Financial Statements of Banks
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Questions and Answers

What type of agreement involves a financial institution guaranteeing repayment for a loan from a third party?

  • Money market deposit account
  • Standby credit agreement (correct)
  • Loan syndication
  • Repurchase agreement

Which of the following is a short-term collateralized loan typically involving T-Bills?

  • Repurchase agreement (correct)
  • Equity line of credit
  • Credit default swap
  • Asset-backed security

What type of account is designed to pay an interest rate competitive with money market mutual funds?

  • Regular savings account
  • High-yield savings account
  • Certificate of deposit
  • Money market deposit account (correct)

How do financial institutions typically record the value of their assets and liabilities?

<p>Historical cost (D)</p> Signup and view all the answers

Which of the following is NOT a type of noninterest income?

<p>Interest income from loans (D)</p> Signup and view all the answers

What document shows the revenues received and expenses incurred over a specific period?

<p>Report of Income (C)</p> Signup and view all the answers

What term refers to the activity of temporarily buying and selling securities to influence the price?

<p>Painting the tape (A)</p> Signup and view all the answers

What generates the largest portion of income for banks?

<p>Loans (C)</p> Signup and view all the answers

What type of income arises from fees charged for ATM and POS transactions?

<p>Noninterest income (A)</p> Signup and view all the answers

Which of the following does not typically fall into the category of loans?

<p>Municipal (D)</p> Signup and view all the answers

To obtain net loans and leases, which adjustment is necessary?

<p>Loan and lease loss allowance and unearned income are subtracted from gross loans (B)</p> Signup and view all the answers

What term describes the practice of banks relying on borrowed funds with minimal owners' capital?

<p>Financial leverage (C)</p> Signup and view all the answers

What is an example of a contra-asset account?

<p>Loan and lease loss allowance (C)</p> Signup and view all the answers

What is the term for the practice of selling appreciated investment securities for profit while holding depreciated ones?

<p>Gains trading (B)</p> Signup and view all the answers

What is the term for the noncash expense designed to protect a bank's earnings from taxes?

<p>Provision for possible loan losses (D)</p> Signup and view all the answers

The bad-debt reserve reported on a financial institution's balance sheet is known as what?

<p>Allowance for possible loan losses (B)</p> Signup and view all the answers

What are noninterest revenue sources for a bank commonly referred to as?

<p>Fee income (B)</p> Signup and view all the answers

When a bank acts as a security dealer, where are the securities typically recorded?

<p>Trading account assets (D)</p> Signup and view all the answers

Which method must large U.S. banks employ to assess their provision for loan loss expense?

<p>Reserve method (D)</p> Signup and view all the answers

Which of the following most accurately describes bank noninterest income?

<p>Fees from additional noninterest income (B)</p> Signup and view all the answers

Credits on which scheduled repayments and interest payments are overdue for more than 90 days are classified as?

<p>Nonperforming loans (B)</p> Signup and view all the answers

How is a bank's temporary lending of excess reserves to other banks labeled on the balance sheet?

<p>Fed funds sold (D)</p> Signup and view all the answers

What is typically the largest expense item observed in banks' financial statements?

<p>Personnel cost (B)</p> Signup and view all the answers

What accounts are affected when a bank sells common stock with a par value greater than its market value?

<p>Common stock outstanding and surplus accounts (A)</p> Signup and view all the answers

What amount will Synopsis Bank report as adjusted allowance for loan losses after a $2 million charge?

<p>$502 million (B)</p> Signup and view all the answers

Which financial statement depicts a bank's revenues and expenses over a specified time period?

<p>Report of Income (B)</p> Signup and view all the answers

Which asset item may include deposits placed with correspondent banks?

<p>Cash and due from depository institutions (B)</p> Signup and view all the answers

Which accounts are also known as the bank's primary reserves?

<p>Cash and deposits due from banks (C)</p> Signup and view all the answers

Securities purchased for short-term profits from price movements are classified as:

<p>Trading account assets (A)</p> Signup and view all the answers

Which of the following is NOT typically classified as a category of loans?

<p>Municipal (A)</p> Signup and view all the answers

What must be subtracted from gross loans to obtain net loans and leases?

<p>Loan and lease loss allowance (C)</p> Signup and view all the answers

Which of the following is an example of a contra-asset account?

<p>Loan and lease loss allowance (B)</p> Signup and view all the answers

What is the purpose of the provision for possible loan losses on a bank's income report?

<p>To shelter current earnings from taxes (A)</p> Signup and view all the answers

What is the term for a financial institution's reserve for bad debts as shown on its balance sheet?

