8. The Big Apple Bank has the following common size income statement where each item is as a % of total average assets (from its Uniform Bank Performance Report) Earnings and Profitability Analysis (% Ave. Total Assets)

2016 2015

Total Interest Income (IR%) 3.69 3.25

Total Interest Expense(IE%) 0.40 0.35

Net Interest Income (NIM) 3.29 2.90

Total Non-interest Revenues (NIR%) 1.34 1.50

Total Non-Interest Expense (NIE%) 2.74 2.50

Burden % 1.40 1.00

Provision for Loan Losses (PLL%) 0.17 0.60

Pretax Operating Income (OROA%) 1.72% 1.30%

Equity to Assets 10.01% 8.00%

a. Explain precisely why Big Apples OROA went up in 2016?

In 2016, the NIM increased up to 3.29, PLL decreased to 0.17 and burden increased to 1.4 because of which OROA increased.

b. Given the change in NIM with a rise in rates in 2016, what type of funding gap did the bank likely have?

c. What was the banks asset utilization each year? (Hint AU = IR% + NIR%)

Asset utilization for 2016: 3.69% + 1.34% = 5.03%

Asset utilization for 2015: 3.25% + 1.50% = 4.75%

d. Given the OROA & AU, what was the NPM each year for the bank?

Hint: (NPM = OROA/AU (as a fraction)]

NPM for 2016: 1.72% / 5.03% = 3.42%

NPM for 2015: 1.30% / 4.75% = 2.74%

e. What were the OROEs each year? (Hint OROE = OROA x EM)

OROE for 2016 = 1.72% x 10.01 = 17.21%

OROE for 2015 = 1.3 % x 8 = 10.4%

f. Do a Dupont Analysis for the trends in OROE where OROE = NPM x AU x EM looking at trends in the net profit margin, asset utilization, and equity multiplier to explain why the OROE went up in 2016.