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: 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 11 months ago

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