1. You recently graduated from college with a business degree and accepted a position at a major corporation earning more than you could have ever dreamed. You want to (1) open a checking account for transaction purposes, (2) open a savings account for emergencies, (3) invest in an equity mutual fund for that far-off future called retirement, (4) see if you can find more affordable auto insurance, and (5) borrow funds to buy a condo, helped along by your uncle who said he was so proud of your grades that he wanted to give you $20,000 towards a down payment. (Is life good or what?) Make five lists of the financial service firms that could provide you each of these services.

2. What advantages can you see to banks affiliating with insurance companies? How might such an affiliation benefit a bank? An insurer? Can you identify any possible disadvantages to such an affiliation? Can you cite any real-world examples of bank-insurer affiliations? How well do they appear to have worked out in practice?
3. Suppose you are managing a medium-size branch banking organization (holding about $25 billion in assets) with all of its branch offices located within the same state. The board of directors has asked you to look into the possibility of the bank offering limited security trading and investment banking services as well as insurance sales. What laws open up the possibility of offering the foregoing services and under what circumstances may they be offered? What do you see as the principal benefits from and the principal stumbling blocks to successful pursuit of such a 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. 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

6. 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
*Note: the bank currently has 40 FTE employees.

Smiling Merchants National Bank
Report of Condition
Assets Liabilities
Cash and deposits due from banks $100 Demand deposits $190
Investment securities 150 Savings deposits 180
Federal funds sold 10 Time deposits 470
Net loans 700 Federal funds purchased 80
(Allowance for loan losses = 25) Total liabilities 920
(Unearned income on loans = 5) Equity capital
Net Fixed Assets 50 Common stock 20
Surplus 35
Total assets 980 Retained earnings 35
Total Capital 80
Total earnings assets 860 Interest-bearing deposits 650

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?