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

Question

Accepted Answer

Happy Merchants National Bank

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 expense	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	16
Securities gains (or losses)	2
Pretax net operating income	18
Taxes	2
Net operating income	16
Net extraordinary income	-1
Net income	15
*Note: the bank currently has 40 FTE employees.

Happy Merchants National Bank

Report of Condition
Assets		Liabilities
Cash and deposits due from banks	$100	Demand deposits
Investment securities	150	Savings deposits
Federal funds sold	10	Time deposits
Net loans	670	Federal funds purchased
(Allowance for loan losses = 25)		Total liabilities
(Unearned income on loans = 5)		Equity capital
Plant and equipment	50	Common stock
		Surplus
Total assets	980	Retained earnings
		Total Capital
Total Earnings Assets	830	Interest-bearing deposits

Fill in the missing items on the income and expense statement. Using these statements, calculate the following performance measures:

ROE	Asset utilization
ROA	Equity multiplier
Net interest margin	Tax management efficiency
Net noninterest margin	Expense control efficiency
Net operating margin	Asset management efficiency
Earnings spread	Funds management efficiency
Net profit margin	Operating efficiency ratio

What strengths and weaknesses are you able to detect in Happy Merchants’ performance?

[latex]ROE =\frac{ ext { Net Income }}{ ext { Total Equity Capital }}=\frac{\$ 15}{\$ 80}=0.1875 ext { or } 18.75 \%[/latex]

[latex]ROA =\frac{ ext { Net Income }}{ ext { Total Assets }}=\frac{\$ 15}{\$ 980}=0.015306 ext { or } 1.53 \%[/latex]

[latex] ext { Net Interest Margin }=\frac{ ext { Net Interest Income }}{ ext { Total Assets }}=\frac{\$ 12}{\$ 980}=\$ 0.0122 ext { or } 1.22 \%[/latex]

[latex] ext { Net Noninterest Margin }=\frac{-1}{\$ 980}=-0.001 ext { or }-0.10 ext { percent }[/latex]

[latex] ext { Net Operating Margin }=\frac{ ext { Total Operating Revenues - Total Operating Expenses }}{ ext { Total Assets }}=\frac{\$ 66-56}{\$ 980}=0.0102 ext { or } 1.02[/latex]

[latex] ext { Earnings Spread }=\frac{ ext { Total Interest Income }}{ ext { Total Earnings Assets }}-\frac{ ext { Total Interest Expenses }}{ ext { Total Interest Bearing Liabilitie: }}=\frac{\$ 50}{\$ 830}-\frac{\$ 38}{\$ 710}=0.0067 ext { or } 0.6[/latex]

[latex] ext { Net Profit Margin }=\frac{ ext { Net Income }}{ ext { Total Operating Revenues }}=\frac{\$ 15}{\$ 66}=0.2273 ext { or } 22.73 \%[/latex]

[latex] ext { Asset Utilization }=\frac{ ext { Total Operating Revenues }}{ ext { Total Assets }}=\frac{\$ 666}{\$ 980}=0.0673 ext { or } 6.73 \%[/latex]

[latex] ext { Equity Multiplier }=\frac{ ext { Total Assets }}{ ext { Total Equity Capital }}=\frac{\$ 980}{\$ 80}=12.25 imes[/latex]

[latex] ext { Tax Management }=\frac{ ext { Net income }}{ ext { Pre Tax Net Operating Income }}=\frac{\$ 15}{16}=0.9375 ext { or } 93.75 \%[/latex]

[latex] ext { Expense Control Efficiency }=\frac{ ext { Pre Tax Net Operating Income }}{ ext { TotalOperating Revenue }}=\frac{\$ 16}{\$ 66}=.02424 ext { or } 24.24 \%[/latex]

[latex] ext { Asset Management Efficiency Ratio }=\frac{ ext { Total Operating Revenues }}{ ext { Total Assets }}=\frac{\$ 66}{\$ 980}=0.0673 ext { or } 6.73 \%[/latex]

[latex] ext { Funds Management Effeciency Ratio }=\frac{ ext { Total Assets }}{ ext { Total Equity Capital }}=\frac{\$ 980}{\$ 80}=12.25 imes[/latex]

[latex] ext { Funds Management Efficiency Ratio }=\frac{ ext { Total Assets }}{ ext { Total Equity Capital }}=\frac{\$ 980}{\$ 80}=12.25 imes[/latex]

Strengths

ROE: Positive value, reflects a high rate of return flowing to shareholders.

Net noninterest margin: Negative value (-.10%), reflects that net noninterest income is inline with noninterest cost.

Net profit margin: Positive value reflects effectiveness of management in cost controlling and service pricing policies.

Asset utilization: Positive value reflects a good portfolio management policies and yield on assets.

Equity multiplier: Positive value reflects efficient financial policies.

Expense control efficiency, asset management efficiency ratio, funds management efficiency ratio, Operating efficiency ratio also reflects a high operating efficiency and expense control.

Tax-management efficiency ratio: Positive ratio reflecting the use of security gains or losses and other tax management tools (such as buying tax-exempt bonds) to minimize tax exposure etc.

Weaknesses

ROA: Positive value (1.53%), reflects managerial efficiency and how successful management has been in converting assets into net earnings. Since the positive value is only 1.53% it acts as a weakness for the Happy Merchants National Bank.

Net interest margin: Positive value (1.22%), reflects that management is not successful in achieving close control over earning assets and in utilizing the cheapest sources of funding. Since the positive value is only 1.22% it acts as a weakness for the Happy Merchants National Bank.

Earnings spread: Positive value (.67%), reflects a high competition, forcing management to try and find other ways to make up for an eroding earnings spread.

Question 6.P.4: The latest report of condition and income and expense statem...

Related Answered Questions