Question 1

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

Accepted Answer

The internal performance of a bank indeed includes aspects such as bank planning, technology assessment, and personnel development, as these are key components in ensuring the bank operates efficiently and remains competitive in the financial industry.

Question 2

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

Accepted Answer

Budget or profit plans are detailed financial plans that outline the bank's objectives and how they translate into specific financial goals and actions at the department level, ensuring alignment with the overall strategy of the bank.

Question 3

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

Accepted Answer

Cash assets indeed encompass vault cash, deposits at the Federal Reserve, deposits at other banks, and cash items in the process of collection, as these are all forms of liquid assets readily available or soon to be available for an institution's use.

Question 4

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

Accepted Answer

Most securities on the balance sheet of commercial banks are typically government and agency securities, which are considered safer and more liquid compared to 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.

Accepted Answer

Loans are less liquid because they cannot be easily converted into cash without significant loss of value, they carry the highest risk due to the uncertainty of repayment, but they also offer the highest yields compared to other bank assets, making them a significant source of income for banks.

Question 6

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

Accepted Answer

Net loans are typically calculated by subtracting the allowance for loan losses (not unearned income) 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.

Accepted Answer

The reserve for loan loss account is an accounting provision made by banks to cover estimated potential losses due to loan defaults and is based on management's assessment of the credit risk in their loan portfolio.

Question 8

Other real estate is principally furniture and equipment.

Accepted Answer

Other real estate primarily refers to properties such as land and buildings, not movable items like 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.

Accepted Answer

Money market deposit accounts (MMDAs) are a type of savings account that pays interest and typically allows the account holder to write a limited number of checks per month, combining features of both savings and checking accounts.

Question 10

Interest revenue is calculated on an accrual system.

Accepted Answer

Interest revenue is recognized when it is earned, not necessarily when it is received, which is consistent with the accrual accounting 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%.

Accepted Answer

The tax equivalent yield is calculated as the tax-free yield divided by (1 - tax rate). So, for a 4% tax-free yield and a 35% tax rate, the tax equivalent yield is 4% / (1 - 0.35) = 4% / 0.65 = 6.15%.

Question 12

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

Accepted Answer

Gains or losses on securities are not classified as extraordinary items on the income statement. They are typically shown under other income or expenses, as extraordinary items are rare and unusual events, not regular trading activities.

Question 13

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

Accepted Answer

Net charge-offs are gross charge-offs minus any recoveries on loans previously charged off, not 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.

Accepted Answer

Nonperforming assets include loans where interest is no longer being accrued due to non-payment, restructured loans with significantly revised interest rates or repayment terms, and properties obtained through foreclosure, indicating the borrower's inability to meet loan obligations.

Question 15

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

Accepted Answer

Return on equity (ROE) is calculated by dividing net income by shareholder equity, not by multiplying the return on assets (ROA) 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.

Accepted Answer

The equity multiplier is calculated as total assets divided by total equity, which is the inverse of the equity to assets ratio.

Question 17

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

Accepted Answer

The return on assets (ROA) ratio is indeed calculated as the product of the profit margin (net income divided by sales) and asset utilization (sales divided by total assets), reflecting how efficiently a company uses its assets to generate profit.

Question 18

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

Accepted Answer

Provision for loan losses is an expense set aside as an allowance for bad loans (customer defaults, or terms of a loan have to be renegotiated, etc.), and it is used by banks to cover such losses. It reflects the bank's estimate of potential loan losses, which directly impacts the asset quality on its balance sheet.

Question 19

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

Accepted Answer

Nonperforming assets show loans that are in trouble before they are written off, indicating current credit quality issues, while charge-offs, which occur after a loan is deemed unrecoverable, reflect past credit decisions and outcomes.

Question 20

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

Accepted Answer

Interest expense is typically the largest noninterest expense for banks, not wages and salaries. Banks often incur significant costs in the form of interest paid on deposits and other borrowed funds, which usually exceed the costs associated with employee compensation.

Quiz 3: Evaluating Bank Performance