Chapter 6

Measuring and Evaluating the Performance of Banks and Their Principal

Competitors

Fill in the Blank Questions

1. The equity multiplier for a bank measures the amount of

_____________________ of the bank and is one part of the evaluation of
the bank's ROE.
Answer: leverage (debt)

2. __________________________ is the risk that has to do with the quality

of the bank's assets and, in particular, the bank's loans.
Answer: Credit risk

3. Solvency (or capital) risk for a bank can be measured

by__________________________. List one way solvency risk can be
measured.
Answer: Purchased Funds/Total Liabilities (There are several other ratios
that can answer this question as well)

4. __________________________ are the assets of a financial institution that

will mature or be repriced within a set period of time.
Answer: Interest Sensitive Assets

5. __________________________ is the risk that the value of the financial

institution's asset portfolio (particularly government or other marketable
securities) will decline in value.
Answer: Market risk

6. Eurodollars, Fed Funds, Repurchase Agreements, and large CDs together are
know as _____________________.
Answer: Purchased Funds

1
Rose/Hudgins, Bank Management and Financial Services, 8/e
 7. __________________________ is the risk that the financial institution may
not be able to meet the needs of depositors for cash.
Answer: Liquidity risk

8. __________________________ are loans which are past due by 90 days or

more.
Answer: Nonperforming loans

9. __________________________ reflects the bank's portfolio management

policies and the mix and yield on the bank's securities and is one part of the
evaluation of ROE.
Answer: Asset utilization

10. __________________________ reflects the effectiveness of the expense

management of the bank and is one part of the evaluation of ROE.
Answer: Net profit margin

11. __________________________ measures the return to stockholders on their

investment in the bank. It is the product of net profit margin, asset
utilization and the equity multiplier.
Answer: ROE

12. __________________________ 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: Equity multiplier

13. 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 has this year's data as well as
three previous years and also contains information on peer institutions.
Answer: Uniform Bank Performance Report

2
Rose/Hudgins, Bank Management and Financial Services, 8/e
 14. __________________________ measures the bank's risk of long run
survival. It measures the bank's capital position and shows if there has been
any erosion of capital over time.
Answer: Solvency risk (or capital risk)

15. __________________________ 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.
Answer: Interest rate risk

16. The ____________________ Act restricts combined auditing and consulting

relationships in order to promote auditor independence and objectivity.
Answer: Sarbanes-Oxley

1. is one of the most widely respected

private institutions that rates the credit quality of financial institutions.
Answer: Thomson’s BankWatch, Inc.

2. refers to the uncertainty regarding the

financial firm’s earnings due to failures in computer systems, errors,
misconduct by employees, lightening strikes and similar events.
Answer: Operational (transactional) risk

3. refers to variability in earnings

resulting from actions taken by the legal system including unenforceable
contracts, lawsuits and adverse judgements.
Answer: Legal risk

3
Rose/Hudgins, Bank Management and Financial Services, 8/e
 4. includes violations of rules and
regulations. It can include failure to hold adequate capital which can lead to
costly corrective actions.
Answer: Compliance risk

5. 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.
Answer: Reputation risk

6. As data processing of financial information becomes more important,

managers of financial firms can realize cost savings from
, transferring tasks from inside to firm itself to other firms specializing in
information technology.
Answer: outsourcing

7. A traditional measure of earnings efficiency is the

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.
Answer: earnings spread

8. One part of ROE is or net income over pre-tax

net operating income which measures the financial firm’s use of security
gains and losses and other tax management tools to minimize tax exposure.
Answer: tax management efficiency

9. 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.
Answer: expense control efficiency

4
Rose/Hudgins, Bank Management and Financial Services, 8/e
True/False Questions

T F 26. Financial institutions that pursue the "quiet life" as a goal are really
pursuing risk minimization.
Answer: True

T F 27. Attempting to maximize a bank's stock value is the key objective for
banks which should have priority over all other bank goals.
Answer: True

T F 28. If the expected stream of future bank shareholder dividends rises, a

bank's stock price should also rise, other factors held constant.
Answer: True

T F 29. 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.
Answer: False

T F 30. A bank's ROA equals its ROE times the ratio of total assets divided by
total equity capital.
Answer: False

