BANK MANAGEMENT

FIN 4017

Unit 2: Tutorial Questions– Analysis of Bank Performance

1. What are the major categories of depository institutions assets and their typical percentage contribution
to total resources? What are the major categories of depository institutions liabilities? What are the
fundamental difference between them?

2. What are the major categories of depository institutions liabilities? How does liability mix vary due to
bank size?

3. What are the primary components of interest and non-interest income and expense?

4. Define net interest income (NIM) and burden. What does a bank’s efficiency ratio measure?

5. Arrange the following items into an income statement. Label each item, place it in the appropriate
category and determine the bank’s bottom line net income.

a. Interest paid on time deposits under $100,000: $78,002

b. Interest paid on Jumbo CDs: $101,001
c. Interest received on US Treasury and Agency securities: $44,500
d. Fees received on mortgage originations: $23,000
e. Dividends paid to shareholders of $0.50 per share for 5,000 shares
f. Provisions for loan losses: $18,000
g. Interest and fees and loans: $189,700
h. Interest paid on checking accounts: $33,500
i. Interest received on municipal bonds: $60,000
j. Employee salaries and benefits: $145,000
k. Purchase of a new computer system: $50,000
l. Service charge receipts from customer accounts: $41,000
m. Occupancy expense for bank building: $22,000
n. Taxes of 34% of taxable income are paid
o. Trust department income equals: $15,000

6. Define each of these components of the return on equity (ROE) model and discuss their
interrelationships
a. ROE
b. ROA
c. EM
d. ER
e. AU

7. Regulators use CAMELS to analyse bank risk.

a. What does CAMELS stand for?
b. What financial ratios might best capture each factor and why?

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Mini Case: Community National Bank (CNB)

Community National Bank (CNB) is a typical small independent bank located in the US state of North
Carolina. CNB’s main office is located in the metropolitan area of Charlotte and the bank has six branches
and no nonbank subsidiaries. CNB services offers a personalised menu of financial services to individuals
and businesses. This includes savings accounts, credit cards, individual retirement accounts, mortgage
loans and personal loans through its personal banking service. For its business clients it offers services
such as commercial loans, cash management services and payroll processing. At year-end 2013, CNB had
$140 million in assets up 6.1% from 2012. Like most small community banks in the US, CNB has a large
loan portfolio and fewer investments. The bank is very reliant on loans as it largest source of income with
a much smaller contribution coming from fees based services. In fact in 2013, revenues from loan sources
was $7.9 million whilst fee income was $717,000.

Evaluate the performance of Community National Bank using the data in Exhibit 3.2, 3.4 and 3.6.

a. Calculate the following ratios for the bank in 2013:

i. ROE decomposition
ii. Asset Utilisation (AU)
iii. Expense Ratio (ER)
iv. Tax Ratio
v. Net Interest Margin
vi. Burden
b. Conduct an profitability analysis for the bank in 2013:
vii. Do the profitability ratios for 2013 compare favourably to 2012?
viii. How do they compare to the following peer group figures for 2013?

RATIO Peer Banks

ROE 9.58%
ROA 1.01%
EM 9.49X
AU 5.06%
ER 3.79%
TAX 0.26%
NIM 3.72%
EFFICIENCY 70.36%
BURDEN 2.31%

c. Calculate the following risk ratios:

ix. Credit Risk: Allowance (Provision) for Loan Loss/ Gross Loans
x. Liquidity Risk: Core Deposits/ Avg. Total Assets
xi. Operational Risk: Efficiency Ratio
xii. Capital Adequacy: Capital Base to total assets

d. Compare the bank’s risk measures with 2012? What are the implications for any significant
differences?

e. What recommendations would you make to improve the bank’s risk and return profile to improve its
performance?

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Exhibit 3.6
Community Na tiona l Ba nk
Ratios 2012
ROE 14.21%
ROA 1.16%
EM 12.25

AU 6.43%
Interest Income/ Avg. TA 5.67%
Non-Int Income/ Avg. Ta 0.76%
Securities Ga ins or Losses/ Avg TA 0.00%

Net Interest Ma rgin 4.83%

Expense Ra tio 5.27%

Interest Expense/ Avg. TA 0.84%
Non-Int Expenses/ Avg. Ta 4.22%
PLL/ Avg TA 0.21%

Efficiency Ra tio 75.55%

Burden 3.46%

Ta x Ra tio 0.004%

PLL/ Gross Loans 0.22%

Core Deposits/ Avg. Total Assets 87.95%

Capital Base to total assets 8.44%