Deck 3: Analyzing Bank Performance

Question 1

Banks generate their largest portion of income from:

A)loans.
B)short-term investment.
C)demand deposits.
D)long-term investments.
E)certificates of deposit.

Answer 1

A

Question 2

The volume of net deferred credit is commonly referred to as:

A)the burden.
B)NOW balances.
C)reserve requirements.
D)equity.
E)float.

Answer 2

E

Question 3

Securities that require unrealized gains or losses to be recorded on the income statement are called:

A)held-to-maturity securities.
B)trading account securities.
C)available-for-sale securities.
D)revenue securities.
E)repurchase agreements

Answer 3

B

Question 4

Which of the following bank assets is the most liquid?

A)Long-term investments
B)Short-term investments
C)Loans
D)Demand deposits
E)Unearned income

Question 5

Which of the following is not a characteristic of a typical commercial bank?

A)Most banks own few fixed assets.
B)Most banks have a high degree of operating leverage.
C)Most banks have few fixed costs.
D)Many bank liabilities are payable on demand.
E)Banks generally operate with less equity capital than non-financial firms.

Question 6

Which of the following would not be considered a commercial loan?

A)An interim construction loan
B)A working capital loan
C)A loans to another financial institution
D)A loan to purchase a piece of industrial equipment
E)A loan to expand a factory

Question 7

Bank assets fall into each of the following categories except:

A)loans.
B)investment securities.
C)demand deposits.
D)noninterest cash and due from banks.
E)other assets.

Question 8

A negotiable instrument often used in trading goods that guarantees payment to the owner the instrument is known as (a):

A)bankers acceptance.
B)payment guarantee.
C)commercial paper.
D)bankers payment.
E)repurchase agreement.

Question 9

Securities that are "held-to-maturity" are:

A)trading account securities.
B)recorded on the balance sheet at amortized cost.
C)marked-to-market.
D)a.and b.
E)a.and c.

Question 10

Which of the following led to the sharp decline in bank profits in 2008?

A)Record high loan loss provisions
B)Record gains in trading activities
C)Significant goodwill impairment expenses
D)All of the above.
E)a.& c.only.

Question 11

The largest component of "non- interest cash and due from banks" is:

A)cash items in process of collection.
B)deposits held at other financial institutions.
C)federal funds sold.
D)vault cash.
E)loans from the Federal Reserve.

Question 12

Which of the following would a bank generally classify as a long-term investment?

A)Treasury bill
B)Vault cash
C)Cash items in process of collection
D)Municipal bond
E)Repurchase agreements

Question 13

Loans typically fall into each of the following categories except:

A)real estate.
B)individual.
C)commercial.
D)agricultural.
E)municipal.

Question 14

A loan to an individual to purchase a home would be considered a:

A)consumer loan.
B)commercial loan.
C)agricultural loan.
D)construction loan.
E)real estate loan.

Question 15

All other things constant, securities that are extremely liquid:

A)earn higher rates of return than securities that are less liquid.
B)have a longer maturity than less liquid securities.
C)have lower risk than less liquid securities.
D)a.and b.
E)b.and c.

Question 16

Which of the following would a bank generally classify as a short-term investment?

A)Demand deposits
B)Deposits at the Federal Reserve
C)Repurchase agreements
D)Fed Funds purchased
E)Vault cash

Question 17

Securities that require unrealized gains or losses to be recorded as a change in stockholder's equity are called:

A)held-to-maturity securities.
B)trading account securities.
C)available-for-sale securities.
D)revenue securities.
E)repurchase agreements

Question 18

An example of a contra-asset account is:

A)the loan and lease loss allowance.
B)unearned income.
C)buildings and equipment.
D)revenue bonds.
E)the provision for loan loss.

Question 19

Which of the following adjustments are made to gross loans and leases to obtain net loans and leases?

A)The loan and lease loss allowance is subtracted from gross loans
B)Unearned income is subtracted from gross interest received
C)Investment income is added to gross interest received
D)a.and b.
E)a.and c.

Question 20

Typically, "Call loans" are:

A)residential mortgages.
B)farm loans.
C)demand deposits.
D)payable on demand.
E)automobile loans.

