Bank Balance Sheet (Note: Use this information for all three problems)

Item Amount Duration Interest Rate

Cash-type Securities $50m 1.2 year 2.25%

Commercial Loans $100m 2.4 years 4.50%

Mortgages $350m 8.0 years 6.50%

Core Deposits $270m 1.0 year 2.00%

Notes Payable $180m 2.0 years 4.50%

1. Deposit Outflow Analysis (6 points)

a. Calculate the banks assets (A), liabilities (L) and its current value, or equity (E).

b. Calculate the banks Net Income (Interest Income Interest Expense) for the current year (ignore taxes here and below, and ignore any maturity values), and the banks ROA% and ROE%. (Return on Assets = Net Income / Assets).

Assume an unexpected $70m outflow of core deposits. The bank considers 2 options:

Option A: Issue $70m of new subordinated debt for 5.50%.

Option B: Sell $70m of its mortgage portfolio at full book value.

c. Under Option A, calculate the banks Net Interest Income, ROA (express as a percent), and ROE (express as a percent).

d. Under Option B, calculate the banks Net Interest Income, ROA and ROE (express ROA and ROE as a percent).

e. If maximizing ROA is the banks goal, which option should it use (report and compare the ROAs)? What if ROE is the goal (report and compare the two ROEs)?