Ch 03 Bank Performance

Question 1

Earning assets:

Answer 1

Loans, investment securities, and short-term investments that generate interest and yield related fee income.

Question 2

Federal funds sold/purchased:

Answer 2

Excess balances of depository institutions, which are loaned to each other, generally on an overnight basis.

Question 3

Interest-bearing liabilities:

Answer 3

Deposits and borrowed funds on which interest is paid.

Question 4

Interest rate spread:

Answer 4

The difference between the average rate earned on earning assets on a taxable equivalent basis and the average rate paid for interest-bearing liabilities.

Question 5

Interest-sensitive assets/liabilities:

Answer 5

Earning assets and interest bearing liabilities that can be repriced or will mature within specific time periods.

Question 6

Interest sensitivity gap:

Answer 6

A measure of the exposure of a bank to changes in market rates of interest, its vulnerability to such changes, and the associated effect on net interest income.

Question 7

Liquidity:

Answer 7

The ability of an entity to meet its cash flow requirements. For a bank it is measured by the ability to convert assets into cash quickly with minimal exposure to interest rate risk, by the size and stability of the core funding base, and by additional borrowing capacity within the money markets.

Question 8

Net charge-offs:

Answer 8

The amount of loans written off as uncollectible less recoveries of loans previously written off.

Question 9

Net interest margin:

Answer 9

Net taxable equivalent interest income divided by average interest-earning assets. It is a measure of how effectively a corporation utilizes its earning assets in relation to the interest cost of funding.

Question 10

Noninterest income:

Answer 10

Fee income from on-balance sheet and off-balance sheet activities, where the latter include loan and security guarantees and derivative securities services.

Question 11

Nonperforming assets:

Answer 11

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.

Question 12

Provision for loan losses:

Answer 12

The period charges against earnings required to maintain the allowance for loan losses at a level considered by management to be adequate to absorb estimated losses inherent in the loan portfolio.

Question 13

Reserve for loan losses:

Answer 13

A valuation allowance offset against total loans, which represents the amount considered by management to be adequate to absorb unexpected losses inherent in the loan portfolio.

Question 14

Return on average assets (ROA):

Answer 14

A measure that indicates how effectively an entity uses its total resources. It is calculated by dividing annual net income by average assets.

Question 15

Return on equity (ROE):

Answer 15

A measure of how productively an entity?s equity has been employed. It is calculated by dividing annual net income by total equity.

Question 16

Taxable equivalent income:

Answer 16

Income that has been adjusted by increasing tax exempt income to a level that is comparable to taxable income before taxes are applied.

Question 17

Three Aspects of Internal Performance

Answer 17

Bank planning, technology and personnel development.

Question 18

External Performance

Answer 18

External performance is reflected in the banks ability to cope with customers, competitors, regulators and the public. Evidenced by market share/earnings, technology, regulatory compliance and public confidence.

Question 19

Two main financial statements?

Answer 19

Balance Sheet (report of condition) and Income Statement (report of income)

Question 20

What are the key Profit Ratios?

Answer 20

ROA (return on assets), ROE (return on equity), NIM (net interest margin)

Question 21

What are the key Risk Ratios?

Answer 21

Capitization, Asset Quality (Provision for Loan Losses, Loan Ratio), Operating Efficiency, Liquidity, Tax Rate %, Interest Sensitivity (Dollar Gap Ratio) and Risk Adjusted Return on Capital (RAROC)

Question 22

asset utilization

Answer 22

This financial ratio represents the ability of management to employ assets effectively to generate revenues. It is calculated as operating revenue to total assets.

Question 23

charge-offs

Answer 23

A loan is charged off, which means that it is removed from the balance sheet, when it is no longer of sufficient value to be considered creditworthy.

Question 24

dollar gap ratio

Answer 24

This ratio measures the sensitivity of a bank?s net interest margin to a change in interest rates. It is calculated as interest rate sensitive assets minus interest sensitive liabilities divided by total assets.

Question 25

early warning systems

Answer 25

Computer-based models used to track or predict bank financial performance.

Question 26

equity multiplier

Answer 26

The ratio of total assets to total equity, which is a measure of financial leverage.

Question 27

EVA

Answer 27

Economic value added is an internal bank performance metric computed as adjusted earnings (or net income after taxes) minus the opportunity cost of capital (or the cost of equity times equity capital). EVA is useful in evaluating loans and other investments to determine if shareholder wealth would increase.

Question 28

operating efficiency

Answer 28

Operating efficiency deals with the production of outputs, such as deposit and loan accounts and securities services, at a minimum cost per dollar (or account).

Question 29

profit margin

Answer 29

This financial ratio provides information about the ability of management to control expenses, including taxes, given a particular level of operating income. It is calculated as net income to operating revenue.

Question 30

RAROC

Answer 30

The Risk-Adjusted Return on Capital allocates equity capital depending on risk of loss, calculates a required rate of return on equity, and then uses this information in pricing loans to make sure that they are profitably to the bank. It is generally employed for the purpose of internal performance evaluations.

Question 31

report of condition

Answer 31

Balance Sheet

Question 32

report of income

Answer 32

Income Statement

Question 33

temporary investments ratio

Answer 33

This ratio is a measure of bank liquidity and is calculated by adding federal funds sold plus securities with maturities of one year or less plus cash due from banks divided by total assets.

Question 34

volatile liability dependency

Answer 34

This ratio is a measure of bank liquidity and is calculated by subtracting temporary investments from volatile liabilities (i.e., brokered deposits, jumbo CDs, deposits in foreign offices, federal funds purchased, and other borrowings) and dividing by net loans and leases.