A senior bank officer has asked you to analyze the profitability of selected customer deposit relationships. The procedure is to estimate the total expense associated with account activity and compare this with projected revenues. Use the data from Exhibit 10.4 to answer the following questions.

1. The typical low-balance customer at your bank with an average monthly demand

deposit balance under $175 exhibits the following monthly activity: 35 withdrawals

(11 electronic), two transit checks deposited, one transit check cashed, two deposits

(one electronic), and one on-us check cashed per month. Assume there is one

account maintenance for an account in which checks are not returned and that net

indirect expenses apply.

a. Use the unit cost data to estimate the average monthly expense for the bank to

service this account.

b. Suppose the bank can earn an average 6.5 percent annually on investable deposits

(ledger balances minus float minus required reserves). The typical customer keeps

an average monthly balance net of float equal to $116 in the account and pays a

$3.25 monthly service charge. The bank must hold 10 percent required reserves

against the average balance and thus can invest 90 percent of the balance. Determine

whether the account is profitable for the bank.

2. The typical interest-checking account customer at your bank maintains a monthly

balance of $1,250 net of float, writes 34 checks or withdrawals (21 electronic), deposits

four transit checks, cashes two transit checks, makes two deposits (one electronic), and

cashes one on-us check per month. Assume there is one account maintenance for an

account in which checks are not returned and that net indirect expenses apply. Interest

is paid on the account at an annual 1.5 percent rate. Use the unit cost information to

determine whether this account is profitable. Assume the bank collects no service

charges and can again earn 4.5 percent on investable balances net of 10 percent required

reserves

at 10.4 Cost and Revenue Accounting Data for Deposit Accounts EXHIBIT 10.4 Co Unit Cost Savings Demand 1.2% Income Interest income (estimated earnings credit) Noninterest income (monthly estimates per account) Service charges Penalty fees Other 1.2% 1.8% $3.10 $2.52 $0.75 $6.37 $0.62 $0.33 $0.16 50.17 $0.27 $0.05 50.49 Total noninterest Income Expenses Activity charges (unit costs per transaction) $0.0149 $0.2634 $0.1722 $0.2663 $0.2350 $0.3072 $0.2778 $1.35 0.0580 $0.8064 $0.4904 $0.7180 $0.6433 Deposit-electronic $3.5525 0.6110 $1.4933 Deposit-nonelectronic Withdrawal-electronic Withdrawal-nonelectronic Transit check deposited Transit check cashed On-us check cashed Official check issued Monthly overhead expense costs Monthly account maintenance (truncated) Monthly account maintenance (nontruncated) Net indirect expense $2.96 $8.11 $4.70 $4.35 $2.16 $2.31 $21.12 Miscellaneous expenses Account opened Account closed $9.10 $6.33 37.55 22.48 $6.95 $3.86 at 10.4 Cost and Revenue Accounting Data for Deposit Accounts EXHIBIT 10.4 Co Unit Cost Savings Demand 1.2% Income Interest income (estimated earnings credit) Noninterest income (monthly estimates per account) Service charges Penalty fees Other 1.2% 1.8% $3.10 $2.52 $0.75 $6.37 $0.62 $0.33 $0.16 50.17 $0.27 $0.05 50.49 Total noninterest Income Expenses Activity charges (unit costs per transaction) $0.0149 $0.2634 $0.1722 $0.2663 $0.2350 $0.3072 $0.2778 $1.35 0.0580 $0.8064 $0.4904 $0.7180 $0.6433 Deposit-electronic $3.5525 0.6110 $1.4933 Deposit-nonelectronic Withdrawal-electronic Withdrawal-nonelectronic Transit check deposited Transit check cashed On-us check cashed Official check issued Monthly overhead expense costs Monthly account maintenance (truncated) Monthly account maintenance (nontruncated) Net indirect expense $2.96 $8.11 $4.70 $4.35 $2.16 $2.31 $21.12 Miscellaneous expenses Account opened Account closed $9.10 $6.33 37.55 22.48 $6.95 $3.86