Fundamentals of Bank Balance Sheet and Income Statement Management

These flashcards cover the fundamentals of bank balance sheet management, credit risk, investment hierarchies, income statement variables, and current regulatory standards like CECL and CRA based on the course lecture.

What is the core function of a commercial bank as described in the "Elevator Speech"?

To accept deposits and then loan or invest those funds at a yield that is greater than the bank's cost of funds.

What is the fundamental accounting equation for a bank balance sheet?

$$Assets = Liabilities + Equity (Capital)$$

Why are customer deposits considered liabilities for a bank?

Because the bank owes that money back to the customer and has a legal obligation to honor and clear checks provided funds are available.

What are the three primary goals when managing securities and excess liquidity?

Return, safety, and liquidity.

According to the Community Reinvestment Act (CRA), what is a bank's obligation regarding lending?

Banks must actively lend within the communities where they gather deposits.

What distinguishes Commercial and Industrial (C&I) Loans from Consumer Loans?

The determination is based primarily on the loan's intended use or purpose.

What is a Standby Letter of Credit used for?

It acts as a guarantee of creditworthiness for a company, provided to a supplier to satisfy risk, and is generally not expected to be funded.

In acquisition financing, what does the slang term "Air Ball" refer to?

The portion of a loan that is not covered by tangible collateral, often representing the purchase of intangibles or enterprise value.

How is EBITDA used in valuation for acquisitions?

Valuation is often calculated as a multiple (e.g., $4 \times$ to $10 \times$) of the adjusted historical Earnings Before Interest, Taxes, Depreciation, and Amortization.

What is the mathematical ratio described for loan loss recovery if a bank has a $3\%$ Net Interest Margin?

If a bank loses $1,000,000$ on a single loan, it must generate $33,000,000$ in brand-new loans to produce enough income to compensate for that loss.

List the 'Five Cs' of Credit used to gauge creditworthiness.

Character, Capacity, Collateral, Conditions, and Capital.

What is the difference between Key Risk Indicators (KRIs) and Key Performance Indicators (KPIs)?

KRIs are predictive and signal future issues, while KPIs are lagging or trailing indicators that measure what has already happened.

What characterizes a Grade 1 loan in a typical individual loan grading system?

Basically no risk; typically indicating loans secured by cash or a Certificate of Deposit (CD).

What is the accounting definition of 'Non-Accrual Status'?

An accounting treatment applied to non-pass loans where the bank no longer recognizes interest income and applies any payments received entirely to the principal.

How is Net Charge-off calculated?

$$\text{Net Charge-offs} = \text{Charge-offs} - \text{Recoveries}$$

What is the function of the 'Bridge to Liquidity' in a bank's assets?

The investment portfolio, which allows the bank to manage the ebb and flow of funds between deposits and loans.

What is Arbitrage in the context of bank investment portfolios?

Borrowing funds (e.g., from the FHLB) at a fixed rate using the investment portfolio as collateral and loaning that money out at a higher spread.

What is Duration Analysis in investment risk management?

The study of maturity and repricing schedules, acknowledging that bond prices move inversely to interest rates.

Under 'Available for Sale' (AFS) accounting, where do unrealized losses appear?

They hit "Accumulated Other Comprehensive Income" in the equity section of the balance sheet but do not impact the Income Statement.

What is the standard FDIC insurance limit per depositor per charter?

$$250,000$$

What are 'Sweep Accounts' in treasury management?

Off-balance sheet products where excess cash is moved overnight into third-party investment accounts, such as treasury money market accounts.

According to the American Bankers Association, what is the 'Expense Multiplier' for every $1.00$ lost to fraud?

A bank incurs approximately $4.36$ in related legal fees and recovery expenses.

Define Net Interest Margin (NIM).

A key performance matrix calculated as Net Interest Income divided by average earning assets.

What is the purpose of calculating Tax-Equivalent Yield (TEY)?

To equate the yield of a tax-free investment (like a municipal bond) to a fully taxable yield for direct comparison.

How is Pre-Provision Net Revenue (PPNR) calculated?

$$PPNR = \text{Net Income Before Taxes} + \text{Provision Expense}$$

What is the Current Expected Credit Loss (CECL) standard?

A FASB accounting standard requiring banks to project losses for the entire life of a loan rather than just the upcoming year.

What is the target range for a bank's Efficiency Ratio?

Typically $50\%$ to $55\%$, where a lower ratio indicates better efficiency.

What is 'Latent Sensitivity' as defined by Paul Burtus of Zions Bancorp?

Sensitivity related to interest rates that have already moved but have not yet been reflected in earnings due to the lag in the loan book repricing.

What is 'Emergent Sensitivity' in bank rate management?

Sensitivity resulting from the "forward curve" and the expectation of continued increases in interest rates.

What are the 'Three Lines of Defense' in bank risk management?

1. Lenders/Relationship Managers, 2. Credit Partners/Teams, and 3. Internal/External Review & Regulators.