Use the following information to answer some additional questions. 1st State Ban

Question

Use the following information to answer some additional questions. 1st State Bank   Balance Sheet Assets Cash and Due from Banks $ 50 Investments $ 300 Federal Funds $ 10 Loans $ 350 Premises $ 90 Average Total Assets $ 800 Liabilities & Equity Demand Deposits $ 100 Time Deposits $ 300 Federal Funds $ 300 Equity $ 100 Average Total Liabilities & Equity $ 800 Income Statement Interest Income $ 100 Interest Expense $ 75 Non-Interest Income $ 5 Non-Interest Expense $ 25 Net Income $ 5 a. What is 1st State’s return on equity?

b.      What is 1st State’s net interest margin? c.       What is the earnings base at 1st State? d.       What is 1st State’s burden ratio? e.        What is 1st State’s efficiency ratio?

Explanation / Answer

a. Return on equity = Net income / Equity x 100 = 5/100 x 100 = 5%

b. Net Interest margin = Interest Income - Interest expense = 100-75 = $25

c. Assumption: Face value of stock = $100

No. of shares = 100 / 100= 1

EPS = Net Income / No. of shares = 5/1 = $5

Market value of equity has been assumed to be book value = $100

Earning base ratio = Stock price / EPS = 100/5 = 20 times

d. Burden Ratio = (Non-interest operating Expenditure - Non-interest operating income ) / Average Total Assets

= (25-5) / 800

= 0.025

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