CBA Financial Reporting & Analysis 2 — Questions and Answers
Question 1: Under ASC 310-20, how should a bank account for loan origination fees received from borrowers?
- Recognize immediately as fee income
- Defer and amortize over the loan's life using the effective interest method (Correct answer)
- Credit directly to retained earnings
- Record as a liability until the loan matures
Correct answer: Defer and amortize over the loan's life using the effective interest method
ASC 310-20 requires loan origination fees to be deferred and recognized as an adjustment to yield (interest income) over the loan's life using the effective interest method.
Question 2: A bank's net interest margin (NIM) declined from 3.2% to 2.8% year-over-year. Which scenario BEST explains this change?
- Interest-earning assets grew faster than interest-bearing liabilities
- The cost of funds rose more rapidly than loan yields (Correct answer)
- Nonperforming loans decreased significantly
- The bank increased its securities portfolio duration
Correct answer: The cost of funds rose more rapidly than loan yields
NIM compresses when the cost of funding rises faster than asset yields, squeezing the spread between earning assets and interest-bearing liabilities.
Question 3: Which financial statement line item most directly reflects a bank's credit risk exposure from off-balance-sheet commitments?
- Allowance for credit losses
- Contingent liabilities disclosed in footnotes (Correct answer)
- Other comprehensive income
- Deferred tax liability
Correct answer: Contingent liabilities disclosed in footnotes
Unfunded loan commitments and letters of credit are off-balance-sheet exposures disclosed as contingent liabilities in the footnotes under ASC 450.
Question 4: A bank auditor notices that the efficiency ratio increased from 58% to 72%. What does this indicate?
- Improved profitability relative to revenue
- Operating expenses are consuming a larger share of net revenue (Correct answer)
- Loan quality has deteriorated significantly
- Capital adequacy ratios have improved
Correct answer: Operating expenses are consuming a larger share of net revenue
The efficiency ratio (noninterest expense / net revenue) rising from 58% to 72% indicates that expenses are taking up more of each revenue dollar, signaling declining operational efficiency.
Question 5: Under CECL (ASC 326), the allowance for credit losses on a bank's held-to-maturity (HTM) securities portfolio is measured using:
- The incurred loss model based on past due status
- Lifetime expected credit losses from the date of acquisition (Correct answer)
- Fair value less estimated selling costs
- The greater of historical loss rate or current period charge-offs
Correct answer: Lifetime expected credit losses from the date of acquisition
CECL requires banks to estimate lifetime expected credit losses on HTM securities at acquisition, replacing the prior incurred-loss model.
Question 6: Which ratio best measures a bank's ability to cover interest payments from operating earnings?
- Debt-to-equity ratio
- Times interest earned (interest coverage ratio) (Correct answer)
- Price-to-earnings ratio
- Return on risk-weighted assets
Correct answer: Times interest earned (interest coverage ratio)
The times interest earned ratio (EBIT / interest expense) directly measures how many times a bank's earnings can cover its interest obligations.
Question 7: A bank reclassifies $50 million of available-for-sale (AFS) securities to held-to-maturity (HTM). The unrealized loss at reclassification date is $3 million. How is this loss treated?
- Immediately recognized in net income
- Remains in AOCI and is amortized over the remaining life of the securities (Correct answer)
- Written off against retained earnings
- Reversed and removed from the financial statements
Correct answer: Remains in AOCI and is amortized over the remaining life of the securities
Under ASC 320, the unrealized loss frozen in AOCI at reclassification from AFS to HTM is amortized over the securities' remaining life as an offset to the discount amortization.
CBA Financial Reporting & Analysis 2
Under ASC 310-20, how should a bank account for loan origination fees received from borrowers?