Question

In: Finance

The financial statements for THE Bank are shown below: Balance Sheet THE Bank Assets Liabilities and...

The financial statements for THE Bank are shown below:

Balance Sheet THE Bank
Assets Liabilities and Equity
Cash $ 220 Demand deposits $ 2,470
Demand deposits from other FIs 620 Small time deposits 4,820
Investments 1,820 Jumbo CDs 1,445
Federal funds sold 920 Federal funds purchased 1,020
Loans 6,920 Equity 815
Reserve for loan losses (700 )
Premises 770
Total assets $ 10,570 Total liabilities/equity $ 10,570
Income Statement THE Bank
Interest income $ 2,470
Interest expense 1,650
Provision for loan losses 100
Noninterest income 260
Noninterest expense 430
Taxes 60


a. Calculate THE Bank’s earning assets.
b. Calculate THE Bank’s ROA. (Round your answer to 3 decimal places. (e.g., 32.161))
c. Calculate THE Bank’s total operating income.
d. Calculate THE Bank’s spread. (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161))

Solutions

Expert Solution

a. Earning assets for a bank includes assets such as loan assets, investment in securities, leases and any other revenue generating asset. Demand deposit from other FIs are highly liquid assets and mostly do not generate interest income, as these are repayable on demand without any penalty. In our example earning assets includes:-

- Loan : 6,920

- Investment : 1,820

b. Return on Asset is an important measure of Bank's performance and measure the net profit ratio to the total assets of a Bank.

ROA: Net Profit / Total Asset

ROA: (2,470-1,650-100+260-430-60) / 10,570

ROA: 0.046

c. Total Operating income is income from business activities during a period before taxes, THE Bank total operating income is:

Particulars Amount
Interest income 2470
Interest expense -1650
Provision for loan losses -100
Noninterest income 260
Noninterest expense -430
Total Operating Income 550

d. THE Bank's spread is the difference between interest earned on loan assets and interest paid on deposit liabilities.

Interest Income Rate: Interest Earned / Loans

Interest Income Rate: 2,470 / 6,920

Interest Income Rate: 2,470 / 6,920

Interest Income Rate: 0.357

Interest Expense Rate: Interest Expense / Deposit Liability (Small Time + Jumbo CD)

Interest Expense Rate: 1,650 / 6,265

Interest Expense Rate: 0.263

Spread: Interest Income rate - Interest expense rate

Spread: 0.357 - 0.263

Spread: 0.094

jeff jeffy answered 1 year ago
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