Understanding Banks' Earnings | ||||||||

Exhibit 7: $ Effect on EPS of a 1% Improvement in the Value of a Critical Ratio | ||||||||

RATIO | $ EFFECT OF 1% | RANK | ORIGINAL | IMPROVEMENT | IMPROVED | |||

IMPROVEMENT | VALUE | FACTOR | VALUE | |||||

INCOME STATEMENT | ||||||||

ADJUSTMENTS | ||||||||

Interest Rate | Do not adjust interest rate directly; | Interest Rate | ||||||

3.973% | instead, adjust $ interest expense. | 3.933% | ||||||

Average Interest Rate | Interest Expense | Interest Expense | ||||||

on Average Liabilities | $0.04959 | 3 | $2,448 | x .99 = | $2,424 | |||

Loan Loss Provision | ||||||||

to Loans | $0.00633 | 9 | 5.464% | x .99 = | 5.409% | |||

Interest Revenue | ||||||||

to Total Revenue | $0.00206 | 11 | 75.403% | [(75.403% x 1.01) -.01] = | 75.157% | |||

Efficiency | ||||||||

Ratio | $0.06886 | 2 | 66.204% | x .99 = | 65.542% | |||

Tax Rate | $0.01407 | 8 | 32.809% | x .99 = | 32.480% | |||

Asset Turnover | Asset Turnover | |||||||

Asset Turnover | 11.444% | x 1.01 = | 11.559% | |||||

(With Original Noninterest | & | & | ||||||

Expense Unchanged) | Noninterest | Noninterest | ||||||

Revenue Consumption | Revenue Consumption | |||||||

$0.09768 | 1 | 44.829% | / 1.01 = | 44.386% | ||||

BALANCE SHEET | ||||||||

ADJUSTMENTS | ||||||||

Preferred Equity Ratio | / { [1.01 x (1 - Prf. Eq. Ratio - Com. Eq. Ratio)] | Preferred Equity Ratio | ||||||

1% Increase in $ Liabilities | 0.530% | + Prf. Eq. Ratio + Com. Eq. Ratio } | 0.525% | |||||

($ Equity Unchanged) | & | |||||||

Common Equity Ratio | / { [1.01 x (1 - Prf. Eq. Ratio - Com. Eq. Ratio)] | Equity Ratio | ||||||

$0.02563 | 7 | 6.471% | + Prf. Eq. Ratio + Com. Eq. Ratio } | 6.411% | ||||

Preferred Equity Ratio | Preferred Equity Ratio | |||||||

0.530% | / [1 + (Com. Equity Ratio x .01)] = | 0.529% | ||||||

& | ||||||||

1% Increase in | Common Equity Ratio | Common Equity Ratio | ||||||

$ Common Equity | 6.471% | x {1.01 / [1 + (Com. Equity Ratio x .01)]} = | 6.531% | |||||

($ Preferred Equity & | & | & | ||||||

$ Liabilities Unchanged) | Prf. Chrg. to Com. Eq. | Prf. Chrg. to Com. Eq. | ||||||

0.961% | / 1.01 = | 0.952% | ||||||

& | & | |||||||

Book Value | Book Value | |||||||

$0.00295 | 10 | $12.92515 | x 1.01 = | $13.05440 | ||||

Common Equity Ratio | Common Equity Ratio | |||||||

6.471% | x 1.01 = | 6.535% | ||||||

1% Increase in | & | & | ||||||

$ Common Equity | Preferred Charge to Common Equity | Preferred Charge to Common Equity | ||||||

(Replacing an Equal | 0.961% | / 1.01 = | 0.952% | |||||

Amount of $ Liabilities) | & | & | ||||||

Book Value | Book Value | |||||||

$0.00116 | 12 | $12.92515 | x 1.01 = | $13.05440 | ||||

Preferred Equity Ratio | Preferred Equity Ratio | |||||||

1% Increase in $ Assets | 0.530% | / 1.01 = | 0.525% | |||||

($ Liabilities Increasing, | & | & | ||||||

$ Equity Unchanged) | Common Equity Ratio | Common Equity Ratio | ||||||

$0.02756 | 6 | 6.471% | / 1.01 = | 6.407% | ||||

1% Increase in $ Assets | ||||||||

(Total Equity Ratio & Prf. | Book Value | Book Value | ||||||

Chrg.as%Com.Eq.Unchanged) | $0.02758 | 5 | $12.92515 | x 1.01 = | $13.05440 | |||

1% Reduction in # of | ||||||||

Common Shares Outstanding | Book Value | Book Value | ||||||

($ Total Equity Unchanged) | $0.02786 | 4 | $12.92515 | / .99 = | $13.05570 | |||