Question

Problem 12-6 (LG 12-5)

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

Balance Sheet MHM Bank
Assets				Liabilities and Equity
Cash and due from banks	$	1,970		Demand deposits	$	10,670
Demand deposits at other FIs		1,600		Small time deposits		10,400
Investments		6,180		Jumbo CDs		7,720
Federal funds sold		3,040		Federal funds purchased		520
Loans (less reserve for loan losses of 2,900)		20,150		Other liabilities		2,610
Premises		2,320		Equity		3,340
Total assets	$	35,260		Total liabilities/equity	$	35,260

Income Statement MHM Bank
Interest income	$	4,158
Interest expense		2,114
Provision for loan losses		600
Noninterest income		750
Noninterest expense		1,025
Taxes		285

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.

Answer 1

Ans. A	Earning assets = Investments + Federal funds sold + Loans
	$6,180 + $3,040 + $20,150
	$29,370
Ans. B	Interest bearing liabilities =    $18,640
	Small time deposits	$10,400
	Jumbo CDs	$7,720
	Federal funds purchased	$520
	Total	$18,640
Ans. C	Spread = (Interest income / Earnings assets) - (Interest expenses / Interest bearing liabilities)
	($4,158 / $29,370) - ($2,114 / $18,640)
	0.14157 - 0.11341
	0.02816
	or   2.816%
Ans. D	Interest expenses ratio = Interest expenses / (Interest income + Non interest income) * 100
	$2,114 / ($4,158 + $750) * 100
	$2,114 / $4,908 * 100
	43.07%