Chapter 12 Commercial Banks` Financial Statements and Analysis

True/False Questions

1.A wholesale bank is one that Iocuses its business activities on commercial banking relationships.
Answer: True Page: 351 Level: Easy

2.In 2004 Bank oI America, headquartered in Charleston, West Virginia, was the nation's sixth largest bank.
Answer: False Page: 351-352 Level: Medium

3.Banks have higher leverage than most manuIacturing Iirms.
Answer: True Page: 352,355 Level: Easy

4.Loans to consumers and to individuals are jointly termed C&I loans on a bank balance
sheet.
Answer: False Page: 355 Level: Easy

5.Currency in the process oI collection is checks that the bank owes to other banks but
has not yet paid.
Answer: True Page: 352 Level: Medium

6.C&I loans are loans to businesses used to Iinance capital needs, equipment purchases
and plant expansions.
Answer: True Page: 355 Level: Easy

7.The provision Ior loan loss account is actual loan losses less loan recoveries in a given
time period.
Answer: False Page: 356, 366 Level: Medium

8.The allowance Ior loan and lease losses is bank management's estimate oI the amount oI gross loans and leases
that will not be repaid to the bank.
Answer: True Page: 355-356 Level: Medium

9.In ratio analysis, the proIit margin times the asset utilization ratio equals return on assets.
Answer: True Page: 371 Level: Medium

10.Loans are the major item on a bank's balance sheet, and they generate the largest amount oI revenue.
Answer: True Page: 354 Level: Easy

11.Unearned income on a loan is the amount oI income that the bank has received on a loan Irom a customer but has
not yet recorded on the income statement.
Answer: True Page: 355-356 Level: Easy

12.Banks generally pay higher interest rates on NOW accounts than on MMDAs.
Answer: False Page: 356 Level: Easy

13.Wholesale CDs obtained Irom an investment house rather than directly Irom a customer are reIerred to as
brokered deposits
.Answer: True Page: 357 Level: Easy

14.Financial standby letters oI credit are an alternative to loan commitments.
Answer: True Page: 361-362 Level: Medium

15.Rate sensitive Iunding sources at a bank are termed core deposits.
Answer: False Page: 358 Level: Medium


ultiple Choice Questions

16.Core deposits are deposits that are
A)At the bank solely Ior the interest rate earned
B)Very stable Iunds sources
C)Typically Ior larger denominations than hot money sources
D)Very Irequently turned over
Answer: B Page: 358 Level: Easy

17.A construction Iirm cannot obtain the necessary permits to begin building a shopping mall until it can show it
either has or will have the necessary Iunding to complete the project. The Iirm may ask a bank Ior which oI the
Iollowing to allow it to obtain the permits?
I .Commercial letter oI 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
Answer: B Page: 359-360 Level: Medium

18.Which one oI the Iollowing is the deIinition oI the 'spread?'
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 BearingLiabilities)
Answer: E Page: 376 Level: Medium

19.UniIorm principles, standards and report Iorms Ior depository institutions are prescribed by the
A)FDIC
B)Federal Reserve
C)Federal Financial Institutions Examination Council
D)OIIice oI Comptroller oI Currency
Answer: C Page: 351 Level: Medium

20.The bank's top earning asset category is
A)Cash and balances due Irom other depository institutions
B)Investment securities
C)Loans
D)Physical plant and equipment
Answer: C Page: 354 Level: Easy

21.Deposits at the Federal Reserve are used Ior all oI the Iollowing except
A)To meet legal reserve requirements
B)To assist in check clearing
C)To purchase Treasury securities
D)To earn interest
E)To Iacilitate wire transIers
Answer: D Page: 352 Level: Medium

22.Cash in the process oI collection is
A)A deposit at another Iinancial institution
B)A Fed Iunds 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
Answer: D Page: 352 Level: Medium

23.More than percent oI Fed Iunds transaction have a maturity oI one day
A)50
B)60
C)70
D)8
0E)90
Answer: E Page: 354 Level: Medium

24.Interest bearing retail accounts with limited checking Ieatures designed to compete with money market mutual
Iund investments are called .
A)NOWs
B)Retail CDs
C)MMDAs
D)Special savings deposits
E)Negotiable CDs
Answer: C Page: 356 Level: Medium

25.Long maturity investments Ior a bank typically include all but which one oI the Iollowing?
A)U.S. Treasury bonds
B)U.S. agency securities
C)Mortgage backed securities
D)Common stocks
E)Municipal bonds
Answer: D Page: 354 Level: Easy

26.Purchased Iunds include all but which one oI the Iollowing?
A)Brokered deposits
B)Wholesale CDs
C)Fed Iunds purchased
D)Repurchase agreements
E)Demand deposits
Answer: E Page: 358 Level: Easy

27.Core deposits typically include all except which one oI the Iollowing?
A)Demand deposits
B)NOW accounts
C)MMDAs
D)Eurodollar deposits
E)Passbook savings accounts
Answer: D Page: 358 Level: Easy

