32. Everything else the same, financial leverage works to a bank’s advantage when: a.the return on assets is positive.b.the return on assets is negative.c.fixed assets are high.d.fixed assets are low.e.Answer: aa. and d. 33. Interest expense varies between banks because of: a. and c. 24
Use the following information for questions 34 – 36. 34. What is 1stState’s return on equity? 25Cash and Due from Banks50$ Investments300$ Federal Funds10$ Loans350$ Premises90$ Total Assts800$ Demand Deposits100$ Time Deposits300$ Federal Funds300$ Equity100$ Total Liabilities800$ Interest Income100$ Interest Expense75$ Non-Interest Income5$ Non-Interest Expense25$ Balance SheetIncome Statement1st State BankAssetsLiabilities
35. What is 1stState’s net interest margin? 36. What is the earnings base at 1stState? a.12.5%b.17.5%c.58.5%d.75.5%e.82.5%Answer: eEarnings Base = Earning Assets/Total AssetsEarning Assets = Investments + Federal Funds + LoansEarning Assets = $300 + $10 + $350 = $660Earnings Base = $660/$800 = 82.5% 37. Which of the following would notbe considered an earning asset? 38. The efficiency ratio measures: 26
39. Which type of risk is the most difficult to quantify? 40. Classified loans: a.still accrue interest.b.have not had a principle or interest payment made in 90 days.c.exactly offset gross charge-offs.d.are loans in which regulators have forced management to set aside reserves.e.all of the aboveAnswer: d41. The risk that a bank cannot meet payment obligations in a timely and cost-effective manner is known as:
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