Question

The financial statements for Bank are shown below (all amounts in $000s). Round all answers to two decimal places (e.g. 4.25%)

Balance Sheet Bank
Assets					Liabilities and Equity
Cash	$	1,650			Brokered deposits	$	9,500
Demand deposits from other FIs		2,000			Small time deposits		15,700
Investments		7,700			Jumbo CDs		2,540
Federal funds sold		750			Federal funds purchased		2,800
Loans		19,250			Equity		3,310
Reserve for loan losses		(2,500	)
Branches and offices		5,000
Total assets	$	33,850			Total liabilities/equity	$	33,850

Income Statement
Interest income	$	6,025
Interest expense		3,495
Provision for loan losses		750
Noninterest income		870
Noninterest expense		1015
Taxes		350

a. What is Banks AU ratio? (3pt)

b. What is Banks Equity Multiplier (EM)? (3pt)

c. What is Banks NIM? (3pt)

d. Discuss Banks ROA and ROE. Which is larger? Is this in line with industry norms? Which metric is more important to shareholders of Banks? (5pt)

Answer 1

a. Asset utilization ratio is the total revenue earned for every dollar of assets the company owns.

Asset Utilization = Revenue / Average Total Assets = (6025+870)/33850 = 0.2037 = 20.37%

b. The equity multiplier is a ratio that measures a company's financial leverage, which is the amount of money the company has borrowed to finance the purchase of assets.

Equity multiplier = Total assets / Total stockholder's equity = 33850/3310 = 10.22

c. Net Interest Margin = (Interest income – Interest paid) / Average Assets

NIM = (6025 - 3495) / 33850 = 0.074 = 7.4%

d. ROA = Net income / Total assets = 1965 / 33850 = 0.058 = 5.8%

ROE = Net income / Total stockholder's equity = 1965 / 3310 = 0.5936 = 59.36%

Here, the ROE is way larger than ROA. The ROA of the bank is inline with the industry norm but the ROE is quite larger than the industry average.

The ROE is an important metric for the shareholders of any company.