<p>Allowance for possible loan losses (A)</p> Signup and view all the answers

If a bank acts as a security dealer, where are the recorded values of these securities typically found?

<p>Trading account assets (A)</p> Signup and view all the answers

What duration classifies a loan as nonperforming regarding overdue payments?

<p>90 days (D)</p> Signup and view all the answers

Which term refers to using fixed assets instead of financial assets to boost operating earnings?

<p>Operating leverage (C)</p> Signup and view all the answers

What term describes the heavy usage of borrowed funds by banks with little owners' capital invested?

<p>Financial leverage (C)</p> Signup and view all the answers

The practice of selling appreciated investment securities to realize gains and holding onto depreciated securities is known as what?

<p>Gains trading (A)</p> Signup and view all the answers

What are noninterest revenue sources for a bank typically referred to as?

<p>Fee income (A)</p> Signup and view all the answers

Which of the following methods must large U.S. banks use to determine their provision for loan loss expense?

<p>Reserve method (B)</p> Signup and view all the answers

When a bank sells shares of its common stock with a par value of $100 for $200, which accounts are affected?

<p>Common stock outstanding and surplus accounts (B)</p> Signup and view all the answers

Which financial statement shows the revenues and expenses of a bank over a specified time period?

<p>The Report of Income (D)</p> Signup and view all the answers

What accounts are referred to as the bank's primary reserves?

<p>Cash and deposits due from banks (A)</p> Signup and view all the answers

Flashcards

Bank's primary income source

Loans are the most significant source of income for banks.

Non-loan example

Municipal bonds aren't considered a loan.

Net Loans Calculation

Calculating net loans involves subtracting the allowance for loan losses from gross loans.

Contra-asset account

A contra-asset account reduces the value of an asset.

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Provision for loan losses

A noncash expense to prepare for bad loans.

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Bank's bad-debt reserve

Allowance for potential loan losses, found on the balance sheet.

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Bank's security dealer account

Value of securities (federal, state, local) usually in 'Investment Securities' or 'Trading Account Assets'.

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Nonperforming loan criteria

Loans with missed repayments for more than 90 days.

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Standby Credit Agreement

A financial institution guarantees repayment of a loan a customer received from a third party.

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Repurchase Agreement

A short-term loan secured by T-Bills, where the borrower agrees to repurchase the collateral later.

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Money Market Deposit Account

A deposit account with competitive interest rates, similar to money market funds, but with limited check-writing privileges.

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Original Cost

The historical price paid for an asset when it was acquired by a financial institution.

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Noninterest Income

Income generated by a bank from sources other than interest on loans, like fees and services.

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Report of Income

A financial statement that shows a bank's revenue and expenses over a specific period.

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Report of Condition

A financial statement that shows a bank's assets, liabilities, and equity on a specific date.

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'Painting the Tape'

A securities firm artificially inflates the price of a thinly traded security by buying and selling it themselves.

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Financial Leverage

Banks use significant borrowed funds from customers to operate, relying less on their own capital. This dependence on borrowed funds is called financial leverage.

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Selective Portfolio Management

Selling investment securities that have increased in value to reap profits, while keeping those whose prices have declined, is known as selective portfolio management.

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Noninterest Revenue

Sources of income for banks that aren't directly from interest charges are called noninterest revenue. Examples include fees, commissions, and service charges.

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Fed Funds Sold

When a bank temporarily lends its excess reserves to other banks, it's called 'fed funds sold.' This appears on the balance sheet.

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Common Stock Outstanding

The number of shares a bank has issued to the public is called common stock outstanding.

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Bank's Primary Reserves

Cash and deposits due from other banks are considered the bank's primary reserves, as they're immediately available to meet customers' demands.

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Largest Bank Expense

The most significant cost incurred by banks is often interest paid on borrowed funds, representing a substantial portion of their operating expenses.

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Allowance for Loan Losses

A contra-asset account that represents the estimated amount of loan principal the bank anticipates not collecting due to defaults, reflecting bad debt risk.

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Correspondent Deposits

Deposits held by a bank at another bank (correspondent bank), often used for clearing checks or other interbank transactions.

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Trading Account Assets

Securities held for short-term trading purposes, aiming to profit from short-term price fluctuations.

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What are NOT considered loans?

Real estate, consumer, commercial and industrial (business), and agricultural loans are all types of loans. Municipal bonds are NOT considered loans.

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How is Net Loan calculated?

Net Loan is calculated by subtracting the allowance for loan losses and unearned income from gross loans.

