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?