Question 21

Jumbo certificates of deposit (CDs) typically:

A)have maturities greater than 10 years..
B)are negotiable.
C)are $1 million in size.
D)All of the above
E)b.and c.

Question 22

Non-interest income includes all of the following except:

A)monthly fee income on checking accounts.
B)late fees on loans.
C)trust income.
D)insufficient funds service charges.
E)all of the above are considered non-interest income.

Question 23

A bank currently owns a municipal bond paying a tax-exempt rate of 5%.If the banks marginal tax rate is 35%, what is the taxable equivalent yield?

A)7.69%
B)3.25%
C)6.75%
D)3.70%
E)9.32%

Question 24

A bank's core deposits are:

A)vault cash.
B)stable deposits that are not typically withdrawn over short periods of time.
C)the bank's deposits at the Federal Reserve.
D)the most interest rate sensitive liabilities of a bank.
E)deposits held in foreign offices.

Question 25

A bank's "burden" is defined as:

A)net interest income minus non-interest income.
B)non-interest income minus non-interest expense.
C)non-interest expense minus non-interest income.
D)net interest income plus non-interest income.
E)interest expense plus non-interest expense.

Question 26

_________ own(s) the bulk of demand deposit accounts.

A)Consumers
B)Businesses
C)State governments
D)The federal government
E)Non-profits

Question 27

Everything else the same, a bank's "burden" would most likely increase given:

A)a decrease in overhead expenses.
B)an increase in interest rates.
C)a decrease in interest rates.
D)an increase in executive salaries.
E)an increase in service charges collected by the bank.

Question 28

Which of the following would be the least sensitive to changes in interest rates?

A)Demand deposits
B)Repurchase agreements
C)Federal funds purchased
D)Eurodollar liabilities
E)Jumbo CDs

Question 29

A bank currently owns a municipal bond paying a tax-exempt rate of 8%.If the banks marginal tax rate is 39%, what is the taxable equivalent yield?

A)11.12%
B)4.88%
C)13.11%
D)5.76%
E)9.32%

Question 30

The "provision for loan and lease losses":

A)are the realized losses from the previous accounting period.
B)represents management's estimate of potential lost revenue from bad loans.
C)determined by the Federal Reserve for all banks.
D)does not affect net income.
E)is another name for a bank's "burden."

Question 31

Net interest income is the difference between:

A)gross interest income and net interest expense.
B)gross interest income and non-interest income.
C)the burden and realized gains or losses.
D)non-interest income and net interest expense.
E)gross interest income and gross interest expense.

Question 32

Which of the following is not considered a volatile liability?

A)Jumbo CDs
B)Deposits in foreign offices
C)Repurchase agreements
D)Federal funds sold
E)All of the above are considered volatile liabilities

Question 33

Non-interest income includes all of the following except:

A)checking account fees.
B)insufficient funds service charges.
C)trust income.
D)personnel expenses.
E)all of the above are considered non-interest income.

Question 34

Unsecured liabilities created from the exchange of immediately available funds are known as:

A)federal funds purchased.
B)repurchase agreements.
C)federal funds sold.
D)pledged securities.
E)brokered deposits.

Question 35

Core deposits consist of all of the following except:

A)demand deposits.
B)NOW accounts.
C)jumbo certificates of deposit.
D)savings accounts.
E)money market demand accounts.

Question 36

Interest income includes:

A)interest earned on all of the bank's assets.
B)fees earned on all of the bank's assets.
C)fees earned on all of the bank's deposit accounts.
D)all of the above.
E)a.and b.only

Question 37

A bank currently owns a municipal bond paying a tax-exempt rate of 6.5%.If the banks marginal tax rate is 40%, what is the taxable equivalent yield?

A)3.90%
B)10.83%
C)9.10%
D)4.64%
E)9.32%

Question 38

Jumbo CDs that a bank obtains from a third-party broker are called:

A)money market demand accounts.
B)time deposit accounts.
C)mortgage loans.
D)brokered deposits.
E)core deposits.

Question 39

Checking accounts with unlimited check-writing and pay interest are known as:

A)demand deposit accounts.
B)money market deposit accounts.
C)NOW accounts.
D)certificates of deposit.
E)time deposits.

Question 40

Which of the following is are only available to non-commercial customers?

