CFMP financial principles 15% Flashcards
Liability
Money that must be repaid upon request
Asset
Loans or investments that represent money due to the bank
Provide examples of bank liabilities
Fed funds borrowed, time deposits, non-time deposits, Federal home loan Bank borrowed funds
Explain the funding gap
Term differences between assets and liabilities. To assist with funding gaps we can run a deposit promotion, purchased fed funds, or brokered deposits etc.
Provide examples of bank assets
Commercial loans, consumer loans, securities, fed funds sold, Oreo property
What are three main methods of generating revenue for a bank
Interest income, noninterest income, investments and securities
Define interest income
Interest earned from lending activities, usually presented net of interest expense for the deposits
Define Noninterest income
Income gained from service fees and other charges. Transaction related income such as interchange income and ATM processing income would be included.
Define investments and securities
Interest income gained from the investment of liabilities that exceed lending volume. Basically excess cash that cannot be loaned out. Using investments and securities can compensate for slow loan demand
Define retained earnings
Dollars that have been generated from operations that exceed liabilities and can be used for future needs
Define the difference between managing expenses and leveraging expenses
Managing expenses involves minimizing the amount spent and controlling where spent.
Leveraging expenses involves maximizing every dollar invested in marketing by spending on the marketing that is bringing in the most profitable volume and type of customer
Name the six people who should be in the Alco meeting
CFO, chief marketing officer, chief lending officer, retail banking leader, business banking leader, trust and investment leader
What are the four pillars of a traditional bank
Retail deposits, retail and consumer lending, commercial lending, trust
What would four options be to change a balance sheet with high assets and low deposits?
Purchase fed funds, deposit promotion, raise loan rates, sell loans from portfolio
Define ROI
ROI is the profit from the marketing effort. This would mean the incremental profit minus the marketing investment.
(Incremental profit - marketing investment) / marketing investment
Define ROE
Return on owners equity ratio reflects the level of return for the bank’s shareholders.
10% is strong
Net income / average total equity (shareholder equity)
Define ROA
ROA ratios reflect a Banks ability to earn income from its assets.
1% or more is considered strong.
Net income / average total assets
Explain the difference between asset sensitivity and liability sensitivity
Asset sensitivity means that the assets will reply price more quickly than the liabilities. Liability sensitivity means the liabilities will reprice more quickly than the assets
How is spread determined?
Earning asset yield - cost of funds rate
Spread is the difference between the income earned in using funds and the cost to the bank of those funds. The goal is to maximize that spread, also called the net interest margin.
What is the equation for profit margin
Net income / total income
What is the equation for earnings per-share?
Net income / number of shares outstanding
What is the equation for the loan to deposit ratio?
Net loans / total deposits
Name one thing a bank can do if the loan to deposit ratio is too high?
Access fed funds
What is the equation for net interest income question
Interest income - interest expense
What is the equation for earning assets to total assets
Interest producing assets/total assets
What is the equation for yield on earning assets?
Gross interest income/average earning assets (earning asset yield)
What is the equation for cost of interest bearing liabilities?
Interest expense/interest-bearing funds (cost of funds rate)
What is the equation for earnings per-share?
Net income/number of shares outstanding
You have a competitor that focuses on the wealth market. Your bank focuses on the mass market. In comparison to your income statement, your competitors income statement will most likely show greater ____
Non-interest income
Define fed funds
Overnight borrowings that bank deposit with the Federal Reserve
Define Alco
Elko is an asset liability committee. The committee charged with ensuring that the banks risk, funding needs, funding sources, and gaps are managed affectively
Interest earned from lending activities, usually presented net of interest expense for the deposits
Interest income
Income gained from service fees and other charges. Transaction related income such as interchange income and ATM processing income would be included
Noninterest income
Interesting come gained from the investment of liabilities that exceed lending volume, excess cash. Can compensate for slow loan demand.
Investments and securities
Net income / total income
Profit margin
Earning asset yield - cost of funds rate
Spread
Net income/number of shares outstanding
Earnings per-share
Net loans / total deposits
Loan to deposit ratio
Interest income-interest expense
Net interest income
Interest producing assets/total assets
Earning assets to total assets
Gross interest income/average earning assets
Yield on earning assets
Interest expense/interest-bearing funds
Cost of interest bearing liabilities
Fed Funds are BEST described as:
a. a measurement of the Federal Reserve’s liquidity
b. any deposit of a federal agency in your bank
c. overnight borrowings that banks deposit with the Federal Reserve
d. a group of mutual funds including only government obligations
c. overnight borrowings that banks deposit with the Federal Reserve
Your bank’s ALCO committee has stated that your bank is liability sensitive. The committee has also determined a need for additional liability growth as a result of a strong loan demand. In a rising rate environment, which of the following product promotions is MOST appropriate?
a. 3-month introductory rate on a money-market savings account
b. 6-month introductory rate on HELOCs
c. 24-month fixed-rate CD special
d. Fixed-rate special on installment loans
c. 24-month fixed-rate CD special
