Southwest State Bank Case Analysis

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Southwest State Bank Q1: Southwest State Bank shows higher profitability than peers in 1998. ROE ratio of Southwest State Bank is 3.16% leading than its peers. ROE ratio comes from the division of Net Income and Total Equity, which measure the ability to generate Net Income by using the Equity. Higher ROE of Southwest State Bank is attributed to the higher ROA, not Equity Multiplier (EM) which is 10 basis points lower than peers. Southwest State Bank has 500 basis point higher ROA rate than our peers which means we have much stronger ability to get returns. Let’s see details of getting higher ROA ratio. Southwest State Bank has all lower Asset Utilization (AU); Expense Ratio (ER) and Tax Ratio (TAX) than peers. ROA is equal to AU minus ER and TAX. Asset Utilization is 0.6% lower than peers which show the weakness of Southwest State Bank’s income generation. But 0.57% lower TAX can approximately offsetting this weakness. However, Southwest State Bank does well on controlling expense that come up with 0.56% lower Expense Ratio relative to peers. Therefore, Southwest State Bank presents better ROA. Southwest State Bank’s lower Expense Ratio is a result of lower interest expense and non-interest expense. The first factor on better controlling expense is interest expense. The total interest expense of Southwest State Bank is 0.24% lower versus peers, which include the interest on CD’s over $100M (0.83% less), Total deposits (1.14% less) and so on. But the most important parts are the source of funds from Money market deposit accounts and Time deposits under $100M. Money market deposit accounts which need to pay only a little interest to our depositors are 20.40% higher than peers, but Time deposits which need pay a lot interest are 14.84% lower than our peers. Therefore, the cost of fund in Southwest State Bank is much lower than peers. The second factor is

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