Deck 12: Commercial Banks Financial Statements and Analysis

Question 1

Loans are the major item on a bank's balance sheet, and they generate the largest amount of revenue.

Answer 1

True

Question 2

Wholesale CDs obtained from an investment house rather than directly from a customer are referred to as brokered deposits.

Answer 2

True

Question 3

Banks generally pay higher interest rates on NOW accounts than on MMDAs.

Answer 3

False

Question 4

MMDAs are a type of savings account that has some limited checking features. These accounts were designed to help banks compete with MMMFs.

Question 5

Fernando Bank has interest expense of $150 million, earning assets of $1,400 million and a NIM of 5.00%. The bank also has interest-bearing liabilities of $1,100 million. Fernando Bank's spread is

A) 1.10%
B) 1.65%
C) 1.94%
D) 2.08%
E) 2.16% [(0.05 x 1,400) + 150]/1,400 - (150/1,100) = 2.08%

Question 6

In ratio analysis, the profit margin times the asset utilization ratio equals return on assets.

Question 7

A construction firm cannot obtain the necessary permits to begin building a shopping mall until it can show it either has or will have the necessary funding to complete the project. The firm may ask a bank for which of the following to allow it to obtain the permits?
I) Commercial letter of credit
II) Loan commitment
III) Credit line
IV) Repurchase agreement

A) I or II
B) II or III
C) II or IV
D) III or IV
E) I or IV

Question 8

The allowance for loan and lease losses is bank management's estimate of the amount of gross loans and leases that will not be repaid to the bank.

Question 9

Both retail and wholesale CDs are negotiable instruments despite their different denominations.

Question 10

Rate sensitive funding sources at a bank are termed core deposits.

Question 11

Loans to consumers and to individuals are jointly termed C&I loans on a bank's balance sheet.

Question 12

Banks have higher leverage than most manufacturing firms.

Question 13

At almost all banks noninterest expense is greater than noninterest income; hence, the overhead efficiency ratio is usually greater than 100%.

Question 14

Core deposits are deposits that are

A) at the bank solely for the interest rate earned.
B) very stable funds sources.
C) typically for larger denominations than hot money sources.
D) very frequently turned over.

Question 15

C&I loans are loans to businesses used to finance capital needs, equipment purchases, and plant expansions.

Question 16

A wholesale bank is one that focuses its business activities on commercial banking relationships.

Question 17

The provision for loan loss account is actual loan losses less loan recoveries in a given time period.

Question 18

Composite rating 5 is the rating for the soundest financial institutions.

Question 19

Which one of the following is the definition of the NIM?

A) (Net interest income - Net noninterest income)/Earning assets
B) Net interest income/Interest-bearing liabilities
C) (Interest income - Interest expense)/Earning assets
D) (Interest income - Interest expense)/Interest-bearing liabilities
E) (Interest income/Earning assets) - (Interest expense/Interest-bearing liabilities)

Question 20

Uniform principles, standards, and report forms for depository institutions are prescribed by the

A) FDIC
B) Federal Reserve
C) Federal Financial Institutions Examination Council
D) Office of Comptroller of Currency

Question 21

The lower the interest expense ratio, the provision for loan loss ratio, the noninterest expense ratio and the tax ratio the _______________ the _______________.

A) lower; PM
B) higher; PM
C) lower; AU
D) higher; AU
E) lower; EM

Question 22

Plains National Bank has interest income of $250 million and interest expense of $110 million, noninterest income of $40 million and noninterest expense of $65 million on earning assets of $3,900 million. What is Plains' overhead efficiency ratio?

A) 61.54%
B) 44.00%
C) 9.23%
D) 42.45%
E) 37.46% 40/65 = 61.54%

Question 23

If the average net interest margin for this type of bank is 4.65%, then, ceteris paribus, this particular bank is performing

A) the same as average because this bank has a NIM of 4.65%.
B) better than average because this bank has a NIM of 6.55%.
C) poorer than average because this bank has a NIM of 4.08%.
D) better than average because this bank has a NIM of 5.23%.
E) One can't determine with the information given. NIM = (450 + 95 - 246)/(1925 + 5400) = 4.08%

Question 24

Cash in the process of collection is

A) a deposit at another financial institution.
B) a Fed funds transaction.
C) checks the bank owes other institutions that have not yet been paid.
D) checks that the bank is owed but has not yet collected.
E) equity capital.

Question 25

Purchased funds include all but which one of the following?

A) Brokered deposits
B) Wholesale CDs
C) Fed funds purchased
D) Repurchase agreements
E) Demand deposits

Question 26

Oceanside bank converts a dollar of equity into 10 cents of net income and has $9.50 in assets per dollar of equity capital. Oceanside also has a profit margin of 15%. What is Oceanside's AU ratio?

A) 1.05%
B) 3.55%
C) 5.56%
D) 6.45%
E) 7.02% (0.10/9.5)/0.15 = 7.02%

Question 27

If a bank has more purchased funds than the average bank, you would not be surprised to see a higher than average ____________________ ratio.

A) provision for loan loss
B) tax
C) noninterest expense
D) interest expense
E) none of the above

Question 28

The bank's ROA is

A) 1.31%
B) 1.78%
C) 1.26%
D) 0.89%
E) none of the above 115/9150 = 1.26%

Question 29

A bank has interest income to total assets ratio of 5.45% and has noninterest income of $45 million and total assets of $700 million. What is the bank's asset utilization ratio?

