Do a Dupont Analysis where ROA = AU x NPM. Given the information above, calculate the asset utilization (AU), total revenues/total assets for Heritage Bank and the PG3 each year by adding the IR% and NIR%. Then calculate the NPMs for Heritage Bank and the PG3 each year (where NPM = OROA / (AU as a fraction). Analyze the trends for Heritage in NPM and AU to explain its lower OROA in 2006. Also compare Heritage's NPM and AU to the PG3, and discuss any weaknesses revealed in the comparison.

Question

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The Answer is

ext { Dupont Analysis: } \quad\quad\quad\quad 12 / 31 / 2006 \quad\quad\quad\quad\quad\quad\quad\quad\quad 12 / 31 / 2005

\begin{array}{lcrcr}& ext { Heritage Bank } & ext { PG3 } & ext { Heritage B Bank }& ext { PG3 } \ ext { IR\% } & 6.99 \% & 6.63 \% & 6.28 \% & 5.84 \% \ ext { NIR } \% & 0.18 \% & 0.83 \% & 0.56 \% & 0.88 \% \ ext { Sum AU } & 7.17 \% & 7.46 \% & 6.84 \% & 6.72 \% \ ext { NPM (ROA/AU) } & (3.49 \%) & 24.26 \% & 7.90 \% & 27.38 \% \ ext { OROA } & (0.25 \%) & 1.81 \% & 0.54 \% & 1.84 \%\end{array}

*** Note AU% = IR% + NIR% and NPM = ROA% / AU as a fraction
Analysis:
Heritage Bank had a rise in AU, because of the rise in IR% despite a fall in the NIR% in 2016, but a large fall in NPM, which was negative in 2006 resulting in the large negative OROA.
Heritage Bank's OROA was lower than the PG3 each year, with a much lower NPM, and in 2006 a lower AU. The lower AU in 2006 was the result of the much lower NIR%, despite HB's higher IR%. In contrast, the PG3 had only a slight 0.03% drop in OROA in 2006 as the result of a lower NPM, with a rise in AU.
In terms of weaknesses Heritage Bank has a lower NIR% resulting in lower AU, and a much higher NIE% and much higher PLL% and a higher IE% than the PG3. In terms of strengths, the only strength is a higher IR% and a small but higher security gain and loss % in 2006

Do a Dupont Analysis Where ROA = AU X NPM