Question

FIN 4243: Commercial Bank Management Homework Assignment 1 1. Use the information listed below for Carter State Bank and calculate the bank's ROE and its three component ratios (Net profit margin, Asset utilization and equity multiplier.) (3 points) Net income $17 million Total assets S1,546 million Total revenue S294 million Total equity capital $148 million 2. A bank which starts with ALLL (used to be abbreviated as ALL) of $11.25 million at the beginning of the year. The charge for provision for loan losses for the year was $4.10 million. The bank charged off worthless loans of $4.76 million during the year and recovered S6,5 million on loans previously charged off. What is the end-of-the year balance for ALLL? (Show work, please.) (2 points) 3. A bank currently owns a municipal bond paying a tax-exempt rate of 2.9%. The banks camed S5.1 million tax-exempt income from this bond. If the banks marginal tax rate is 32%, what is the taxable equivalent income in dollars? What is the tax benefit? (2 points) $27 4. Incomplete financial statements of M Street Bank are given below. S In millions Balance Sheet Income Statement Cash $60 Interest Income Securities Investments $145 Interest Expenses Net Loans $921|Net interest income Net Premises and Equip Total Assets ........ Non-interest Income Deposits $907 Non-interest Expenses Non-deposit Borrowings $121 Provision for Loan Losses Equity Capital Pre Tax Net Operating Income Total Liabilities and Equity Securities Gains (Losses) Taxes Earning assets Net Income Interest bearing liabilities 5861 a. Please complete the missing items in the balance sheet and the income statement. (2 points) b. Calculate the following ratios: ROE, ROA, Net interest margin, Net profit margin, Earnings spread, Equity multiplier, and Asset Utilization. You may assume that the balance sheet numbers are averages for two periods. (5 points) c. Write the extended Du Pont equation for the bank (actual numbers, not the formulas). (1 point)

Answer 1

Q No 1
Ans:-
	Net Income			$ 17 million
	Share Holder's Equity			$ 148 million
	Return Of Equity = Net Income / Share holders Equity
				=17/148*100
		Return Of Equity		11.49	Percentage
	Net Income			$ 17 million
	Revenue			$ 294 million
	Net Profit Margin Ratio = Net Income / Revenue
				=17/294*100
	Net Profit Margin Ratio			5.78	Percentage
	Revenue			$ 294 million
	Total Assets			$ 1,546 million
	Asset utilization ratio = Revenue /Total average assets
				=294/1546*100
	Asset utilization ratio			19.02	Percentage
Q No 2
Ans:-	Opening balance of ALLL					11.25 million
Add:-	Provision for loan					4.10 million
Less:-	Worth less loans charged off					4.76 million
Closing balance / Year end balance in ALL						10.59
Prev Year Charged off bad debts received				6.5 Millions
This amount should not be added to ALLL account. It is directly treated as income.
Q NO 3
Ans:-	Interest Rate	2.90%
	Total amount of interest income earned				5.1 Million
	Total Amount invested by bank in bonds X Interest rate /100 = Interest income
	Amount invested in bonds =			Interest*100 / interest rate
				=5.1*100/2.9
				175.86	Millions
	Equivalent yeild on tax free bond = yeild percent on tax free bonds / (1- tax rate)
				=2.9 / (1- 0.32)
				4.26	Percentage
	Equivalent Taxable income = total Amount invested in bonds * interest rate
			= 175.86 millions * 4.26 Percentage
			7.49	millions Approx
	Tax Benefit =	Equivalent Taxable income - amount of Tax free interest income earned
		= 7.49 millions - 5.1 Millions
	Tax Benefit =	$ 2.39	Millions
Q No 4				("$ ) amount	( $ in millions)
	a.	Net interest income		54.00
	Less:-	Interest expenses		23.40
	***	Net interest income		$54-$ 23 =	$ 31
		Non interest income		5.2
	Less:-	Non interest expense		14.6
	Less:-	Prov for Loans & Losses		3.1
				Loss	($ 12.50)
	***	Pre Tax operating income			$ 18.50
	Less:-	Security gain ( Losses)			($ 1.90)
	Less:-	Taxes			($ 4.10)
	***	Net income			$ 12.50