive because it can manage more assets per employee. Of course, this ratio

ignores the volume of a bank’s o#-balance sheet activity. The average personnel

6. Recommendations: i) identify which accounts are unprofitable and which products

or services are most commonly used by these individuals; reprice these accounts to

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accessible website, in whole or in part.

7. Fees/service charges

a. Bank must pay an interchange fee to the owner of the ATM and wants to

b. It costs more to serve a customer with a live teller versus electronically. The pricing

c. Banks know that the demand for this is price inelastic. Any increase in price thus

d. An origination fee covers the cost of making the loan and perhaps the prepayment

8. Three revenue sources include loan interest (if the customer borrows), investment

income from the customer’s deposit balances and fee income from services

9. Comparative profitability (REV – EXP) – TARGET PROFIT:

Class Action Corp.: $1.53 million – $1.50 million implies the account earned the

Zisk Drive: -$1.54 million – $4.66 million implies that expenses related to the

Gonzo Ltd.: $5.42 million – $6.48 million implies that account revenue exceeded

10. Online brokerage accounts are becoming increasingly popular and represent an

alternative delivery vehicle for banking services. Most banks will need to provide

11. Expense reduction: strength is the immediate impact as costs decline; weaknesses

include the loss of employee and customer morale and making cuts that lower

service quality. Revenue enhancement: strength is that revenues grow without

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accessible website, in whole or in part.

12. Detail Labs and The Right Stu#: The description indicates an equal pro*t from two

accounts with far different profiles. The different profiles suggest different strategies

to improve profitability for each account.

a. The bank should sell credit-related services to Detail Labs and its principals.

Perhaps credit and debit cards might serve as the relationship medium. The

b. If profit come from loans, the bank must ensure that the loans are priced at

a reasonable spread over the matched maturity (duration) cost of funds.

Activity

a. When bank managers decide to reduce their e&ciency ratios, they o!en implement a

combination of strategies designed to control costs and generate additional revenue.

One approach is to pare down the list of products and services offered to control costs,

b. Bank stock analysts have a history of in;uencing managers to adjust strategies in line

with analyst recommendations. A common criticism is that managers focus too much on

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accessible website, in whole or in part.

c. Some analysts focus on a bank’s operating risk ratio in order to be4er differentiate

performance a4ributable to cost controls versus fee generation. The lower the operating

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accessible website, in whole or in part.