T F 31. According to the textbook a bank's asset-utilization ratio reflects the

mix and yield on the bank's portfolio of assets.
Answer: True

T F 32. The bank's profit margin or ratio of net after-tax income to total
operating revenue is a measure of financial leverage for a bank.
Answer: False

5
Rose/Hudgins, Bank Management and Financial Services, 8/e
 T F 33. The ratio of a bank's net after-tax income to pre-tax net operating
income is described in the text as a measure of tax management
efficiency.
Answer: True

T F 34. In the textbook the ratio of pre tax net operating income to total
operating revenues is described as a measure of the effectiveness of a
financial institution’s expense-control efficiency.
Answer: True

T F 35. The ratio of non-performing assets to total loans and leases is a

measure of credit risk in banking.
Answer: True

T F 36. The measure of a bank's efficiency and return known as the "earnings
spread" subtracts total interest expenses from all the bank's interest
income and these two items are then divided by total assets.
Answer: False

T F 37. In recent years the U.S. banking industry's equity multiplier has
generally risen in response to regulatory pressure to raise more
capital.
Answer: False

T F 38. 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.
Answer: True

T F 39. 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

6
Rose/Hudgins, Bank Management and Financial Services, 8/e
 billion, according to the textbook.
Answer: True

T F 40. ROA measures how capably the management of a financial institution

has been converting the institution's assets into net earnings.
Answer: True

T F 41. The noninterest margin is generally positive for most banks.

Answer: False

T F 42. The ratio of nonperforming assets to total loans and leases is

considered to be a measure of a bank's market risk.
Answer: False

T F 43. Charge-offs represent securities a bank decides to sell because they

have declined in value.
Answer: False

T F 44. Loans past due for 90 days or more are classified as nonperforming
assets.
Answer: True

T F 45. The ratio of cash and government securities to total assets is

considered to be a measure of liquidity risk in banking.
Answer: True

T F 46. The ratio of uninsured deposits to total deposits is considered to be a

measure of credit risk in banking.
Answer: False

T F 47. The interest rate spread between market yields on bank debt issues
(such as capital notes and CDs) and the market yields on government

7
Rose/Hudgins, Bank Management and Financial Services, 8/e
 securities of the same maturity is considered to be a measure of
market risk in banking.
Answer: False

T F 48. 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.
Answer: True

T F 49. Smaller banks usually have fewer liquid assets than larger banks.
Answer: False

T F 50. The bank's asset utilization ratio reflects the effectiveness of the
bank's expense management.
Answer: False

T F 51. The FDIC is a private credit rating company which provides credit
ratings on the short term and long term securities issued by banks.
Answer: False

T F 52. During the 1980's the Comptroller of the Currency, the Federal
Reserve and the FDIC created a new tool to help them analyze the
financial condition of banks. This new tool is called the Uniform
Bank Performance Report.
Answer: True

T F 53. Liquidity risk for a bank examines the quality of the bank's assets and,
in particular, the quality of the bank's loans.
Answer: False

T F 54. The bank's degree of asset utilization (AU) or ratio of total operating
revenue to total assets is a measure of asset management efficiency,
especially in terms of the mix and yield on assets.

8
Rose/Hudgins, Bank Management and Financial Services, 8/e
 Answer: True

T F 55. According the case study of the failure of Superior Bank of Chicago
and the FDIC’s takeover of this institution in 2001, the main problem
was attributed to misleading accounting practices of inflating asset
values and revenues deflating liabilities and expenses. The Sarbanes-
Oxley Accounting Standards Act of 2002 addresses this issue and
expressly encourages combining auditing and consulting relationships
in order to promote efficiency and profitability of financial
institutions.
Answer: False

Multiple Choice Questions

1.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 above
Answer: C

2.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) Deducting total interest expenses from total interest income and dividing
by total equity capital.
D) Noninterest income less noninterest expenses divided by total earning
assets.
E) None of the above.

