Modules 1 & 3: Depository Institutions: Chapter 1 & Chapter 4

6. The managers of Happy Bank ask for a performance/risk analysis, and ask you to answer the following questions.

Happy Bank's balance sheet is as follows:

Assets:Ave. Duration

Securities4% rate$300 million1 year

Long-term Loans 7% rate$ 900 million5 years

Total Assets$1,200 million

Liabilities & Equity

Short-term Deposits2% rate$600 million1 year

Certificates of Deposit3% rate400 million5 year

Total Liabilities$1,000 million

Equity200million

Total Liab.& Equity$1,200 million

a.What is the bank's expected net interest income $ (NII) and expected net interest margin (NIM)?[Hint: NII = Sum (Each asset x its rate) - Sum (Each liability x its rate)]

and NIM = NII / Earning Total Assets (excludes cash)

NII ($'s) ____________NIM % ______________

b.If the bank has the NIM % that you calculated above, a PLL% of 1.00%, and a Burden % of 1.50%, what is the bank's operating ROA before taxes (NIM - Burden% - PLL%)?Operating ROA (OROA) _______________

c.What is the equity multiplier (EM) for the bank?(hint EM = total assets/equity)

EM ______________

d.Using this equity multiplier, what is the bank's Operating ROE?

(hint OROE = OROA x EM)Operating ROE _______________

e. What is the bank's 1-year income (funding) gap (Rate Sensitive Assets (RSA) for 1 year - Rate Sensitive Liabilities (RSL) for 1 year?Funding Gap ____________

f.Given this funding gap if rates go up by 1%, what is the expected change in the bank's NII $?[Hint:Change NII $ = Funding Gap x Change Rate]

Expected Change in NII _______________

g.What is the Bank's Duration gap (D-Gap)?

D-GAP = Duration of Assets - {[Total Liabs./Total Assets] x Duration Liabs.}

Hint: Duration of Assets = Sum {[Each type of asset / Total Assets] x its Duration}

Duration of Liabilities = Sum {[Each type of Liability / Total Liabs.] x its Duration}

Duration of Assets __________

Duration of Liabilities ______________Duration Gap _____________

h.What is the expected % change in the value of equity with a rise in rates of 1%?Expected Change in Value of Equity = - D-GAP x {[(Chg rate / (1+ Ave loan rate)]

***(Use 7% as the average loan rate).

Expected % Chg in the Value of the Bank's Equity ___________