11. Challenge Problem. This problem focuses on bank capital management and various capital ratio measures. Following are recent balance sheet accounts for Prime First National Bank.
Cash assets $ 17 million Demand deposits $50 million
Loans secured by Time & savings
real estate 40 deposits 66
Commercial loans 45 Federal funds
purchased 15
Government Trust-preferred
securities owned 16 securities 2
Goodwill 5
Bank fixed assets 15 Owners’ capital 5
Total assets $138 million Total liabilities $138 million and owners’ capital
All amounts are in millions of dollars.
Note: The bank has loan-loss reserves of $10 million. The real estate and commercial loans shown on the balance sheet are net of the loan-loss reserves.
a. Calculate the equity capital ratio. How could the bank increase its equity capital ratio?
b. Risk-adjusted assets are estimated using the following weightings process: cash and government securities = .00; real estate loans = .50; commercial and other loans = 1.00. Calculate the risk-adjusted assets amount for the bank.
c. Calculate the Tier 1 Ratio based on the information provided and the risk-adjusted assets estimate from Part b.
d. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio based on the information provided and the risk-adjusted assets estimate from Part b.
e. What actions could the bank management team take to improve the bank’s Tier 1 and Total Capital ratios?
Click here for the solution: Following are recent balance sheet accounts for Prime First National Bank
