Question 1

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

Accepted Answer

The lower these ratios are, the higher the Profit Margin (PM) because it indicates that the bank is operating more efficiently, with lower costs relative to its income.

Question 2

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?

Accepted Answer

To calculate overhead efficiency ratio, we need to divide the noninterest expense by the sum of net interest income and noninterest income. In this case, the calculation would be (110 + 250 + 40) / (3,900) = 0.0615 or 61.54%. Therefore, the best choice is A.

Question 3

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

Accepted Answer

The bank's NIM of 4.08% is lower than the average NIM of 4.65%, indicating poorer performance.

Question 4

Cash in the process of collection is

Accepted Answer

Cash in the process of collection refers to checks that the bank is owed but has not yet collected. The other options do not accurately describe cash in the process of collection.

Question 5

Purchased funds include all but which one of the following?

Accepted Answer

Purchased funds are those funds that a bank obtains from external sources rather than from its own depositors or earnings. Brokered deposits, wholesale CDs, Fed funds purchased, and repurchase agreements are all examples of purchased funds, but demand deposits are not. Demand deposits are funds that are deposited by customers and are considered core deposits, whereas purchased funds are not.

Question 6

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?

Accepted Answer

Oceanside's AU ratio is calculated as (Net Income / Assets) / Profit Margin = (0.10 / 9.5) / 0.15 = 7.02%.

Question 7

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

Accepted Answer

If a bank has more purchased funds, it means that the bank is relying on more borrowed funds to finance its operations. As a result, the bank is likely to have a higher interest expense ratio, which measures the amount of interest paid relative to the bank's total income.

Question 8

The bank's ROA is

Accepted Answer

ROA (Return on Assets) is calculated by dividing the net income by the total assets. Therefore, ROA = Net Income/Total Assets (in decimal form). Plugging in the numbers from the question, we get ROA = 115/9150 = 0.0126 = 1.26%. The answer is therefore choice C.

Question 9

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?

Accepted Answer

The answer of A bank has interest income to total...

Question 10

The largest source of income at a typical bank is

Accepted Answer

The primary function of a bank is to lend money, and the interest earned on loans and leases is the largest source of income for most banks. Interest income on securities held for investment (B) and noninterest income (D) may also be sources of revenue, but they are typically smaller in magnitude compared to interest income on loans and leases. Dividends or stock (E) are not sources of income for banks, but rather represent ways for banks to distribute their profits to shareholders. Interest income on securities held for sale (A) may generate some revenue, but it is typically a smaller portion of a bank's overall income compared to interest on loans and leases.

Question 11

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.

Accepted Answer

Investors with a tax rate of 25% or higher would prefer the municipal bond because the tax exempt status of municipal bonds would provide a higher after-tax yield compared to the equivalent risk corporate bond paying 7%.

Question 12

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.

Accepted Answer

An overhead efficiency ratio of 0.65 indicates that the typical bank is spending 65 cents to generate $1 in revenue. Therefore, a bank with a lower overhead efficiency ratio (in this case, 0.6964) is doing a better job managing noninterest income and expenses, meaning it is more efficient in generating revenue.

Question 13

The bank's profit margin is

Accepted Answer

Based on the given information, the bank's profit margin is calculated to be 18.46%. Therefore, the best choice is D. None of the other answer choices match the calculated profit margin.

Question 14

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

Accepted Answer

The AU ratio, also known as the asset utilization ratio, measures the bank's ability to generate income from its assets. On the other hand, the PM ratio, or the profit margin ratio, measures the bank's ability to control expenses and generate income from its operations. Therefore, option B, "generate income from assets; control expenses," is the correct answer.

Question 15

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

Accepted Answer

Eurodollar deposits are not considered core deposits because they are typically large deposits made by foreign entities in U.S. banks and are therefore more volatile and subject to fluctuations based on economic and political conditions outside of the U.S.

Question 16

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

Accepted Answer

We can use the DuPont analysis to find out the ROE of Blue Ridge Bank.
ROE = PM x Asset Turnover x Equity Multiplier
Asset Turnover = Total Assets / Equity Capital = 9
Equity Multiplier = Total Assets / Total Equity = 9
PM = 12%
ROE = 0.12 x (Total Revenue / Total Assets) x (Total Assets / Total Equity)
ROE = 0.12 x (Interest Income / Total Assets + Noninterest Income / Total Assets) x (Total Assets / Total Equity)
ROE = 0.12 x (0.06 + 0.015) x 9 = 8.10%
Therefore, the answer is (C).

Question 17

The bank's ROE is

Accepted Answer

The ROE is calculated by dividing the net income by the shareholder's equity, and multiplying by 100. In this case, ROE = (115/1030) x 100 = 11.17%. Therefore, the correct choice is D.

Question 18

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?

Accepted Answer

To calculate operating income per dollar of total assets, we need to divide net income per dollar of assets by the profit margin:

Operating Income per Dollar of Total Assets = Net Income per Dollar of Assets / Profit Margin

Plugging in the given values:

Operating Income per Dollar of Total Assets = 0.0155 / 0.1225 = 0.1265 or 12.65%

Therefore, the best choice is B.

Question 19

The bank's asset utilization ratio is

Accepted Answer

The asset utilization ratio is calculated by dividing total revenue by total assets. Here, the total revenue is (450 + 95 + 78) and the total assets are 9150, resulting in a ratio of 6.81%.

Question 20

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

Accepted Answer

MMDAs (Money Market Deposit Accounts) are specifically designed to compete with money market mutual fund investments. They typically have higher interest rates than traditional savings accounts and limited checking features, such as a cap on the number of transactions per month. NOWs (Negotiable Order of Withdrawal) are similar to MMDAs but are specifically designed for small businesses and nonprofits. Retail CDs (Certificates of Deposit) and special savings deposits usually offer higher interest rates than traditional savings accounts, but do not have the limited checking features of MMDAs. Negotiable CDs are similar to traditional CDs and do not have the checking features of MMDAs.

Quiz 12: Commercial Banks Financial Statements and Analysis

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