A)Money Market Demand Accounts
B)Demand deposit accounts
C)Mortgage loans
D)Negotiable Orders of Withdrawal (NOW) accounts
E)Auto leases

Question 41

Return on equity can be decomposed into:

A)the sum of return on assets and the equity multiplier.
B)the product of return on assets and the equity multiplier.
C)the product of the profit margin and the equity multiplier.
D)the sum of the profit margin and the equity multiplier.
E)the sum of the profit margin, equity multiplier, and the interest ratio.

Question 42

Which of the following would be considered an extraordinary item on an income statement of a bank?

A)Revenue from the sale of the bank's office building.
B)Interest income when the spread is greater than 10%.
C)Realized security gains.
D)Collection on loans already charged off.
E)All of the above would be considered extraordinary items.

Question 43

Net income is calculated as:

A)total revenue - total operating expenses.
B)total revenue - total operating expenses - taxes.
C)asset utilization - expense ratio.
D)asset utilization - expense ratio - tax ratio.
E)interest expense ratio - non-interest expense ratio - provision for loan loss ratio.

Question 44

Net income is defined as:

A)Net interest income - burden + provision for loan loss + securities gains or losses - taxes.
B)Net interest income + burden + provision for loan loss + securities gains or losses - taxes.
C)Net interest income - burden - provision for loan loss + securities gains or losses - taxes.
D)Net interest income - burden - provision for loan loss + securities gains or losses + taxes.
E)Net interest income + burden - provision for loan loss + securities gains or losses - taxes.

Question 45

Non-interest expenses includes all of the following except:

A)occupancy expenses.
B)goodwill impairment.
C)insufficient funds service charges.
D)personnel expenses.
E)all of the above are considered non-interest expense.

Question 46

Total operating expense is comparable to _________ for a non-financial firm.

A)sales
B)cost of goods sold + other operating expenses
C)interest expense
D)earnings before taxes
E)net income

Question 47

Relative to retail banks, wholesale banks:

A)deal primarily with consumers.
B)operate with fewer commercial deposits.
C)purchase more non-core liabilities.
D)hold proportionally more consumer loans.
E)All of the above.

Question 48

Everything else the same, financial leverage works to a bank's advantage when:

A)the return on assets is positive.
B)the return on assets is negative.
C)fixed assets are high.
D)fixed assets are low.
E)a.and d.

Question 49

Relative to wholesale banks, retail banks:

A)focus on individual consumer banking relationships.
B)operate with fewer consumer deposits.
C)purchase more non-core liabilities.
D)hold proportionally more business loans to large firms.
E)All of the above.

Question 50

What is the equity multiplier for a bank where equity is equal to 8% of total assets?

A)1.08
B)8.00
C)0.92
D)12.5
E)1.25

Question 51

What is the return on equity for a bank that has an equity multiplier of 14, an interest expense ratio of 4%, and a return on assets of .9%?

A)1.3%
B)4.0%
C)9.0%
D)12.6%
E)8.6%

Question 52

A bank's equity multiplier measures the bank's:

A)financial leverage.
B)operating leverage.
C)credit leverage.
D)interest rate exposure.
E)duration gap.

Question 53

What is the return on equity for a bank that has an equity multiplier of 12, an interest expense ratio of 5%, and a return on assets of 1.1%?

A)5.0%
B)13.2%
C)8.2%
D)26.4%
E)0.66%

Question 54

Total operating income is comparable to _________ for a non-financial firm.

A)sales
B)cost of goods sold
C)gross profit
D)earnings before interest and taxes
E)net income

Question 55

A change in net interest income would occur when:

A)the composition of the assets of the bank change.
B)the average asset yield changes.
C)the volume of the assets of the bank change.
D)the average interest expense changes.
E)All of the above

Question 56

hat is the equity multiplier for a bank where equity is equal to 10% of total assets?

A)90.00
B)10.00
C)1.10
D)110.00
E)1.00

Question 57

Return on assets can be calculated as:

A)return on equity plus the equity multiplier.
B)net interest income divided by earning assets.
C)asset utilization minus the expense ratio and the tax ratio.
D)interest income minus interest expense.
E)earning assets divided by average total assets.

