N1577
Principles of Banking
Seminar 3. Bank evaluation and performance
Students are expected to prepare for the seminar/workshop by attempting the following exercises.
Exercise 1
PNC Bank is a typically large depository institution. Which balance sheet accounts would be affected by the following transactions? Indicate at least 2 accounts with each transaction.
a. John Lewis opens a money market deposit account with $5,000. The funds are lent in the overnight market for one week.
b. Just as a real estate developer pays off a shopping centre loan, a new resident takes out a mortgage on a home.
c. The bank hires an investment banker to sell shares of stock to the public. It plans to use the proceeds to finance additional commercial loans.
Exercise 2
You know the following information about Miller Bank:
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Balance sheet
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in EUR thousand
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Cash
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???
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Securities Investments
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1500
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Net Loans
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2500
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Net Premises and Equipment
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400
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Other assets
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500
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Total Assets
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5000
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Deposits
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3900
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Non-Deposit Borrowings
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???
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Equity
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500
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Total Liabilities and Equity
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???
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Income Statement
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in EUR thousand
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Interest Income
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200
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Interest Expenses
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70
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Non-Interest Income
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25
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Non-Interest Expenses
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55
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Provision for Loan Losses
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30
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Pre-tax Net Operating Income
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???
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Securities Gains (Losses)
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10
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Taxes
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15
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Net Income
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???
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a. Present the relevant formulas and calculate the values of the missing balance sheet and income statement items.
b. Present the relevant formulas and calculate: Return on Asset, Net interest Margin, and Equity Multiplier.
Exercise 3
The ratio analysis for the Community National Bank and for its peer banks based on 2007 year- end data is shown below:
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Ratio
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Community National Bank
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Peer Banks
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ROE
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20.68%
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9.43%
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ROA
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1.89%
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0.93%
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AU
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8.24%
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7.59%
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ER
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6.32%
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6.33%
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TAX
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0.03%
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0.33%
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Compare and discuss the profitability of Community National Bank with that of its peers based on: financial leverage; average yield on assets (AU); operating expenses (ER); and the level of taxation (TAX).
Note that TAX = applicable income tax/total assets.
Exercise 4
Fill in the missing items from the income statement shown below (all figures in millions of dollars):
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Income statement
Total interest income Total interest expense Net interest income
Provision for loan and lease losses
Total noninterest income
Fiduciary activities
Service charges on deposit accounts Trading account gains and fees
Additional noninterest income
Total noninterest expense
Salaries and employee benefits
Premises and equipment expense Additional noninterest expense
Pretax net operating income Securities gains (losses)
Applicable income taxes
Income before extraordinary items Extraordinary gains—net
Net income
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$200
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60
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100
20
25
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30
125
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10
20
15
5
3
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2
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