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Contra-asset Account Example

A contra-asset account reduces the value of an asset. An example is the allowance for loan losses, which decreases the value of a bank's loan portfolio.

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Noncash Expense for Loan Losses

The provision for possible loan losses is a noncash expense banks use to prepare for potential bad loans and shelter current earnings from taxes.

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Bad-Debt Reserve on Balance Sheet

A bank's bad-debt reserve is called the allowance for possible loan losses. It's a balance sheet item, not an income statement item.

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Security Dealer Account

Banks acting as security dealers often record their securities (federal, state, local) under the accounts 'Investment Securities' or 'Trading Account Assets' on their Report of Condition.

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Nonperforming Loan Definition

A loan becomes nonperforming when scheduled payments and interest payments are overdue for more than 90 days.

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Operating Leverage

Using fixed assets like machinery and buildings to increase operating earnings, rather than relying on financial assets, is known as operating leverage.

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Noninterest Revenue for banks

Income from sources besides interest on loans, contributing significantly to bank profitability.

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Provision for Loan Loss Expense

A non-cash expense recorded by banks to anticipate potential loan losses. This builds a reserve for potential bad debts.

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Impact of Stock Sale on Bank Balance Sheet

When a bank sells its own stock, it affects both the common stock outstanding and surplus accounts, increasing equity.

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Report of Income (Bank Financial Statement)

A bank's financial statement presenting their revenues and expenses over a specific period, showing their profitability.

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Study Notes

Financial Statements of Banks and Competitors

  • Fed funds purchased is an example of nondeposit borrowings along with Eurodollar borrowings.
  • Short-term securities of a bank, such as T-Bills and commercial paper, are often called secondary reserves. They act as a second line of defense to meet demands for cash.
  • Provision for loan losses is a noncash expense on a bank's income statement. It allows the bank to account for future bad loans.
  • Net interest income is the difference between total interest income and total interest expenses for a financial institution.
  • Subordinated notes and debentures are the primary long-term liabilities of a bank.
  • Standby credit agreement is where a financial institution guarantees repayment of a customer's loan from a third party.
  • Repurchase agreement (repo) is a short-term collateralized loan. T-Bills are a common collateral.
  • Money market deposit account is a deposit account with an interest rate competitive with money market mutual funds. It has limited check writing ability.
  • Original cost is the value at which a financial institution records its assets and liabilities.
  • Principal types of fiduciary activities and service charges include fee income and income from fiduciary activities.
  • Report of Income (income statement) shows the revenues and expenses over a specific time period.
  • Report of Condition (balance sheet) lists assets, liabilities, and equity capital held by the bank on a given date.
  • Painting the tape is the activity of manipulating financial statements to artificially enhance a bank's financial strength.
  • Unearned income is interest income that has not yet been earned, according to accrual accounting methods.
  • NOW accounts allow for individuals and nonprofit institutions to hold money, bear interest, and permit drafts to be paid to a third party.
  • Noninterest income includes fees from ATM and POS transactions and checking account maintenance fees and overdraft fees.

Bank Assets and Liabilities

  • Loans are a significant source of income for banks.
  • Investment securities are bank assets.
  • Demand deposits are bank assets.
  • Cash and due from banks are bank assets.
  • Securities are the largest asset item on a bank's balance sheet.
  • Loan and lease loss allowance is subtracted from gross loans and investment income.

Bank Expenses

  • Provision for loan losses is a significant expense, to cover potentially bad loans.
  • Personnel costs are a large expense.
  • Premises and equipment cost is often a large expense.
  • Interest on borrowed funds is a large expense.
  • Employee benefits are a large expense.
  • Noninterest expense is the largest expense item observed on a bank's income statement; covering items like noncash expenses and provision for bad loans

Other Topics

  • Nonperforming loans are credits that are past due for more than a set period (usually 30 to 180 days).
  • Financial leverage is when banks use borrowed funds to make heavy use.
  • Gains trading is a practice of selling securities that have appreciated in value and holding onto those that have declined.
  • Noninterest revenue includes supplemental income and noninterest margin.
  • Loan loss expense is calculated using different methods.
  • Fed funds purchased is a bank's temporary lending of excess reserves to other banks. It is recorded on the balance sheet.
  • Allowance for possible loan losses is a bad debt reserve that shows up on a bank's balance sheet.

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Description

This quiz covers key concepts related to financial statements of banks and their competitors. It includes topics such as nondeposit borrowings, provisions for loan losses, and net interest income. Test your knowledge on the essential elements of bank financial management and reporting.

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