A) 5.45%
B) 6.43%
C) 9.67%
D) 15.02%
E) 11.88%

Question 30

The largest source of income at a typical bank is

A) interest income on securities held for sale.
B) interest income on securities held for investment.
C) interest income on loans and leases.
D) noninterest income.
E) dividends or stock.

Question 31

A municipal bond is paying a 6% annual yield. An equivalent risk corporate bond is paying 7%. Investors with a tax rate of _______________ or higher would prefer the municipal bond.

A) 65.13%
B) 14.28%
C) 25.00%
D) 80.75%
E) 25.75% 1 - (0.0525/0.0700) = 25.00%

Question 32

If the typical bank of this type has an overhead efficiency ratio of 0.65, then this particular bank ___________________ than the typical bank, ceteris paribus.

A) is doing a poorer job generating profitable off-balance-sheet activities
B) is doing a better job time managing noninterest income and expenses
C) is paying higher taxes
D) has fewer loan losses
E) none of the above Overhead efficiency ratio = 78/112 = 69.64%

Question 33

The bank's profit margin is

A) 27.27%
B) 23.08%
C) 21.31%
D) 18.46%
E) none of the above 115/(450 + 95 + 78) = 18.46%

Question 34

The AU ratio measures the bank's ability to __________ and the PM ratio measures the bank's ability to __________________.

A) control expenses; generate income from assets
B) generate income from assets; control expenses
C) maximize interest revenue; minimize interest expense
D) control leverage; minimize physical plant
E) none of the above

Question 35

Core deposits typically include all except which one of the following?

A) Demand deposits
B) NOW accounts
C) MMDAs
D) Eurodollar deposits
E) Passbook savings accounts

Question 36

Blue Ridge Bank has a PM of 12%, an interest income to total assets ratio of 6.00%, and a noninterest income to assets ratio of 1.50%. Blue Ridge also has $9 in assets per dollar in equity capital. Blue Ridge's ROE is

A) 7.50%
B) 9.00%
C) 8.10%
D) 6.48%
E) 5.75% 0.12 x (0.06 + 0.0150) x 9 = 8.10%

Question 37

The bank's ROE is

A) 15.65%
B) 13.21%
C) 19.55%
D) 11.17%
E) 12.67% 115/1030 = 11.17%

Question 38

The First Bank of the Ozarks generates $0.0155 dollars of net income per dollar of assets and it has a profit margin of 12.25%. How much operating income per dollar of total assets does First Bank generate?

A) 12.50%
B) 12.65%
C) 12.75%
D) 12.85%
E) 12.95% 0.0155/0.1225 = 12.65%

Question 39

The bank's asset utilization ratio is

A) 58.04%
B) 6.12%
C) 5.46%
D) 4.29%
E) 6.81% (450 + 95 + 78)/9150 = 6.81%

Question 40

Interest-bearing retail accounts with limited checking features designed to compete with money market mutual fund investments are called ________________.

A) NOWs
B) retail CDs
C) MMDAs
D) special savings deposits
E) negotiable CDs

Question 41

A(n) __________________ is a contra asset account.

A) loan commitment
B) provision for loan and lease losses
C) allowance for loan and lease losses
D) net charge-off

Question 42

If the net noninterest income were to increase to -$16, what would the average loan rate (ALR) have to be to generate a 12% ROE? Compared to the industry, does this ALR appear feasible? If not, what options does FNB have?

Question 43

What is the difference between net charge-offs (sometimes called write-offs) and the provision for loan loss? What is the purpose of the provision for loan loss account?

Question 44

How has the negotiable feature of wholesale CDs improved bank's ability to manage their liquidity?

Question 45

What are the major sources of purchased funds? Can using purchased funds change a bank's profitability? Its risk level? Explain

Question 46

Net loans and leases plus ________________ plus _________________ equals gross loans and leases.

A) earned income; provision for loan and lease losses
B) unearned income; the allowance for loan and lease losses
C) net charge-offs; provision for loan and lease losses
D) provision for loan and lease losses; allowance for loan and lease losses
E) none of the above

Question 47

The largest market available for purchased funds is the ___________________.

A) wholesale CD market
B) Eurodollar deposit market
C) banker's acceptances market
D) discount window purchases
E) fed funds market

Question 48

What must net noninterest income (net of noninterest expense) be in order for FNB to have a 12% ROE? Based on your answer, must FNB be performing better or worse than the industry average in this area? Explain.

Question 49

All but which one of the following is an example of noninterest income or noninterest expense?

A) Income from service charges on deposits
B) Income from trust services
C) Gains and losses from trading account assets
D) Earnings on securities held for investment
E) Salaries and benefits paid to employees

Question 50

What is the bank's NIM? Is the bank performing better or worse than average? In what area is the bank performing better or worse than average? How could the bank improve if necessary?

Question 51

Investment securities plus ____________________ is equal to a bank's earning assets.

A) net loans and leases
B) gross loans and leases
C) property, plant, and equipment
D) securities held for trading
E) purchased accounts

Question 52

What are the differences between purchased funds and core deposits?

Question 53

What is the difference between a loan commitment and a letter of credit?

Question 54

At the start of the quarter a bank has $55 million (gross) in its loan portfolio, and has $1 million in its allowance for loan loss account. During the quarter, loan audits indicate that an additional $300,000 of loans will not be paid as promised. These loans have not yet been written off as uncollectible however. What are the starting and ending gross and net loan amounts, the provision for loan loss account, and what is the effect on the bank's quarterly earnings?