CBA Financial Reporting & Analysis 3 — Questions and Answers
Question 1: In a bank's call report (FFIEC 041), which schedule captures loan-level data on past due and nonaccrual loans?
- Schedule RC-B (Securities)
- Schedule RC-N (Past Due and Nonaccrual) (Correct answer)
- Schedule RC-E (Deposits)
- Schedule RI (Income Statement)
Correct answer: Schedule RC-N (Past Due and Nonaccrual)
Schedule RC-N of the call report specifically captures loans, leases, and debt securities categorized by days past due and nonaccrual status.
Question 2: A bank reports a loan-to-deposit ratio (LDR) of 115%. Which risk does this elevated ratio PRIMARILY signal?
- Excessive capital adequacy
- Liquidity risk from over-reliance on borrowed funds (Correct answer)
- Overstatement of interest income
- Understated credit loss reserves
Correct answer: Liquidity risk from over-reliance on borrowed funds
An LDR above 100% means the bank has lent out more than it holds in deposits, indicating heavy reliance on wholesale or borrowed funding and heightened liquidity risk.
Question 3: Under ASC 842, how does a bank lessee classify a lease where it obtains substantially all economic benefits and controls the asset's use?
- Operating lease with no balance sheet impact
- Finance lease recognized as right-of-use asset and liability (Correct answer)
- Off-balance-sheet arrangement disclosed in footnotes only
- Short-term lease expensed on a straight-line basis
Correct answer: Finance lease recognized as right-of-use asset and liability
A lease meeting finance lease criteria under ASC 842 is recognized as a right-of-use asset and corresponding liability on the balance sheet, with interest and amortization expense recognized separately.
Question 4: Which component of regulatory capital is subject to the most stringent deductions under Basel III, including deductions for deferred tax assets and goodwill?
- Tier 2 capital (supplementary capital)
- Common Equity Tier 1 (CET1) (Correct answer)
- Additional Tier 1 (AT1) capital
- Tier 3 capital
Correct answer: Common Equity Tier 1 (CET1)
Basel III requires the most conservative deductions—including goodwill, intangibles, deferred tax assets, and certain investments—to be applied against CET1, the highest-quality regulatory capital.
Question 5: A bank's return on assets (ROA) is 0.85% while its return on equity (ROE) is 12.5%. The difference is primarily driven by:
- A high noninterest income ratio
- Financial leverage (equity multiplier) (Correct answer)
- Elevated credit loss provisions
- A low efficiency ratio
Correct answer: Financial leverage (equity multiplier)
The DuPont relationship ROE = ROA × (Assets/Equity) shows that the equity multiplier (leverage) amplifies ROA into the higher ROE figure.
Question 6: When auditing mortgage servicing rights (MSRs), which valuation input has the GREATEST sensitivity impact on fair value?
- Prepayment speed assumptions (CPR) (Correct answer)
- Current coupon rate on new originations
- Servicing fee percentage
- Escrow float earnings rate
Correct answer: Prepayment speed assumptions (CPR)
Prepayment speed (conditional prepayment rate) is typically the most sensitive input to MSR valuation because faster prepayments shorten the expected servicing period and dramatically reduce MSR fair value.
Question 7: A bank issues $100 million in subordinated debt qualifying as Tier 2 capital. After 5 years (2 years before maturity), the regulatory capital credit is:
- Full $100 million
- 80% of the original amount ($80 million) (Correct answer)
- 20% of the original amount ($20 million)
- Zero — subordinated debt within 5 years of maturity is excluded
Correct answer: 80% of the original amount ($80 million)
Basel III phases out Tier 2 capital instruments during the final 5 years before maturity at 20% per year, so with 2 years remaining, only 40% is recognized — but with exactly 2 years left the credit is 40%, and at exactly 5 years remaining it starts at 80%.
CBA Financial Reporting & Analysis 3
In a bank's call report (FFIEC 041), which schedule captures loan-level data on past due and nonaccrual loans?