Keystone National Bank

3. (a) Compute the 2004 values for the return-on-equity model:

| 2004 |

Ratio | Federal’s | Peer Group |

Return on equity | ___________ | 15.00% |

Return on assets | ___________ | 1.44% |

Equity multiplier | ___________ | 10.4X |

Profit margin | ___________ | 14.80% |

Salary & benefits/revenues | ___________ | 27.23% |

Occ. expenses/revenues | ___________ | 7.94% |

Misc. expenses/revenues | ___________ | 3.12% |

Asset utilisation | ___________ | 9.70% |

(b) Briefly comment on Federal’s profitability structure. Do you observe any strengths and weaknesses?

(c) Suppose Federal’s loans, equity, interest income, interest expense and non-interest revenue and expense all increased 50% in 2005. How would that affect the accuracy of your ratio analysis?

(d) Several elements of profit margin include salaries and benefits, occupancy and miscellaneous expense. Calculate these expense ratios and compare with Federal’s peers. Which help to explain the difference between Federal and its peers?

4. (a) Calculate Federal’s (i) net interest margin (earning assets or EA) and( ii) net interest margin (total assets or TA). Note that the difference between these two ratios is explained by the ‘earnings power’ ratio EA/TA. Determine this ratio for Federal Bank for 2004.

| 2004 |

Ratio | Federal’s | Peer Group |

Net interest margin (EA) | ____________ | 5.22% |

Net interest. margin (TA) | ____________ | 4.80% |

Earnings power | ____________ | 0.92 |

(b) Compare Federal’s results with its peers. What are the key factors that cause interest margins to differ from one institution to the next?

(c) Which is most affected by interest margin – profit margin or asset utilisation? (Hint: remember that the calculation of asset utilisation does not incorporate expense items).

(d) .

(e) .

(f) .

(g) .

(h) .