1-Forever Savings Bank estimates that building a new branch office in the newly developed Washington township will yield an annual expected return of 12 percent with an estimated standard deviation of 10 percent. The bank’s marketing department estimates that cash flows from the proposed Washington branch will be mildly positively correlated (with a correlation coefficient of + 0.15) with the bank’s other sources of cash flow. The expected annual return from the bank’s existing facilities and other assets is 10 percent with a standard deviation of 5 percent. The branch will represent just 20 percent of Lifetime’s total assets. Will the proposed branch increase Forever’s overall rate of return? Its overall risk?

2-A group of businesspeople from Scott Island are considering filing an application with the state banking commission to charter a new bank. Due to a lack of current banking facilities within a 10-mile radius of the community, the organizing group estimates that the initial banking facility would cost about $3.3 million to build along with another $500,000 in other organizing expenses and would last for about 25 years. Total revenues are projected to be $400,000 the first year, while total operating expenses are projected to reach $160,000 in year 1. Revenues are expected to increase 4 percent annually after the first year, while expenses will grow an estimated 2 percent annually after year 1. If the organizers require a minimum of a 10 percent annual rate of return on their investment of capital in the proposed new bank, are they likely to proceed with their charter application given the above estimates?

3-Norfolk Savings Bank is considering the establishment of a new branch office at the corner of 49th Street and Hampton Boulevard. The savings association’s economics department projects annual operating revenues of $1.6 million from fee income generated by service sales and annual branch operating expenses of $800,000. The cost of procuring the property is $1.75 million and branch construction will total an estimated $2.75 million; the facility is expected to last 20 years. If the savings bank has a minimum acceptable rate of return on its invested capital of 15 percent, will Norfolk Savings likely proceed with this branch office project

4- The following statistics and estimates were compiled by Big Moon Bank regarding a proposed new branch office and the bank itself:

Branch office expected return = 15%

Standard deviation of branch return = 8%

Existing bank’s expected return = 10%

Standard deviation of existing bank’s return = 5%

Branch asset value as a percentage of total bank assets = 16%

Correlation of net cash flows for branch and bank as a whole = +0.48

What will happen to Big Moon’s total expected return and overall risk if the proposed new branch project is adopted?

5-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.

6-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)?

7-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?

8-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.

9-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

10-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

11-Life Is Good Financial Services has provided Good Things to Eat Groceries a proposal for in-store branches in two of its four Davidson locations. Good Things to Eat counter proposed opening one in-store branch in one of the two proposed locations as a test case. The locations would be identified as the Lily Branch or the Daisy Branch. Given the following statistics and forecasts compiled by Life Is Good regarding the two alternatives, which branch should be used as a test case? Base your recommendation on returns and risk

	Expected Return	Standard Deviation	Correlation Coefficient Other Services	Percentage Total Assets
In-store branch at Lily location	15.00%	6.50%	0.5	5.00%
In-store branch at Daisy location	15.50%	7.50%	0.3	5.00
Existing facilities	12.00	5.00		95.00