Question

The financial statements for MHM Bank (MHM) are shown below:

Balance Sheet MHM Bank
Assets				Liabilities and Equity
Cash and due from banks	$	2,070		Demand deposits	$	10,770
Demand deposits at other FIs		2,600		Small time deposits		10,500
Investments		6,370		Jumbo CDs		7,820
Federal funds sold		3,140		Federal funds purchased		620
Loans (less reserve for loan losses of 3,900)		20,350		Other liabilities		3,800
Premises		2,420		Equity		3,440
Total assets	$	36,950		Total liabilities/equity	$	36,950

Income Statement MHM Bank
Interest income	$	4,368
Interest expense		2,314
Provision for loan losses		1,600
Noninterest income		850
Noninterest expense		1,125
Taxes		385

a. Calculate the dollar value of MHM’s earning assets.
b. Calculate the dollar value of MHM’s interest-bearing liabilities.
c. Calculate MHM’s spread. (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161))
d. Calculate MHM’s interest expense ratio. (Round your answer to 3 decimal places. (e.g., 32.161))
  

Answer 1

Solution:

a. Earning Assets = Investment securities + Net loans

Earning Assets = $6,370 + $3,140 + $20,350

Earnings Assets = $29,860

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b. Interest-bearing liabilities = Small time deposits + Jumbo CDs + Federal funds purchased

Interest-bearing liabilities = $10,500 + 7,820 + 620

Interest-bearing liabilities = $18,940

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c. Spread = (Interest income/earnings assets) - (interest expense/interest bearing liabilities)

Spread = (4,368/29,860) - (2,314/18,940)

Spread = 2.4107%

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d. Interest expense ratio = Interest expense/(Interest income + Non-interest income)

Interest expense ratio = 2,314/(4,368 + 850)

Interest expense ratio = 44.347%