100+ Free CBA Practice Questions

Explanation: Debt securities a bank has both the positive intent and ability to hold to maturity are classified as held-to-maturity (HTM) and reported at amortized cost. Unrealized gains and losses are not recognized unless an impairment exists. Trading and available-for-sale securities are carried at fair value.

Explanation: CECL requires banks to estimate and record an allowance for all expected credit losses over the remaining contractual life of loans and held-to-maturity securities at origination, using historical experience, current conditions, and reasonable forecasts. This replaced the older incurred-loss model. The estimate is forward-looking rather than waiting for a loss to be probable.

Explanation: Deposits represent money the bank owes back to its customers, so they are liabilities on the bank's balance sheet. Loans the bank makes are its assets. This is a foundational distinction in bank accounting that often confuses those new to the industry.

Explanation: Net interest income (NII) equals the interest and fees earned on loans and securities minus the interest paid on deposits and borrowings. It is the core earnings measure for most banks. Non-interest (fee) income and operating expenses are separate components of the income statement.

Explanation: A charge-off removes the uncollectible loan balance from gross loans and is absorbed by the previously established allowance for credit losses; it debits the allowance and credits loans. Because the loss was already provided for, the charge-off itself does not hit current earnings. Subsequent recoveries are credited back to the allowance.

Explanation: Accrual accounting recognizes interest income as it is earned over time, regardless of when cash is collected. For a performing loan, the bank accrues interest each period. When a loan becomes nonaccrual, the bank stops recognizing accrued interest until collectibility is assured.

Explanation: Regulatory guidance generally requires a loan to be placed on nonaccrual when it becomes 90 days past due or when full collection of principal and interest is in doubt, unless the loan is well secured and in the process of collection. On nonaccrual, the bank stops accruing interest income. This prevents overstating earnings on troubled credits.

Explanation: The income statement (statement of operations) summarizes revenues such as interest and fee income, expenses including interest and operating costs, the provision for credit losses, and the resulting net income for a reporting period. The balance sheet is a point-in-time snapshot, while the cash flow statement reconciles cash movements.

Explanation: The provision for credit losses is the periodic expense charged to earnings to establish or replenish the allowance for credit losses on the balance sheet. It reflects management's estimate of expected losses for the period. The allowance is the cumulative balance, while the provision is the income-statement charge that feeds it.

Explanation: Unrealized gains and losses on AFS debt securities bypass net income and are reported in accumulated other comprehensive income (AOCI), a component of equity. They are only recognized in earnings when the security is sold or when a credit impairment is recorded. This distinguishes AFS from trading securities, which flow through net income.