Part TWO: The following is based upon the Integrative Problem discussed in class.

The information provided the forecast of the earnings and expenses associated with this institution (worksheet provided). Current Treasury Bill rate is 0.75%.

DATA: Dollar AmountExpense

Source of Funds(in millions)Interest Rate

Demand Deposits$5,0000%

Time Deposits$2,0001%

1-year NCD$3,000T-bill + 0.5%

5-year NCD$2,5001-year NCD + 1%

Money Market$2,500T-bill - 0.5%

Total Liabilities$15,000

Use of FundsDollar AmountEarnings RateLoan Loss %

Cash$1,800

Small Bus. Loans$4,000T-bill + 3%0.5%

Lg Bus. Loans$2,000T-bill + 1.5%0.25%

Consumer Loans$4,000T-bill + 4%1.0%

Treasury Bills$1,000T-bill rate0%

Treasury Bonds$1,500T-bill rate + 2%0%

Corporate Bonds$1,000T-bond rate + 2%0%

Fixed Assets$700

Total Assets$16,000

Non-Interest Revenue$200

Non-Interest Expense$250

Tax rate34%

Difference between Assets and Liabilities must be Equity (Capital).

Part 2 a: Worksheet: answers are provided for expenses & earnings 20 POINTS

Current T-bill Rate 0.75%[all $$$ in millions]

Source of Funds

Dollar Amount

(in millions)

Relevant Interest Rate

Expected Expenses

#

Demand deposits

$5,000

0

1

Time deposits

$2,000

1%

2

1-year NCDs

$3,000

1.25%

3

5-year NCDs

$2,500

2.25%

4

Money Market Borrowings

$2,500

.25%

5

Total Liabilities

$15,000

TOTAL =

6

Use of Funds

LL%

Loan Loss

$ Amt

Funds

Earning Interest

Relevant Interest Rate

Expected Earnings(corrected for LL)

Cash

$1,800

0

0

1800

0

7

Small business loans

$4,000

0.5%

$20

3980

3.75%

8

Large business loans

$2,000

0.25%

$5

1995

2.25%

9

Consumer loans

$4,000

1.0%

$40

3960

4.75%

10

Treasury bills

$1,000

0

0

1000

.75%

11

Treasury bonds

$1,500

0

0

1500

2.75%

12

Corporate bonds

$1,000

0

0

1000

4.75%

13

Total investments

$15,300

0

$65

TOTAL =

14

Income Statement

Interest Revenues

#

Interest Expenses

Non Interest Revenues

Non Interest Expenses

Loan Loss Provision

Income Before Tax

15

Income tax liability (34%)

16

Net Income

17

Cash Dividends (60% DPR)

18

Retained Earnings (40% RR)

19

Equity

20

*DPR: dividend payout ratio (portion of earnings available to common stockholders paid out as dividends), thus 1-DPR = Retention Ratio.

Part 2b: Complete these questions using the data from the data above. Each answer is worth 2 points. Compare with "above, below, on/near target".22 POINTS

1.RETURN

a.Calculate & compare the expected ROA (Return on Assets = Net Income / Total Assets) for the bank.Norm is ROA of 1%.

Calculate:

Compare:

b.Calculate the expected ROE (Return on Equity = Net Income / Total Equity) for the bank.Norm is ROE of 12%.

Calculate:

Compare:

2.LIQUIDITY

a.Does the institution meet its 10% reserve requirement?

Calculate percentage:

Circle: YES orNO

b.Contrast the bank's Primary Liquidity with an industry average of 20%: (Primary is CASH: Vault Cash plus Reserves at FED)

Calculate:

Compare:

c.Calculate the total Liquidity Position (Total Liquidity is the cash position plus the holding of short term US Treasuries. T-bonds are held as collateral if a bank is a Tax & Loan Facility for the Treasury, and are not held for liquidity.)

Compare the bank's total liquidity with an industry average of 25%.

Calculate Percentage:

Compare:

3.CAPITAL

a.Calculate the Capital Ratio position of the institution (Capital Ratio is the Equity or Capital divided by Total Assets).

Calculate:

b.Compare the bank's current Capital Ratio with a Basil Expectation of 8% for a risk-ranked institution similar to this one.