Deck 6: Measuring and Evaluating the Performance of Banks and Their Principal Competitors

Question 1

__________________________ risk is one that deals with the quality of the bank's assets and,in particular,the bank's loans.

Answer 1

Credit

Question 2

__________________________ measures the amount of debt or leverage a bank has and is one part of the evaluation of the bank's ROE.It is generally a number larger than one.

Answer 2

Equity multiplier

Question 3

The __________________________ is a standardized report provided by federal regulators which reports the balance sheet,income statement,and other data for all federally supervised banks.It also contains information on peer institutions.

Answer 3

Uniform Bank Performance Report

Question 4

________________________ is one of the most widely respected private institutions that rates the credit quality of financial institutions.

Question 5

__________________________ reflects the effectiveness of the expense management of a bank and is one of the principal components of evaluating ROE.

Question 6

__________________________ assets of a financial institution are those that will mature or be repriced within a set period of time.

Question 7

__________________________ measures the return to stockholders on their investment in a bank.It is the product of net profit margin,asset utilization,and the equity multiplier.

Question 8

__________________________ assets,including loans,are those which are past due by 90 days or more.

Question 9

A phenomenon wherein interest rates and security prices in the financial marketplace move against a troubled firm,forcing it to make crucial adjustments in policies and performance in order to calm investors' worst fears is often referred to as __________________ by economists.

Question 10

The cumulative impact of all the risks (market risk,credit risk,operational risk,and legal and compliance risk)put together that can affect a financial firm's long-run survival is often referred to as _________________________.

Question 11

The ____________________ Act restricts combined auditing and consulting relationships in order to promote auditor independence and objectivity.

Question 12

__________________________ is the risk that a financial institution may not be able to meet the needs for cash of its depositors.

Question 13

________________________ includes violations of rules and regulations.It can include failure to hold adequate capital which can lead to costly corrective actions.

Question 14

The equity multiplier measures the amount of _____________________ for a bank and is one principal component of the bank's ROE.

Question 15

__________________________ is the risk that the value of the financial institution's asset portfolio will decline due to falling market prices.

Question 16

One of the principal components of evaluating ROE is _____________________ ratio,which reflects a bank's portfolio management policies and the mix and yield on its assets.

Question 17

________________________ refers to the uncertainty regarding a financial firm's earnings due to failures in computer systems,errors,misconduct by employees,lightning strikes,and similar events.

Question 18

__________________________ is the risk that shifting interest rates in the market will adversely affect a financial institution's net income or the value of its assets or equity.

Question 19

________________________ refers to variability in earnings resulting from actions taken by the legal system including unenforceable contracts,lawsuits,and adverse judgements.

Question 20

For a bank,sources of funds like Eurodollars,Fed funds,repurchase agreements,and large CDs are categorized as ____________________.

Question 21

According to the textbook,a bank's asset-utilization ratio reflects the mix and yield on a bank's portfolio of assets.

Question 22

The ratio of non-performing assets to total loans and leases is a measure of credit risk in banking industry.

Question 23

ROA measures how capably the management of a financial institution has been converting the institution's assets into net earnings.

Question 24

If the discount factor associated with the value of a bank's stock rises,the bank's stock price should rise,other factors held constant.

Question 25

According to the text,the ratio of a bank's net after-tax income to pre-tax net operating income is a measure of tax management efficiency.

Question 26

If a bank adds more full-time employees and posts the same net operating income,its employee productivity ratio,as defined in the text,must fall.

Question 27

One of the traditional measures of earnings efficiency is ________________________ or total interest income over total earnings assets less total interest expenses over total interest bearing bank liabilities.It measures the effectiveness of a firm's intermediation function in the borrowing and lending of money.

Question 28

One part of ROE is ________________________ or net income divided by pre-tax net operating income,which measures a financial firm's use of security gains and losses and other tax management tools to minimize tax exposure.

Question 29

According to the textbook,the most profitable U.S.banks in terms of both ROA and ROE are medium-size institutions in the asset size range of $100 million to $10 billion.

Question 30

As data processing of financial information becomes more important,managers of financial firms can realize cost savings from _______________________,transferring tasks from inside the firm to other firms specializing in information technology.

Question 31

Basic principles of financial management suggest that attempting to maximize a bank's stock value is the key objective for banks which should have priority over all other goals.

Question 32

A bank's profit margin or ratio of net after-tax income to total operating revenue is a measure of financial leverage for a bank.

Question 33

________________________ is the uncertainty associated with public opinion.Negative publicity (whether true or not)can affect a financial firm's earnings by dissuading customers from using the services of the institution.

Question 34

According to the textbook,the ratio of a bank's pre-tax net operating income to total operating revenues is a measure of expense-control efficiency.

Question 35

In recent years,the U.S.banking industry's equity multiplier has generally risen in response to regulatory pressure to raise more capital.

Question 36

Financial institutions that pursue the "quiet life" as a goal face less risk of losing earnings or market share.

