Question

The latest report of condition and income and expense statement for Happy Merchants National Bank are...

The latest report of condition and income and expense statement for Happy Merchants National Bank are as shown in the following tables:

Income and Expense Statement (Report of Income)

    Interest and fees on loans  

$44  

    Interest and dividends on securities  

6  

Total interest income

50  

    Interest paid on deposits  

32  

    Interest on nondeposit borrowings  

6  

Total interest expenses  

38  

Net interest income  

12  

Provision for loan losses  

1  

Noninterest income and fees  

16  

Noninterest expenses:  

    Salaries and employee benefits  

10  

    Overhead expenses  

5  

    Other noninterest expenses  

2  

Total noninterest expenses  

17  

Net noninterest income  

-1  

Pretax operating income  

10  

Securities gains (or losses)  

2  

Pretax net operating income  

12  

Taxes  

2  

Net operating income  

10  

Net extraordinary income  

-1  

Net income  

9  

Report of Condition  

Assets  

Liabilities  

Cash & deposits due from banks

$100  

Demand deposits  

$190  

Investment securities  

150  

Savings deposits  

180  

Federal funds sold  

10  

Time deposits  

470  

Net loans  

670  

Federal funds purchased  

60  

(Allowance for loan losses = 25)

Total liabilities  

900  

(Unearned income on loans = 5)

Equity capital  

Plant and equipment  

50  

Common stock  

20  

Total assets  

980  

Surplus  

25  

Retained earnings  

35  

Total equity capital  

80  

Total Earnings Assets  

830  

Interest-bearing deposits  

650  

Using these statements, calculate the following performance measures:

ROE, ROA, Net interest margin, Net operating margin, Earnings spread, Net profit margin, Asset utilization, and Equity multiplier.

A) ROE=

B) ROA=

C) Net interest margin=

D)Net operating margin=

E) Earnings spread=

F)Net profit margin=

G)Asset utilization=

H) Equity multiplier=

Homework Answers

Answer #1

Answer of Part a:

ROE = Net Income / Total Equity Capital
ROE = $9 / $80
ROE =0.1125 or 11.25%

Answer of Part b:

ROA = Net Income / Total Assets
ROA = $9 / $980
ROA = 0.0092 or 0.92%

Answer of Part c:

Net Interest Margin = Net Interest Income / Total Assets
Net Interest Margin = $12 / $980
Net Interest Margin =0.0122 or 1.22%

Answer of Part d:

Net Operating Margin = Net Operating Income / Total Assets
Net Operating Margin = $10 / $980
Net Operating Margin = 0.0102 or 1.02%

Answer of Part e:

Earnings Spread = (Total Interest Income / Total Earnings Assets) – (Total Interest Expenses / Total Interest Bearing Liabilities)
Earnings Spread = ($50 / $830) – ($38 / $650)
Earnings Spread = 0.0602 – 0.0585
Earnings Spread = 0.0017 or 0.17%

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