Onshore Bank has $32 million in assets, with risk-adjusted assets of $22 million
ID: 2758048 • Letter: O
Question
Onshore Bank has $32 million in assets, with risk-adjusted assets of $22 million. Core Equity Tier 1 (CET1) capital is $1,000,000, additional Tier I capital is $340,000, and Tier II capital is $424,000. The current value of the CET1 ratio is 4.55 percent, the Tier I ratio is 6.09 percent, and the total capital ratio is 8.02 percent. Calculate the new value of CET1, Tier I, and total capital ratios for the following transactions. a. The bank repurchases $112,000 of common stock with cash. (Round your answers to 2 decimal places. (e.g., 32.16)) CET1 ratio % Tier I ratio % Total capital ratio % b. The bank issues $3.2 million of CDs and uses the proceeds to issue category 1 mortgage loans with a loan-to-value ratio of 80 percent. (Round your answers to 2 decimal places. (e.g., 32.16)) CET1 ratio % Tier I ratio % Total capital ratio % c. The bank receives $512,000 in deposits and invests them in T-bills. (Round your answers to 2 decimal places. (e.g., 32.16)) CET1 ratio % Tier I ratio % Total capital ratio % d. The bank issues $812,000 in common stock and lends it to help finance a new shopping mall. The developer has an A+ credit rating. (Round your answers to 2 decimal places. (e.g., 32.16)) CET1 ratio % Tier I ratio % Total capital ratio % e. The bank issues $2.2 million in nonqualifying perpetual preferred stock and purchases general obligation municipal bonds. (Round your answers to 2 decimal places. (e.g., 32.16)) CET1 ratio % Tier I ratio % Total capital ratio % f. Homeowners pay back $5.2 million of mortgages with loan-to-value ratios of 40 percent and the bank uses the proceeds to build new ATMs. (Round your answers to 2 decimal places. (e.g., 32.16)) CET1 ratio % Tier I ratio % Total capital ratio
Explanation / Answer
(a) Repurchase Common Stock with Cash = $ 112,000
CET1 Ratio = ($ 1,000,000 - $ 112,000) / ($ 22,000,000 - ($ 112,000 x 0%)) x 100
= ($ 888,000) / ($ 22,000,000) x 100
= 4.04%
Tier I Ratio = ($ 1,000,000 + $ 340,000 - $ 112,000) / ($ 22,000,000 - ($ 112,000 x 0%)) x 100
= ($ 1,228,000) / ($ 22,000,000) x 100
= 5.58%
Total Capital Ratio = ($ 1,000,000 + $ 340,000 + $ 424,000 - $ 112,000) / ($ 22,000,000 - ($ 112,000 x 0%)) x 100
= ($ 1,652,000) / ($ 22,000,000) x 100
= 7.51%
(b) Issue of CDs of $ 3,200,000 and issue category 1 mortgage loan of loan-to-value ratio of 80%
CET1 Ratio = ($ 1,000,000) / ($ 22,000,000 + ($ 3,200,000 x 100%)) x 100
= ($ 1,000,000) / ($ 25,200,000) x 100
= 3.97%
Tier I Ratio = ($ 1,000,000 + $ 340,000) / ($ 22,000,000 + ($ 3,200,000 x 100%)) x 100
= ($ 1,340,000) / ($ 25,200,000) x 100
= 5.32%
Total Capital Ratio = ($ 1,000,000 +$ 340,000 +$ 424,000 +$ 3,200,000)/($ 22,000,000 +($ 3,200,000 x100%)) x100
= ($ 4,964,000) / ($ 25,200,000) x 100
= 19.70%
(c) Deposits received of $ 512,000 which are deposited in T-Bills
CET1 Ratio = ($ 1,000,000) / ($ 22,000,000 + ($ 512,000 x 0%)) x 100
= ($ 1,000,000) / ($ 22,000,000) x 100
= 4.55%
Tier I Ratio = ($ 1,000,000 + $ 340,000) / ($ 22,000,000 + ($ 512,000 x 0%)) x 100
= ($ 1,340,000) / ($ 22,000,000) x 100
= 6.09%
Total Capital Ratio = ($ 1,000,000 + $ 340,000 + $ 424,000 + $ 512,000) / ($ 22,000,000 +($ 512,000 x 0%)) x100
= ($ 2,276,000) / ($ 22,000,000) x 100
= 10.35%
(d) Issued Common Stock of $ 812,000 and proceeds used to finance a mall, developer has A+ Rating
CET1 Ratio = ($ 1,000,000 + $ 812,000) / ($ 22,000,000 + ($ 812,000 x 10%)) x 100
= ($ 1,812,000) / ($ 22,081,200) x 100
= 8.21%
Tier I Ratio = ($ 1,000,000 + $ 340,000 + $ 812,000) / ($ 22,000,000 + ($ 812,000 x 10%)) x 100
= ($ 2,152,000) / ($ 22,081,200) x 100
= 9.75%
Total Capital Ratio = ($ 1,000,000 + $ 340,000 + $ 424,000 + $ 812,000) / ($ 22,000,000 +($ 812,000 x 10%)) x100
= ($ 2,576,000) / ($ 22,081,200) x 100
= 11.67%
(e) Issued Non-Qualifying perpetual Preferred Stock of $ 2,200,000 and proceeds used to purchase general obligation municipal bonds
CET1 Ratio = ($ 1,000,000 + $ 2,200,000) / ($ 22,000,000 + ($ 2,200,000 x 0%)) x 100
= ($ 3,200,000) / ($ 22,000,000) x 100
= 14.55%
Tier I Ratio = ($ 1,000,000 + $ 340,000 + $ 2,200,000) / ($ 22,000,000 + ($ 2,200,000 x 0%)) x 100
= ($ 3,540,000) / ($ 22,000,000) x 100
= 16.09%
Total Capital Ratio = ($ 1,000,000 +$ 340,000 +$ 424,000 +$ 2,200,000)/($ 22,000,000 +($ 2,200,000 x0%)) x100
= ($ 3,964,000) / ($ 22,000,000) x 100
= 18.02%
(f) Home owners repay $ 5,200,000 with loan-to-value of 40% and proceeds used to purchase ATMs
CET1 Ratio = ($ 1,000,000) / ($ 22,000,000 - ($ 5,200,000 x 50%) + ($ 5,200,000 x 0%) x 100
= ($ 1,000,000) / ($ 19,400,000) x 100
= 5.15%
Tier I Ratio = ($ 1,000,000 + $ 340,000) / ($ 22,000,000 - ($ 5,200,000 x 50%) + ($ 5,200,000 x 0%) x 100
= ($ 1,340,000) / ($ 19,400,000) x 100
= 6.91%
Total Capital Ratio = ($1,000,000 +$340,000 +$424,000)/($22,000,000 -($5,200,000 x50%) +($5,200,000 x0%) x100
= ($ 1,764,000) / ($ 19,400,000) x 100
= 9.09%
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