Question 37

One of the measures of a bank's efficiency and return is "earnings spread".It is calculated by the ratio of total interest income to total liabilities as reduced by the ratio of total interest expenses to total assets.

Question 38

A bank's ROA equals its ROE times the ratio of total assets divided by total equity capital.

Question 39

Net profit margin can be split into two parts,________________________ and tax management efficiency.The first part is pre-tax net operating income over total operating revenue which looks at how many dollars of revenue survive after operating expenses are removed.

Question 40

If the expected stream of future dividends for a bank's shareholder rises,the bank's stock price should also rise,other factors held constant.

Question 41

Charge-offs represent the securities a bank decides to sell because they have declined in value.

Question 42

During the 1980s,the Comptroller of the Currency,the Federal Reserve and the FDIC created a new tool called the Uniform Bank Performance Report to help them analyze the financial condition of banks.

Question 43

Smaller banks usually have fewer liquid assets than larger banks.

Question 44

Loans past due for 90 days or more are classified as nonperforming assets.

Question 45

A bank's ROE equals its ROA times its:

A)net profit margin.
B)total assets divided by total equity capital.
C)total operating revenues divided by total assets.
D)ratio of net after-tax income to total operating revenues.
E)None of the options is correct.

Question 46

The ratio of a bank's interest income from its loans and security investments less interest expenses on debt issued,divided by total earning assets measures a bank's:

A)net operating margin.
B)net return before special transactions.
C)net interest margin.
D)return on assets.
E)None of the options is correct

Question 47

The ratio of a bank's net operating income to the number of a bank's full-time-equivalent employees is called the employee productivity ratio.

Question 48

The ratio of nonperforming assets to total loans and leases is considered to be a measure of a bank's market risk.

Question 49

Liquidity risk examines the quality of a bank's assets and,in particular,the quality of the bank's loans.

Question 50

A bank's asset utilization ratio reflects the effectiveness of the bank's expense management.

Question 51

The difference between such sources of bank income as service charges on deposits and trust-service fees,and such sources of bank expenses as salaries and wages and overhead expenses divided by total assets or total earning assets is called the:

A)net profit margin.
B)net operating margin.
C)net noninterest margin.
D)net return on assets.
E)None of the options is correct.

Question 52

ROE for a bank is calculated by:

A)dividing net after-tax income by total equity capital.
B)dividing total operating revenue less operating expenses by total assets.
C)dividing net pre-tax income by total equity capital.
D)noninterest income less noninterest expenses divided by total earning assets.
E)None of the options is correct.

Question 53

The interest rate spread between market yields on bank debt issues (such as capital notes and CDs)and the market yields on government securities of the same maturity is considered to be a measure of market risk in banking.

Question 54

The ratio of cash and government securities to total assets is considered to be a measure of liquidity risk in banking.

Question 55

The ratio of uninsured deposits to total deposits is considered to be a measure of credit risk in banking.

Question 56

The earnings spread for a bank is equal to:

A)total interest income divided by total earning assets less total interest expense divided by total interest-bearing bank liabilities.
B)total interest income less total interest expenses divided by earning assets.
C)total operating revenues less total operating expenses divided by total assets.
D)total cash and noncash expenses subtracted from interest and noninterest income divided by total assets.
E)None of the options is correct.

Question 57

The noninterest margin is generally positive for most banks.

Question 58

The main reason behind the failure of Superior Bank of Chicago and eventual FDIC's takeover of this institution in 2001 was attributed to misleading accounting practices of inflating asset values and revenues deflating liabilities and expenses.

Question 59

The FDIC is a private credit rating company which provides credit ratings on the short term and long term securities issued by banks.

Question 60

A bank's degree of asset utilization (AU)or the ratio of total operating revenues to total assets is a measure of asset management efficiency,especially in terms of the mix and yield on assets.

Question 61

Following is the information for Carter State Bank.What is the bank's ROE? $\begin{array} { l l } \text { Net income } & \$ 55 \text { million } \\\text { Total operating revenue } & \$ 650 \text { million } \\\text { Total assets } & \$ 4,055 \text { million } \\\text { Total equity capital } & \$ 350 \text { million }\end{array}$

A)8.46 percent
B)16.03 percent
C)15.71 percent
D)1.36 percent
E)None of the options is correct

Question 62

Which of the following would be the best example of a ratio used to examine the cost of one of a bank's liabilities?

A)Demand deposits/Total assets
B)Interest on time deposits/Total time deposits
C)Interest on real estate loans/Total real estate loans
D)Interest sensitive assets/Interest sensitive liabilities
E)Interest on business loans/Total business loans

Question 63

The ratio that equals total interest income divided by total earning assets less total interest expense divided by total interest-bearing liabilities is known as the:

A)earnings base.
B)earnings spread.
C)net income margin.
D)net return prior to special transactions.
E)None of the options is correct

Question 64

A larger proportion of small and medium-size bank's loans tend to be:

A)lower-interest-business loans.
B)higher-interest business loans.
C)lower-interest consumer loans.
D)higher-interest consumer loans.
E)None of the options is correct.