28.A bank has interest income to total assets ratio oI 5 and has noninterest income oI $30 million and total assets
oI $750 million. What is the bank's asset utilization ratio?
A)5.0
B)9.0
C)7.5
D)6.3
E)8.2
Answer: B Page: 371 Level: Medium

29.A person who enters a Iorward contract to sell British pounds in six months would worry about the counterparty
deIaulting on the contract iI over the next six months:
A)The dollar depreciated
B)The pound appreciated
C)The exchange rate remained unchanged
D)The NYSE went out oI business
E)The dollar appreciated
Answer: E Page: 362-363 Level: Easy

30.A person who purchased a Iutures contract on British pounds on an exchange would worry about counterparty
deIault only iI:
A)The counterparty declared bankruptcy
B)The pound appreciated
C)The exchange rate remained unchanged
D)The exchange went bankrupt
E)The dollar appreciated
Answer: D Page: 362-363 Level: Medium

31.The largest source oI income at a typical bank is
A)Interest income on securities held Ior sale
B)Interest income on securities held Ior investment
C)Interest income on loans and leases
D)Non-interest income
E)Dividends or stock
Answer: C Page: 354 Level: Easy

32.A municipal bond is paying a 6 annual coupon. An equivalent risk corporate bond is paying 7. Investors in a
tax bracket oI or higher would preIer the municipal bond.
A)85.7
B)14.28
C)19.25
D)80.75
E)25.75
Answer: B Page: 364 Level: Medium

33.A bank raises the interest rate Irom 3 to 4 on $100,000 oI its 6 month CD liabilities that are currently
maturing. Assuming no change in volume oI deposits, pre-tax net income would
A)Rise by $1000
B)Fall by $1000
C)Be unchanged
D)Rise or Iall but can't tell by how much
Answer: B Page: 358 Level: Easy

Use the Iollowing to answer questions 34-39:34.

The bank's ROA is
A)1.31
B)1.78
C)1.65
D)0.89
E)None oI the above
Answer: A Page: 371 Level: Easy

35.The bank's ROE is approximately
A)15.65
B)13.21
C)19.55
D)14.21
E)12.67
Answer: B Page: 370 Level: Easy

36.The bank's proIit margin is
A)30.04
B)27.27C)23.08
D)21.31
E)None oI the above
Answer: D Page: 371 Level: Medium

37.The bank's asset utilization ratio is
A)58.04
B)6.12
C)5.46
D)4.29
E)None oI the above
Answer: B Page: 371 Level: Medium

38.II the average net interest margin Ior this type oI bank is 4.65, then, ceteris paribus, this particular bank is
perIorming
A)The same as average because this bank has a NIM oI 4.65
B)Better than average because this bank has a NIM oI 6.55
C)Better than average because this bank has a NIM oI 5.23
D)Poorer than average because this bank has a NIM oI 3.64
E)One can't determine with the inIormation given
Answer: D Page: 376 Level: Medium

39.II the typical bank oI this type has an overhead eIIiciency ratio oI 0.65, then this particular bank is, ceteris
paribus, than the typical bank.
A)Doing a better job generating proIitable oII-balance sheet activities
B)Having a more diIIicult time managing non-interest income and expenses
C)Is paying higher taxes
D)Has Iewer loan losses
E)None oI the above
Answer: B Page: 376-377 Level: Medium

40.II a bank has more purchased Iunds than the average bank, you would not be surprised to see a higher than
average ratio
A)Provision Ior loan loss
B)Tax ratio
C)Non-interest expense ratio
D)Interest expense ratio
E)None oI the above
Answer: D Page: 371-372 Level: Easy

41.The AU ratio measures the bank's ability to and the PM ratio measures the bank's ability to
.A)Control expenses; generate income Irom assets
B)Generate income Irom assets; control expenses
C)Maximize interest revenue; minimize interest expense
D)Control leverage; minimize physical plant
E)None oI the above
Answer: B Page: 371 Level: Medium

42.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 Ior trading
E)Purchased accounts
Answer: A Page: 356 Level: Medium

43.Net loans and leases plus plus equals gross loans and
leases.
A)Earned income; provision Ior loan and lease losses
B)Unearned income; the allowance Ior loan and lease losses
C)Net charge oIIs; provision Ior loan and lease losses
D)Provision Ior loan and lease losses; allowance Ior loan and lease losses
E)None oI the above
Answer: B Page: 355-356 Level: DiIIicult

44.The largest market available Ior purchased Iunds is the .
A)Wholesale CD market
B)Eurodollar deposit market
C)Banker's acceptances market
D)Discount window purchases
E)Fed Iunds market
Answer: E Page: 357 Level: Medium

45.A is a contra asset account.
A)Loan commitment
B)Provision Ior loan and lease losses
C)Allowance Ior loan and lease losses
D)Net charge oIIs
Answer: C Page: 355 Level: DiIIicult

46.All but which one oI the Iollowing is an example oI noninterest income or noninterestexpense?
A)Income Irom service charges on deposits
B)Income Irom trust services
C)Gains and losses Irom trading account assets
D)Earnings on securities held Ior investment
E)Salaries and beneIits paid to employees
Answer: D Page: 367 Level: Medium