Chapter 2 Solutions - In Class PDF

Preview

Summary

Download Chapter 2 Solutions - In Class PDF

Description

FINC 422 /FINC 518 Chapter 2 1.Smallville Bank has the following balance sheet, rates earned on its assets, and rates paid on its liabilities.

Balance Sheet (in thousands) Assets

Rate Earned (%)

Cash and due from banks

$

6,000

0

Investment securities

22,000

8

Repurchase agreements

12,000

6

Loans less allowance for losses

80,000

10

Fixed assets

10,000

0

4,000

9

Other earning assets Total assets

$134,000

Liabilities and Equity Demand deposits

$

Rate Paid (%) 9,000

0

NOW accounts

69,000

5

Retail CDs

18,000

7

Subordinated debentures

14,000

8

Total liabilities

110,000

Common stock

10,000

Paid-in capital surplus Retained earnings Total liabilities and equity

3,000 11,000 $134,000

If the bank earns $120,000 in noninterest income, incurs $80,000 in noninterest expenses, and pays $2,500,000 in taxes, what is its net income? Revenues (in thousands) = 22,000 x 0.08 + 12,000 x 0.06 + 80,000 x 0.10 + 4,000 x 0.09 = $10,840 Expenses (in thousands) = 69,000 x 0.05 + 18,000 x 0.07 + 14,000 x 0.08 = $5,830 Net income = 10,840,000 - 5,830,000 + 120,000 - 80,000 - 2,500,000 = $2,550,000

1

2. Community Bank has the following balance sheet, rates earned on its assets, and rates paid on its liabilities.

Balance Sheet (in thousands) Assets

Rate Earned (%)

Cash and due from banks

$

7,900

0

Investment securities

29,600

1.50

Repurchase agreements

15,960

1.15

106,400

7.25

Fixed assets

13,500

0

Other assets

5,320

0

Total assets

$178,680

Loans less allowance for losses

Liabilities and Equity Demand deposits

Rate Paid (%) $ 27,490

0

NOW accounts

90,700

0.50

Retail CDs

23,940

1.20

Subordinated debentures

15,000

5.50

Total liabilities

157,130

Common stock

5,000

Paid-in capital surplus

5,000

Retained earnings

11,550

Total liabilities and equity $178,680 If the bank earns $159,000 in noninterest income, incurs $306,000 in noninterest expenses, and pays $3,320,000 in taxes, what is its net income? Revenues (in thousands) = 29,600 x 0.015 + 15,960 x 0.0115 + 106,400 x 0.0725 = $8,341.54 Expenses (in thousands) = 90,700 x 0.005 + 23,940 x 0.0120 + 15,000 x 0.055 = $1,565.78 Net income = $8,341,540 – 1,565,780 + 159,000 - 306,000 - 3,320,000 = $3,308,760 2

3.The financial statements for First National Bank (FNB) are shown below:

Balance Sheet First National Bank Assets Cash

Liabilities and Equity $

450

Demand deposits

$ 5,510

Demand deposits from other FIs

1,350

Small time deposits

Investments

4,050

Jumbo CDs

3,200

Federal funds sold

2,025

Federal funds purchased

2,250

Equity

2,200

Loans

15,525

Reserve for loan losses

(1,125)

Premises

10,800

1,685 Total

Total assets

$23,960

liabilities/equity

$23,960

Income Statement First National Bank Interest income

$ 2,600

Interest expense

1,650

Provision for loan losses

180

Noninterest income

140

Noninterest expense

420

Taxes 90 a. Calculate the dollar value of FNB’s earning assets. Earning assets = investment securities + net loans = $4,050 + $2,025 + $15,525 – $1,125 = $20,475 b. Calculate FNB’s ROA. ROA = ($2,600 – $1,650 – $180 + $140 – $420 – $90) / $23,960 = 1.67% 3

c. Calculate FNB’s asset utilization ratio. Asset utilization = ($2,600 + $140) / $23,960 = 11.44% d. Calculate FNB’s spread. Spread = ($2,600 / $20,475) – ($1,650 / ($10,800 + $3,200 + $2,250)) = 2.54% 4. The financial statements for BSW National Bank (BSWNB) are shown below: Balance Sheet BSW National Bank Assets Cash and due from banks

Liabilities and Equity $

936

Demand deposits

$ 5,040

Investments

3,100

Small time deposits

4,020

Federal funds sold

1,664

Jumbo CDs

4,680

9,120

Federal funds purchased

Loans (less reserve for loan losses of 2,400)

Equity

Premises

312 1,548

780 Total

Total assets

$15,600

liabilities/equity

Income Statement BSW National Bank Interest income

$ 1,150

Interest expense

475

Provision for loan losses

150

Noninterest income

260

Noninterest expense

525

Taxes

60

a. What is the dollar value of earning assets held by BSWNB?

4

$15,600

Earning assets = investment securities + net loans = $3,100 + $1,664 + $9,120 = $13,884 b. What is the dollar value of interest-bearing liabilities held by BSWNB? Interest-bearing liabilities = $4,020 + $4,680 + $312 = $9,012

c. What is BSWNB’s total operating income? Total operating income = $1,150 + $260 = $1,410

d. Calculate BSWNB’s asset utilization ratio. Asset utilization ratio = ($1,150 + $260) / $15,600 = 9.038%

e. Calculate BSWNB’s net interest margin. Net interest margin = ($1,150 - $475) / $13,884 = 4.862%

5. The financial statements for MHM Bank (MHM) are shown below: Balance Sheet MHM Bank Assets Cash and due from banks

Liabilities and Equity $ 1,920

Demand deposits

Demand deposits at other FIs

1,100

Small time deposits

Investments

6,080

Jumbo CDs

2,990

Federal funds purchased

Federal funds sold

Other liabilities

Loans (less reserve for loan losses of 2,400)

20,040

Premises

2,270

5

Equity

$10,620 10,350 7,670 470 2,000 3,290

Total Total assets

$34,400

liabilities/equity

Income Statement MHM Bank Interest income

$4,048

Interest expense

2,024

Provision for loan losses

100

Noninterest income

700

Noninterest expense

975

Taxes 235 a. Calculate the dollar value of MHM’s earning assets. Earning assets = investment securities + net loans = $6,080 + $2,990 + $20,040 = $29,110 b. Calculate the dollar value of MHM’s interest-bearing liabilities. Interest bearing liabilities = $10,350 + $7,670 + $470 = $18,490 c. Calculate MHM’s spread. Spread = ($4,048 / $29,110) – ($2,024 / $18,490) = 2.959% d. Calculate MHM’s interest expense ratio. Interest expense ratio = $2,024 / ($4,048 + $700) = 42.628%

6

$34,400...