Question 65

The tax-management efficiency ratio consists of:

A)total tax liabilities over net income.
B)tax-exempt assets over taxable assets.
C)net income over pre-tax net operating income.
D)taxes owed over total liabilities of a bank.
E)None of the options is correct.

Question 66

Which of the following would be the best example of a ratio used to examine a bank's interest rate risk?

A)Demand deposits/Total assets
B)Interest on time deposits/Total time deposits
C)Interest on real estate loans/Total real estate loans
D)Interest sensitive assets/Interest sensitive liabilities
E)Nonperforming assets/Total capital

Question 67

What do loans and security investments represent for a bank?

A)Earning assets
B)Contra-assets
C)Discretionary accounts
D)Market-valued assets
E)None of the options is correct

Question 68

Following is the information listed below for Carter State Bank.What is the bank's net profit margin? $\begin{array} { l l } \text { Net income } & \$ 55 \text { million } \\\text { Total operating revenue } & \$ 650 \text { million } \\\text { Total assets } & \$ 4,055 \text { million } \\\text { Total equity capital } & \$ 350 \text { million }\end{array}$

A)8.46 percent
B)16.03 percent
C)15.71 percent
D)1.36 percent
E)None of the options is correct

Question 69

Following is the information listed below for Carter State Bank.What is the bank's ROA? $\begin{array} { l l } \text { Net income } & \$ 55 \text { million } \\\text { Total operating revenue } & \$ 650 \text { million } \\\text { Total assets } & \$ 4,055 \text { million } \\\text { Total equity capital } & \$ 350 \text { million }\end{array}$

A)8.46 percent
B)16.03 percent
C)15.71 percent
D)1.36 percent
E)None of the options is correct

Question 70

A bank that has a low profit margin most likely:

A)is doing a poor job of controlling expenses.
B)has a small amount of financial leverage.
C)has a small amount of liquidity risk.
D)has assets that are not very productive.
E)None of the options is correct.

Question 71

A bank that has a high asset utilization (AU)ratio most likely:

A)is doing a poor job of controlling expenses.
B)has a small amount of financial leverage.
C)has a small amount of liquidity risk.
D)is allocating assets to the most productive investments.
E)None of the options is correct

Question 72

The employee productivity ratio for a bank is equal to:

A)net operating revenue less total interest expenses per employee.
B)total interest and noninterest expense per employee.
C)net operating income per full-time-equivalent employee.
D)total operating earnings less salaries and wages expense per employee.
E)None of the options is correct.

Question 73

Following is the information listed below for Carter State Bank.What is the bank's asset utilization ratio? $\begin{array} { l l } \text { Net income } & \$ 55 \text { million } \\\text { Total operating revenue } & \$ 650 \text { million } \\\text { Total assets } & \$ 4,055 \text { million } \\\text { Total equity capital } & \$ 350 \text { million }\end{array}$

A)8.46 percent
B)16.03 percent
C)15.71 percent
D)1.36 percent
E)None of the options is correct

Question 74

The risk that a financial institution may be forced to borrow emergency funds excessive cost to cover its immediate cash needs is known as:

A)credit risk
B)liquidity risk
C)market risk
D)interest-rate risk
E)None of the options is correct

Question 75

Which of the following would be the best example of a ratio used to examine the return on one of a bank's assets?

A)Demand deposits/Total assets
B)Interest on time deposits/Total time deposits
C)Interest on real estate loans/Total real estate loans
D)Interest sensitive assets/Interest sensitive liabilities
E)Interest on CDs/Total CDs issued

Question 76

The TRC Bank has a net profit margin of 7.5%,an asset utilization ratio of 18%,and an equity multiplier of 20.What is the bank's ROA?

A)27.00 percent
B)1.35 percent
C)7.50 percent
D)1.50 percent
E)3.6 percent

Question 77

A bank expects to pay a dividend of $3.45 next year and growth rate on dividends to be 7%.If the appropriate discount rate is 15%,what should the bank's stock price be in the market?

A)$23.00
B)$43.13
C)$46.14
D)$49.29
E)$24.61

Question 78

A bank's stock price will tend to rise if the:

A)value of the stream of future stockholder dividends is expected to increase.
B)banking organization's perceived level of risk increases.
C)expected dividends decrease.
D)All of the options are correct.
E)None of the options is correct.

Question 79

ROE for a bank indicates:

A)how capable the management has been in converting assets into net earnings.
B)the growth of bank's interest margin.
C)the growth of bank's earnings spread.
D)the rate of return flowing to the shareholders of the bank.
E)All of the options are correct.

Question 80

Which of the following ratios can be used to measure a bank's credit risk?

A)Net loans' duration/Total assets
B)Interest sensitive assets/Interest sensitive liabilities
C)Total assets/Number of full time employees
D)Nonperforming assets/Total loans and leases
E)Cash and equivalents/Total loans and leases