Question

Assets Amount Interest rate of return Liab. & Equity Amount Interest Cost Securities $ 475 4.5...

Assets

Amount

Interest rate

of return

Liab. & Equity

Amount

Interest

Cost

Securities

$

475

4.5

%

Liabilities

$

1,175

3.0

%

Loans

725

7.5

%

Equity

125

Non-earning

100

0.0

%

Total

$

1,300

Total

$

1,300

First National Bank

ROE

12

%

Tax rate

34

%

Noninterest Expense

$

30

PLL

$

3

Industry Average

NIM

3.54

%

Overhead Efficiency

0.85

Average Loan Rate (ALR)

7.5

%

What is the bank's NIM? Is the bank performing better or worse than average? In what area is the bank performing better or worse than average? How could the bank improve if necessary?

NIM = (Interest revenue − Interest expense)/(Securities + Loans)

Homework Answers

Answer #1

I have answered the question below .

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Answer:

Bank's Net interest margin can be calculated as

=> (Interest revenues - Interest expense)/(Total securities + loans)

= 475*0.045 + 725*0.075 - 1175*0.03 / 475 + 725

= 3.375%

The bank is performing worser than the average bank in generating a large enough spread between interest income and interest expense. The bank may need to increase loan rates, shift to more profitable loans or seek lower cost deposits

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