Solved by verified expert :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?