Question 58

A bank that deals primarily with commercial customers is called:

A)an Edge Act bank.
B)a retail bank.
C)a wholesale bank.
D)a uniform bank.
E)a liability bank.

Question 59

What is the equity multiplier for a bank where equity is equal to 12% of total assets?

A)83.33
B)1.12
C)0.88
D)12.00
E)8.33

Question 60

What is the return on equity for a bank that has an equity multiplier of 9, an interest expense ratio of 6%, and a return on assets of 1.2%?

A)10.8%
B)6.0%
C)8.0%
D)4.8%
E)0.65%

Question 61

What is 1st State's return on equity?

A)0.6%
B)3.8%
C)5.0%
D)8.2%
E)13.0%

Question 62

Use the following information for questions

What is 1st State's net interest margin?

A)0.6%
B)3.8%
C)5.0%
D)8.2%
E)9.8%

Question 63

Which of the following is not one of the risks identified by the Federal Reserve Board?

A)Credit Risk
B)Market Risk
C)Ownership Risk
D)Reputation Risk
E)Legal Risk

Question 64

What is the earnings base at 1st State?

A)12.5%
B)17.0%
C)58.5%
D)75.5%
E)82.0%

Question 65

Use the following information for questions

What is 1st State's burden?

A)2.5%
B)17.5%
C)25.0%
D)75.5%
E)82.5%

Question 66

Use the following information for questions

What is 1st State's efficiency ratio?

A)2.53%
B)17.51%
C)0.83%
D)0.45%
E)83.3%

Question 67

The efficiency ratio measures:

A)a bank's ability to control interest expense.
B)a bank's ability to control non-interest expense.
C)a bank's spread.
D)a bank's burden.
E)a bank's operating leverage.

Question 68

Recoveries refer to:

A)the dollar value of loans actually written off as uncollectible.
B)the dollar amount of loans that were previously charged-off but now collected.
C)net charge-offs.
D)loans not currently accruing interest.
E)loans that regulators have required the bank to "recover".

Question 69

Classified loans:

A)still accrue interest.
B)have not had a principle or interest payment made in 90 days.
C)exactly offset gross charge-offs.
D)are loans in which regulators have forced management to set aside reserves.
E)all of the above

Question 70

The goal of a bank manager should be:

A)to maximize earnings.
B)to minimize taxes.
C)to minimize risk.
D)to maximize shareholder wealth.
E)to maximize net interest income.

Question 71

What is 1st State's burden?

A)2.7%
B)17.5%
C)25.0%
D)75.5%
E)82.5%

Question 72

Which of the following would not be considered an earning asset?

A)Cash due from banks
B)Municipal securities
C)Treasury bills
D)Repurchase agreements
E)Mortgages

Question 73

Use the following information for questions

What is 1st State's return on equity?

A)0.6%
B)3.8%
C)5.0%
D)8.2%
E)9.8%

Question 74

A savings and loan that sold off their junk bond holdings and issued consumer auto loans with the proceed would most likely be:

A)decreasing their market risk.
B)increasing their capital risk.
C)decreasing their legal risk.
D)increasing their operating risk.
E)reducing their credit risk.

Question 75

What is 1st State's net interest margin?

A)0.6%
B)3.8%
C)4.9%
D)8.2%
E)9.8%

Question 76

Use the following information for questions

What is the earnings base at 1st State?

A)12.5%
B)17.5%
C)58.5%
D)75.5%
E)82.5%

Question 77

Interest expense varies between banks because of:
a.rate effects.
b.composition effects.
c.volume effects.
d.all of the above.
e.a.and c.

Question 78

What is 1st State's efficiency ratio?

A)2.5%
B)17.5%
C)25.0%
D)74.5%
E)82.5%

Question 79

The expense ratio is calculated as:

A)total revenue - total operating expenses.
B)total revenue - total operating expenses - taxes.
C)interest expense ratio - non-interest expense ratio - provision for loan loss ratio.
D)asset utilization - expense ratio - tax ratio.
E)interest expense ratio + non-interest expense ratio + provision for loan loss ratio.

Question 80

Which type of risk is the most difficult to quantify?

A)Credit risk
B)Liquidity risk
C)Legal risk
D)Operating risk
E)Market risk