Question

The Prime Bank had interest income of $85 million and noninterest income of $10 million. This
bank also had interest expenses of $30 million and noninterest expenses of $25 million. This
bank’s provision for loan losses is $5 million and taxes are $5 million. This bank has total assets
of $1 billion and has equity capital totaling 15 percent of total assets. What would be this bank’s
net interest margin (use total assets as earning assets), ROA and ROE?

Answer 1

Net interest income = Interest income-Interest expenses

= $85 million - $30 million

= $55 million

Net non-interst income = Non interest income - Non interest expenses

= $10 million -$25 million

= -$15 million

Net interest margin = Net interest income/Total Assets

= $55 million/$1000 million

= 0.055 or 5.5%

Net income = Net interest income + Net noninterest income - Provision for losses- Taxes

= $55 million + (-$25 million) - $5 million - $5 million

=$55 million - $25 million -$10 million

= $55 million -$35 million

= $20 million

Return on Assets(ROA) = Net income/Total Assets

= $20 million/$1000 million

= 0.02 or 2%

Equity capital = 15% of total assets

= 0.15*$1000 million

= $150 million

Return on Equity(ROE) = Net income/Equity capital

= $20 million/$150 million

= 0.1333 or 13.33%