9
Rose/Hudgins, Bank Management and Financial Services, 8/e
 Answer: A

3.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 above
Answer: C

4.A bank's ROE equals its ROA times its:

A) Net profit margin
B) Total assets divided by total equity capital (Equity multiplier)
C) Total operating revenues divided by total assets
D) Ratio of net after-tax income to total operating revenues
E) None of the above.
Answer: B

5.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 above.
Answer: A

6.The so-called 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

10
Rose/Hudgins, Bank Management and Financial Services, 8/e
 C) Net operating income per full-time-equivalent employee
D) Total operating earnings less salaries and wages expense per employee.
E) None of the above.
Answer: C

7.According to the textbook the most profitable banks in the United States in
2007 fell in the asset size range of:
A) Under $25 million in total assets
B) Under $100 million in total assets
C) Between $100 million and $10 billion in total assets
D) Over $10 billion in total assets
E) None of the above.
Answer: D

8.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) The banking organization's perceived level of risk has fallen
C) Expected dividends increase, while perceived level of risk declines
D) All of the above.
E) None of the above.
Answer: D

9.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 above
Answer: B

10.What do loans and security investments represent for a bank?

A) Earning assets

11
Rose/Hudgins, Bank Management and Financial Services, 8/e
 B) Classified assets
C) Discretionary accounts
D) Market-valued assets
E) None of the above
Answer: A

11.The so-called 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 above.
Answer: C

12.The ratio of net loans to total assets is considered to be a measure of what

form of risk in banking?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest-rate risk
E) None of the above
Answer: B

13.ROE for a bank reflects:

A) How well the assets of the bank are managed
B) The bank's use of leverage
C) How well the bank controls expenses
D) All of the above
E) None of the above
Answer: D

14.A ratio that can be used to measure a bank's credit risk would be:
A) Net loans/total assets
B) Interest sensitive assets/interest sensitive liabilities
C) Total assets/number of full time employees
D) Nonperforming loans/total loans

12
Rose/Hudgins, Bank Management and Financial Services, 8/e
 Answer: D
15.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 above
Answer: A

16.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 above
Answer: D

17.Which of the following would be the best example of a ratio used to examine
the cost of one of the 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
Answer: B

18.Which of the following would be the best example of a ratio used to examine
the return of one of the 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
Answer: C

19.Which of the following would be the best example of a ratio used to examine
the bank's interest rate risk?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits

13
Rose/Hudgins, Bank Management and Financial Services, 8/e
 C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
Answer: D

20.A bank expects to pay a dividend next year of $3.45 and also expects
dividends to grow at a rate of 7% from now on. If the appropriate
discount rate is 15%, what should this bank's stock price be in the market?
A) $23.00
B) $43.13 (3.45/(15%-7%))
C) $46.14
D) $49.29
E) $24.61
Answer: B

21.Using the information listed below for Carter State Bank, what is this bank's
ROE?

Net income $55 million

Total operating revenue $650 million
Total assets $4,055
million
Total equity capital $350 million

A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Answer: C

22.Using the information listed below for Carter State Bank, what is this bank's
ROA?

Net income $55 million

Total operating revenue $650 million
Total assets $4,055

14
Rose/Hudgins, Bank Management and Financial Services, 8/e
 million
Total equity capital $350 million

A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Answer: D

23.Using the information listed below for Carter State Bank, what is this bank's
net profit margin?

Net income $55 million

Total operating revenue $650 million
Total assets $4,055
million
Total equity capital $350 million

A) 8.46 percent (Net income / Total operating revenue)

B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Answer: A

24.Using the information listed below for Carter State Bank, what is this bank's
asset utilization ratio?

