Deck 3: Evaluating Bank Performance

Question 1

The internal performance of a bank encompasses bank planning, technology assessment, and personnel development.

Answer 1

True

Question 2

Budget or profit plans are in-depth statements that are intended to bring the bank's objectives down to the department level.

Answer 2

True

Question 3

Cash assets include vault cash, deposits at the Federal Reserve, deposits at other banks, and cash items in the process of collection.

Answer 3

True

Question 4

Most securities on the balance sheet of commercial banks are high yielding corporate bonds.

Question 5

Loans are the least liquid of bank financial assets, and the major source of risk, but the highest yielding.

Question 6

Net loans is obtained by subtracting unearned income and the provision for loan losses from gross loans.

Question 7

The amount in the reserve for loan loss account reflects an estimate by management of probable charge-offs for uncollectible loans and leases.

Question 8

Other real estate is principally furniture and equipment.

Question 9

Money market deposit accounts are savings accounts on which the bank pays interest and check writing is limited to a certain number of checks per month.

Question 10

Interest revenue is calculated on an accrual system.

Question 11

If a bank earns 4% on a tax-free municipal security, and is in the 35% federal tax bracket, the tax equivalent yield on that security is 11.4%.

Question 12

Banks show gains or losses on securities as an extraordinary item on their income statement.

Question 13

Net charge-offs are gross charge-offs less the provision for loan losses.

Question 14

Nonperforming assets are loans on which interest income is not being accrued, restructured loans on which interest rates or terms of repayment have been materially revised, and real properties acquired through foreclosure.

Question 15

Return on equity is obtained by multiplying the return on assets by the ratio of equity to assets.

Question 16

The inverse of the ratio of equity to assets is known as the equity or leverage multiplier.

Question 17

The return on assets ratio is the product of the profit margin and asset utilization.

Question 18

Provision for loan losses is used as a measure of asset quality.

Question 19

Nonperforming assets represent a leading indicator of credit quality while charge-offs represent a lagging indicator.

Question 20

Wages and salaries are the largest noninterest expense item for most banks, and substantially larger than interest expense.

Question 21

The volatile liability dependency ratio subtracts temporary investments from volatile liabilities and expresses the difference as a fraction of loans.

Question 22

The dollar gap ratio is calculated by subtracting the amount of interest-rate sensitive liabilities from the amount of interest-rate sensitive assets and expressing the difference as a percent of total assets.

Question 23

RAROC is an external performance evaluation measure.

Question 24

EVA is a financial management technique that enables banks to select loans that maximize shareholder wealth.

Question 25

RAROC and EVA can reduce agency costs.

Question 26

All of the following are examples of banking objectives EXCEPT:

A) improve the market share of prime grade loans
B) establish a more automated delivery system for payment services
C) upgrade the quality of management
D) cut loans for residential real estate by 5%

Question 27

Banks quantify goals and formalize the planning process by using:

A) budgets
B) profit plans
C) objectives
D) a and b
E) a, b, and c

Question 28

Which of the following is a characteristic of strategic planning?

A) it focuses on cost efficiency
B) it must be consistent with the bank's budget
C) it is creative by nature
D) a and b
E) a, b, and c

Question 29

The proportion of assets, deposits, and loans held by a bank in its business region relative to other banks is called:

A) profit ratio
B) market share
C) asset quality
D) capitalization

Question 30

Banks implement new technologies for all of the following reasons EXCEPT:

A) it can be a marketing tool to attract new customers
B) it can improve the competitiveness of the bank
C) it increases the dependence on human resources
D) it enhances the convenience of the bank

Question 31

The _____ of increasing technology must be weighed against the potential benefits of ______.

A) benefits, increased return on equity
B) added costs, improved competitiveness
C) lower costs; increased deposits
D) added costs; asset liquidity

Question 32

A high equity multiplier can increase ROE and the growth rate of the bank as long as ROA is:

A) increasing
B) decreasing
C) positive
D) negative

Question 33

The _____ ratio gives actual losses on loans, while the ______ ratio gives the extent to which the bank's assets are devoted to loans.

A) loan risk; loss rate
B) loss rate; capitalization
C) operating efficiency; loan risk
D) loss rate; loan risk

Question 34

The operating efficiency ratios calculated to provide information on cost control include all of the following EXCEPT:

A) depository ratio
B) occupancy ratio
C) wages and salaries expense rate
D) interest expense ratio

Question 35

Decreasing the amount of liquid assets held for the purpose of meeting loan demands and deposit withdrawals and increasing the usage of deposit and nondeposit sources of funds paying market rates of interest is known as:

A) liquidity management
B) leverage adjustment
C) liability management
D) liquidity adjustment

Question 36

If a firm has $250,000 in securities, $40,000 due from other institutions, $22,000 in cash, and $8 million in total assets, its cash ratio equals:

A) 3.9%
B) 0.78%
C) 0.28%
D) 0.50%
E) none of the above.

Question 37

The ratio that best measures the tax exposure of a bank is ____ divided by _____.

A) total taxes paid divided by net income before taxes
B) net income before taxes divided by total taxes paid
C) municipal bond rate divided by marginal tax rate
D) net income before taxes divided by (1-marginal tax rate)

Question 38

Which of the following groups have an interest in evaluating bank performance?

A) bank shareholders
B) bank management
C) bank regulators
D) bank depositors
E) all of the above.

Question 39

Internal bank performance includes which of the following:

A) bank planning
B) technology assessment
C) personnel development
D) all of the above.

Question 40

Cash assets include which of the following?

A) vault cash
B) deposits at the Federal Reserve and at other commercial banks
C) cash items in the process of collection
D) all of the above.

Question 41

To obtain net loans from gross loans the following items must be subtracted:

A) unearned income
B) reserve for loan losses
C) all loans with maturities beyond 5 years
D) a and b

Question 42

Which of the following accurately describes the other real estate owned that appears as an asset on the bank's balance sheet?

A) usually represents property obtained through foreclosure on problem loans
B) includes premises and equipment
C) is limited to the equipment owned by the bank
D) includes only the land owned by the bank.

Question 43

The return on equity is the product of:

A) return on assets multiplied by the ratio of equity to assets
B) the return on assets multiplied by the inverse of the ratio of equity to assets
C) the profit margin multiplied by the asset utilization
D) none of the above.

Question 44

If a bank has a return on assets of 1% and a ratio of equity to assets of 5%, its return on equity will be:

A) 5%
B) 20%
C) 25%
D) none of the above.

Question 45

If a bank earns 5% on a tax-free municipal security, and the bank is in the 35% federal income tax bracket, the tax equivalent yield on the security is:

A) 14.3%
B) 7.7%
C) 17.5%
D) none of the above.

Question 46

If a bank has gross charge-offs of $25 for the current year, recoveries of $40, and provision for loan losses of $30, how much will the reserve for loan losses change?

A) $45
B) $-15
C) $+15
D) none of the above.

Question 47

Which of the following internal performance evaluation methods focuses on shareholder wealth maximization?

A) EVA
B) ROA
C) RAROC
D) a and c
E) a, b, and c

Question 48

A weakness of RAROC is:

A) reduces agency costs
B) can be used to evaluate management performance
C) use on product lines with shared input costs
D) use on product lines with positive profit rates

Question 49

Which of the following internal performance evaluation methods subtracts the opportunity cost of capital from adjusted earnings?

A) EVA
B) ROA
C) RAROC
D) none of the above

Question 50

Under RAROC, if the required loan rate is calculated to be 10%, the loan must earn at least this rate in order to earn the target:

A) ROA
B) ROE
C) loan loss rate
D) capital ratio