12-1.

Exeter National Bank reports the following figures in its current Report of Condition: Cash and Interbank Dep S.T. Securities investment Total Loans, gross L.T. Securities Other Assets Total Assets 50 15 375 150 10 600 Core Deposits Large Negotiable CDs Deposits placed by brokers Other Deposits Money Mkt. Liabilities Other Liabilities Equity Capital Total Liab. & Eq. 50 150 65 140 95 70 35 600

a. Evaluate the funding mix of deposits and nondeposit sources of funds employed by Exeter. Given the mix of its assets, do you see any potential problems? What changes would you like to see management of this bank make? Why? Core deposits/Assets Large Negotiable CDs/Assets Brokered Deposits/Assets Other Deposits/Assets Money Market Liabilities/Assets Other Liabilities/Assets Equity Capital/Assets = = = = = = = 8.33% 25.00% 10.83% 23.33% 15.83% 10.40% 11.66%

The proportion of core deposits at exeter is exceptionally low, while large CDs and other moneymarket borrowings make up more than 40.83 percent of the banks total funding sources. This funding mix tends to subject the bank to excessive vulnerability to quick withdrawal of funds and high interest-rate risk exposure. Exeter also appears to be excessively dependent on other deposits.Brokered deposits, more than half of exeters assets are funded with highly interestsensitive deposits and money-market borrowings. Management needs to expand the banks core deposits and other more stable funds sources.

12-3. First Metrocentre Bank posts the following schedule of fees for its household and smallbusiness transaction accounts: y For average monthly account balances over $1,500 there is no monthly maintenance fee and no charge per check or other draft. y For average monthly account balances of $1,000 to $1,500, a $2 monthly maintenance fee is assessed and there is a 10 charge per check or charge cleared. y For average monthly account balances of less than $1,000, a $4 monthly maintenance fee is assessed and there is a 15 per check or per charge fee.

What form of deposit pricing is this? What is First Metrocentre trying to accomplish with its pricing schedule? Can you foresee any problems with this pricing plan?

First Metrocentre Bank has posted a schedule of deposit fees that allows the customer servicecharge free checking for average monthly account balances over $1,500. Lower balances are assessed an inverse monthly maintenance fee plus an increased per-check charge as the average monthly account balance falls. This is conditional deposit pricing designed to encourage more stable, larger-denomination accounts which would give the bank more money to use and, perhaps, a more stable funding base. The fees on under-$1,000 accounts are stiff which may drive away many small depositors to other banks.

12-4. Diamond Pit Savings Association finds that it can attract the following amounts of deposits if it offers new depositors and those rolling over their maturing CDs the interest rates indicated below: Expected Volume of New Deposits $10 million 15 million 20 million 26 million 28 million Rate of Interest Offered Depositors 5.00% 5.25 5.50 5.75 6.00

Management anticipates being able to invest any new deposits raised in loans yielding 7.00 percent. How far should this thrift institution go in raising its deposit interest rate in order to maximize total profits (excluding interest costs)?

Expected Inflows

$10 15 20 26 28

Rate Offered on New Funds 3.0% 3.25 3.50 3.75 4.00

Total Interest Cost 0.3000 0.4875 0.7 0.975 1.12

Marginal Interest Cost 0.3000 0.1875 0.2125 0.275 0.145

Marginal Cost Rate

Marginal Revenue Rate 6.25% 6.25 6.25 6.25 6.25

3.000% 3.750 4.250 4.583 7.250

Exp. Diff. In Marg. Rev and Cost +3.250% +2.500 +2.00 +1.667 -1.00

Total Profits Earned $0.3250 $0.4500 $0.5500 $0.6500 $0.6300

Gold Mine Pit Savings Association should raise its deposit rate to 3.75%, attracting $26 million in new deposits; because up to that point the marginal revenue rate is greater than the marginal cost rate and total profits are also rising. At 4.0%, the marginal cost rate is greater than the marginal revenue rate and total profits have fallen from a high of $0.65 million back down to $0.63 million.

Richman Savings Bank finds that its basic transaction account, which requires a $400 minimum balance, costs this savings bank an average of $2.65 per month in servicing costs (including labor and computer time) and $1.18 per month in overhead expenses. The savings bank also tries to build in a $0.50 per month profit margin on these accounts. What monthly fee should the bank charge each customer? Following the cost-plus-profit approach, the monthly fee should be: Monthly fee = $2.65 + $1.18 + $0.50 = $4.33 per month.

Further analysis of customer accounts reveals that for each $100 above the $500 minimum in average balance maintained in its transaction accounts, Richman Savings saves about 5 percent in operating expenses with each account. (Note: If the bank saves about 5 percent in operating expenses for each $100 held in balances above the $500 minimum, then a customer maintaining an average monthly balance of $1,000 should save the bank 25 percent in operating costs.) For a customer who consistently maintains an average balance of $1,000 per month, how much should the bank charge in order to protect its profit margin? The appropriate fee for this customer would be:

[$2.65 -0.25 ($2.65)] + $1.18 + $0.50 = $1.9875 + $1.18 + $0.50 = $3.6675 per month.