Net income $55 million

Total operating revenue $650 million
Total assets $4,055
million
Total equity Capital $350 million

A) 8.46 percent
B) 16.03 percent (650/4,055)
C) 15.71 percent
15
Rose/Hudgins, Bank Management and Financial Services, 8/e
 D) 1.36 percent
E) None of the above
Answer: B

25.The TRC Bank has a net profit margin of 7.5%, an asset utilization ratio of
18%, an equity multiplier of 20 times. What is this bank's ROA?
A) 27.00 percent
B) 1.35 percent (7.5% x 18%)
C) 7.50 percent
D) 1.50 percent
E) 3.6 percent
Answer: B

26.The TRC Bank has a net profit margin of 7.5%, an asset utilization ratio of
18%, an equity multiplier of 20 times. What is this bank's ROE?
A) 27.00 percent (20x7.5%x8%)
B) 1.35 percent
C) 7.50 percent
D) 1.50 percent
E) 3.6 percent
Answer: A

27.The Smith-James Bank has an ROE of 17.5%, an asset utilization ratio of 13%
and a net profit margin of 9%. What is this bank's ROA?
A) 14.96 percent
B) 1.58 percent
C) 1.17 percent
D) 134.62 percent
E) None of the above
Answer: C

28.The Smith-James Bank has an ROE of 17.5%, an asset utilization ratio of 13%
and a net profit margin of 9%. What must this bank's equity multiplier be?
A) 14.96 times
B) 1.58 times
C) 1.17 times

16
Rose/Hudgins, Bank Management and Financial Services, 8/e
 D) 134.62 times
E) None of the above
Answer: A

29. What is the equity multiplier for a bank where equity is equal to 10 percent of
total assets?
A) 90.0
B) 10.0
C) 1.1
D) 110.0
E) 1.0
Answer: B

30.Which of the following ratios would be a measure of credit risk?

A) Nonperforming Loans/Net Loans
B) Net Loans/Total Assets
C) Interest Sensitive Assets/Interest Sensitive Liabilities
D) Equity Capital/Total Assets
E) None of the above
Answer: A

31. Which of the following ratios would be a measure of market risk?

A) Nonperforming Loans/Net Loans
B) Net Loans/Total Assets
C) Interest Sensitive Assets/Interest Sensitive Liabilities
D) Equity Capital/Total Assets
E) None of the above
Answer: E

32.In recent years banks have been __________ profitable than (as) S&Ls and
Savings Banks.
A) More
B) Less
C) As
D) Much more
E) Much less
Answer: A

17
Rose/Hudgins, Bank Management and Financial Services, 8/e
 33. Operational risk includes which of the following?
A) Failure of bank’s computer system
B) Closure of a bank for three months due to flooding from a major
hurricane
C) Embezzlement of funds of a bank by a teller of the bank
D) Closure of a bank for two weeks due to a fire from a lightening
strike
E) All of the above are example of operational risk
Answer: E

34. Brian Smith, CEO of Carter National Bank, decides that interest rates
are going to fall in the future and as a result buys $100 million in 30
year Treasury Bonds for the bank’s security portfolio. Instead,
interest rates rise causing the value of these bonds to fall. This would
be an example of which of the following types of risk?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Answer: D

35. Chaos State Bank has an old computer system which can go down
for weeks at a time, leaving customers unable to access their
accounts online. Many customers have left the bank for banks with
more reliable computer systems. Which type of risk would this be an
example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Answer: A

36. Carson County State Bank has a ratio of equity capital to total assets
of 2.5%. The FDIC which regulates this bank has determined that

18
Rose/Hudgins, Bank Management and Financial Services, 8/e
 this is not enough equity capital and is making the bank issue new
stock in the market. In addition, they are not allowing the bank to
issue a dividend to their current stockholders. Which type of risk
would this be an example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Answer: C

37. Everett Bank has just learned that there is a disgruntled former
employee who has created a blog that is telling everyone that Everett
Bank has halved their customer service representatives and so
customers have great difficulty getting through to a live person when
there is a problem with their account. Everett is worried that they
may lose customers as a result. Which type of risk would this be an
example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Answer: E

38. Norman Bank made a loan of $1,000,000 to Jarod LeFevre. Jarod

has declared bankruptcy and Norman Bank has just learned that the
judge in the case has ruled that Jarod does not have to pay any of
the loan back or forfeit any of his assets. Which type of risk would
this be an example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Answer: B

19
Rose/Hudgins, Bank Management and Financial Services, 8/e
 39. Forrest Fennell is thinking about investing in Capital City Bank. He is
examining certain ratios of the bank including the ratio of
nonperforming loans to total loans and leases and the provision for
loan losses to total loans and leases. What type of risk is Forrest
attempting to measure with these ratios?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Answer: A

40. Gerald Wilkens is thinking about investing in Tallahassee State Bank.

He is examining certain ratios of the bank including the ratio of cash
assets and government securities to total assets and purchased
funds to total assets. What type of risk is Gerald attempting to
measure with these ratios?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Answer: B

41. Amy Farmer is thinking about investing in the Guthrie National Bank.
She is examining certain ratios of the bank including the ratio of the
book value of the assets to the market value of the assets and the
market value of the bonds held by the bank to their recorded value.
What type of risk is Amy attempting to measure with these ratios?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Answer: C

20
Rose/Hudgins, Bank Management and Financial Services, 8/e
 42. Paul Smith is thinking about investing in Capital City Bank. He is
examining certain ratios of the bank including the ratio of interest
sensitive assets to interest sensitive liabilities and uninsured deposits
to total deposits. What type of risk is Paul attempting to measure with
these ratios?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Answer: D

43. The Garic State Bank of New Orleans was under water for three
weeks after Hurricane Katrina hit the state. The lobby is full of mud
and other debris. Many of the valuables stored in the bank’s safety
deposit boxes have been ruined. John Garic, the President and CEO
of the bank, has been working night and day to reopen the bank.
What type of risk has John been dealing with?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Answer: E

44. Castle State Bank has the following financial information.

Balance Sheet Income Statement

Cash $100 Interest Income $400
Securities Investments $600 Interest Expenses ($150)
Net Loans $1200 Non-Interest Income $50
Net Premises and $300 Non-Interest Expenses ($100)
Equip.
Total Assets $2200 Provision for Loan ($60)
Losses
Deposits $1100 Pre Tax Net Operating $140
Income

21
Rose/Hudgins, Bank Management and Financial Services, 8/e
 Non-Deposit $800 Securities Gains ($40)
Borrowings * (Losses)
Equity Capital $300 Taxes ($45)
Total Liabilities and $2200 Net Income $55
Equity
* All Purchased Funds

Use this information to calculate Castle State Bank’s ROE

A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%
Answer: B

45. Castle State Bank has the following financial information.

Balance Sheet Income Statement

Cash $100 Interest Income $400
Securities Investments $600 Interest Expenses ($150)
Net Loans $1200 Non-Interest Income $50
Net Premises and Equip. $300 Non-Interest Expenses ($100)
Total Assets $2200 Provision for Loan ($60)
Losses
Deposits $1100 Pre Tax Net Operating $140
Income
Non-Deposit Borrowings * $800 Securities Gains (Losses) ($40)
Equity Capital $300 Taxes ($45)
Total Liabilities and $2200 Net Income $55
Equity
* All Purchased Funds

Use this information to calculate Castle State Bank’s ROA

A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%

22
Rose/Hudgins, Bank Management and Financial Services, 8/e
 Answer: E

46. Castle State Bank has the following financial information.

Balance Sheet Income Statement

Cash $100 Interest Income $400
Securities Investments $600 Interest Expenses ($150)
Net Loans $1200 Non-Interest Income $50
Net Premises and Equip. $300 Non-Interest Expenses ($100)
Total Assets $2200 Provision for Loan ($60)
Losses
Deposits $1100 Pre Tax Net Operating $140
Income
Non-Deposit Borrowings * $800 Securities Gains (Losses) ($40)
Equity Capital $300 Taxes ($45)
Total Liabilities and $2200 Net Income $55
Equity
* All Purchased Funds

Use this information to calculate Castle State Bank’s net profit margin
A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%
Answer: C

47. Castle State Bank has the following financial information.

Balance Sheet Income Statement

Cash $100 Interest Income $400
Securities Investments $600 Interest Expenses ($150)
Net Loans $1200 Non-Interest Income $50
Net Premises and Equip. $300 Non-Interest Expenses ($100)
Total Assets $2200 Provision for Loan ($60)
Losses
Deposits $1100 Pre Tax Net Operating $140
23
Rose/Hudgins, Bank Management and Financial Services, 8/e
 Income
Non-Deposit Borrowings * $800 Securities Gains (Losses) ($40)
Equity Capital $300 Taxes ($45)
Total Liabilities and $2200 Net Income $55
Equity
* All Purchased Funds

Use this information to calculate Castle State Bank’s asset utilization

ratio
A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%
Answer: A

48. Castle State Bank has the following financial information.

Balance Sheet Income Statement

Cash $100 Interest Income $400
Securities Investments $600 Interest Expenses ($150)
Net Loans $1200 Non-Interest Income $50
Net Premises and Equip. $300 Non-Interest Expenses ($100)
Total Assets $2200 Provision for Loan ($60)
Losses
Deposits $1100 Pre Tax Net Operating $140
Income
Non-Deposit Borrowings * $800 Securities Gains (Losses) ($40)
Equity Capital $300 Taxes ($45)
Total Liabilities and $2200 Net Income $55
Equity
* All Purchased Funds

Use this information to calculate Castle State Bank’s equity multiplier

A) 20.45 times
B) 18.33 times
C) 12.22 times
D) 7.33 times
24
Rose/Hudgins, Bank Management and Financial Services, 8/e
 E) 2.5 times
Answer: D

49. Castle State Bank has the following financial information.

Balance Sheet Income Statement

Cash $100 Interest Income $400
Securities Investments $600 Interest Expenses ($150)
Net Loans $1200 Non-Interest Income $50
Net Premises and Equip. $300 Non-Interest Expenses ($100)
Total Assets $2200 Provision for Loan ($60)
Losses
Deposits $1100 Pre Tax Net Operating $140
Income
Non-Deposit Borrowings * $800 Securities Gains (Losses) ($40)
Equity Capital $300 Taxes ($45)
Total Liabilities and $2200 Net Income $55
Equity
* All Purchased Funds

Use this information to calculate Castle State Bank’s earnings spread

A) 37.5%
B) 22.22%
C) 14.33%
D) 7.89%
E) 2.5%
Answer: C

50. Harrison Bank has the following financial information.

Net Profit Margin 12.5%

Net Income $1000
Total Assets $62,500
Total Equity $6250

What is this bank’s ROA?

A) 1.6%

25
Rose/Hudgins, Bank Management and Financial Services, 8/e
 B) 10%
C) 12.8%
D) 16%
E) None of the above
Answer: A

51. Harrison Bank has the following financial information.

Net Profit Margin 12.5%

Net Income $1000
Total Assets $62,500
Total Equity $6250

What is this bank’s ROE?

A) 1.6%
B) 10 %
C) 12.8%
D) 16%
E) None of the above
Answer: D

52. Harrison Bank has the following financial information.

Net Profit Margin 12.5%

Net Income $1000
Total Assets $62,500
Total Equity $6250

What is this bank’s Equity Multiplier

A) 1.6 times
B) 10 times
C) 12.8 times
D) 16 times
E) None of the above
Answer: B

26
Rose/Hudgins, Bank Management and Financial Services, 8/e
53. Harrison Bank has the following financial information.

ROE 16%
Net Income $1000
Total Assets $62,500
Total Equity $6250

What is this bank’s asset utilization ratio?

A) 1.6%
B) 10%
C) 12.8%
D) 16%
E) None of the above
Answer: C

54. Harrison Bank has the following financial information.

Net Profit Margin 12.5%

Net Income $1000
Total Assets $62,500
Total Equity $6250

What is this bank’s total operating revenue?

A) $125
B) $8000
C) $488,281
D) $31,250,000
E) None of the above
Answer: B

55. Which assets are excluded from risk assets?

A) Real Estate Loans
B) Commercial Paper
C) Plant and Equipment
D) Commercial and Industrial Loans
E) All of the above are risk assets
Answer: C

27
Rose/Hudgins, Bank Management and Financial Services, 8/e
28
Rose/Hudgins, Bank Management and Financial Services, 8/e