BHC

Question 1

Three areas do we analyze when determining the impact the parent company has on the depository institutions in the organization?

Answer 1

Leverage, Cash Flow, Liquidity

Question 2

The Federal Reserve can require a nondepository institution to transfer capital to a depository institution?

Answer 2

FALSE

Question 3

What financial areas of a nonbank subsidiary can an examiner analyze to help assess the financial condition of the nonbank subsidiary?

Answer 3

Capital, Earnings, Liquidity, Asset Quality

Question 4

A nonbank subsidiary generates break?even earnings, which meet the purpose of the company. Due to the lack of profitability, an examiner intends to criticize earnings?

Answer 4

No

Question 5

A material nonbank subsidiary has capital on par with its peers. Examiners conclude the nonbank has adequate capital. Do you agree?

Answer 5

Yes

Question 6

The laundry list 225.28(b) of Regulation Y contains approved activities that are deemed closely related to banking and produce public benefits.

Answer 6

TRUE

Question 7

Most nondepository activities may be performed by a bank?

Answer 7

TRUE

Question 8

The BHC Act permits selected nondepository activity?

Answer 8

TRUE

Question 9

ABC Corporation has an asset securitization subsidiary, which is very small in relation to consolidated assets (less than .5% of capital). Should this subsidiary be inspected onsite?

Answer 9

Yes

Question 10

Section 106(b) of the BHC Act

Answer 10

Prohibits a bank from conditioning the availability or price of one product or service (the tying product) on a requirement that the customer obtain another product or service (the tied product) from the bank or an affiliate of the bank.

Question 11

“A subsidiary engaged in working out loans has material advances from the parent company, which it
cannot repay on a demand basis. The debt to equity ratio is low; therefore, the examiner will assess
funding as satisfactory. Should the examiner go further in this analysis?”

Answer 11

No

Question 12

A BHC’s fixed contractual obligations consist of?

Answer 12

(1) interest expense; (2) lease and rental expense; (3) contractual longterm debt payments; and (4) preferred stock cash dividend payments.

Question 13

Fixed Charge Coverage Ratio Metrics

Answer 13

If the FCCR exceeds 100%, fixed charges are covered by after‐tax cash earnings, a sign of cash flow strength. However, if the FCCR is less than 100%, the BHC must rely on external sources of cash or cash reserves to meet its contractual obligations.

Question 14

Measures the ability of the BHC to pay common stock cash dividends from residual cash earnings?

Answer 14

Common Stock Cash Dividend Coverage Ratio

Question 15

Common Stock Cash Dividend Coverage Ratio Metrics

Answer 15

If the CSCDCR exceeds 100%, the BHC’s common stock dividends are covered by its residual cash earnings. However, if the CSCDCR is less than 100%, common stock cash dividends must be funded from other external sources or excess cash reserves.

Question 16

This ratio measures the BHC’s level of salaries and other expenses that are covered by management fees and other income from subsidiaries?

Answer 16

BHC Fees and Other Income Ratio

Question 17

BHC Fees and Other Income Ratio Metrics

Answer 17

The best scenario for this ratio would be for it to approximate 100%. However, if the ratio exceeds 100%, it would suggest that BHC could be overcharging its subsidiaries for the services provided. If the ratio is less than 100%, it would suggest that the BHC is bearing some of the cost for the services it provides.

Question 18

What is the major factor in determining the financial strength of a BHC?

Answer 18

cash flow

Question 19

Definition of a company per Reg Y?

Answer 19

Bank, Corporation, Association, Partnership, Business Trust, or Similar Organization. An individual cannot be a BHC!

Question 20

BHC Act of 1956

Answer 20

prohibit monopolies in the banking industry and ensure the separation of banking and commerce by restricting BHC activities

Question 21

BHC Benefits

Answer 21

1. Financial Flexibility 2. Economies of scale 3. non-bank activities

Question 22

Primary responsibility of BHC to its sub

Answer 22

to serve as source of strength

Question 23

BHCs are permitted to invest in and engage in activities that

Answer 23

are closely related to banking

Question 24

Transactions affect the cash account and would appear on the BHC’s cash flow statement

Answer 24

Equity in Undistributed Earnings (subtract), Depreciation (add), Amortization of Prepaid Expenses (add), Impairment of Goodwill (add), Purchase of Treasury Stock

Question 25

The level of debt has little impact on the cash flow of the organization?

Answer 25

FALSE

Question 26

Restrictive covenants typically enhance the cash flow position of a BHC by providing additional opportunities to borrow funds that previously were unavailable?

Answer 26

FALSE

Question 27

Measures the BHC's ability to cover its operating expenses and dividends with operating income?

Answer 27

Cash Flow Match Ratio

Question 28

Cash Flow Match Ratio Metrics

Answer 28

If the ratio exceeds 100%, operating income adequately covers operating expenses and the payment of preferred and common dividends. If the ratio is less than 100%, the BHC would have to rely on cash reserves or externally provided sources to meet its operating expenses and pay dividends on its preferred and common stock.

Question 29

This ratio measures the BHC's ability to pay for FIXED contractual obligations with after‐tax income?

Answer 29

Fixed Charge Coverage Ratio

Question 30

Disadvantages of using Leverage

Answer 30

1. high debt levels may force a BHC to rely heavily on its subsidiaries to provide debt service funds 2. high debt may strain cash flow and force mgmt to make poor operating decisions to conserve fund 3. high debt levels may prevent a BHC from taking advantage of new investment opportunities 4. lenders may impose restrictive covenants.

Question 31

Advantages of leverage

Answer 31

1. raises funds quickly 2. shifts the financial risk of a project from shareholders to lenders 3. LT debt improves a BHCs liquidity position b/c it extends maturity of obligations 4. interest pmts on corp debt are tax-deductible 5. debt does not dilute stockholders equity 6. debt usually less expensive than equity (tax education) 7. debt increases the ROR on investment (equity) 8. LT debt can be retired from cash flow

Question 32

Well capitalized level for FHC?

Answer 32

T1LC 5%, T1RBC 6%, TRBC 10%

Question 33

Well Capitalized level for BHC

Answer 33

T1RBC 6%, Total RBC 10%

Question 34

Bank Holding Company Rating System

Answer 34

RFIC(D) RISK MGMT (Compency BOD & Sr. Mgmt Oversight; Policies/Procedures/Limits; Risk Monitoring & Mgmt Info Systems; Internal Controls); FINANCIAL CONDITION (Capital Adequacy, Asset Quality, Earnings, Liquity) IMPACT of parent company and nonbanks on the subsidiary depository institutions.; COMPOSITE (reflects primary regulator's assessment of bank subsidiary) DEPOSITORY INSTITUTIONS. *For non-complex institutions w/less than $1billion in assets, only the R and C are addressed.

Question 35

Minimal capital levels for BHCs?

Answer 35

T1LC 4%, T1RBC 4%, TRBC 8%

Question 36

BHCs should always attempt to maintain a current ratio > 100% or 1:1.

Answer 36

TRUE

Question 37

Current Ratio

Answer 37

Current Assets / Current Liabilities Should be greater than 1

Question 38

Current Ratio

Answer 38

Current Assets / Current Liabilities | Should be greater than 1

Question 39

Decreases in the asset categories are reported as positive values onthe cash flow statement. When a BHC sells an asset, cash will be generated from the transaction

Answer 39

TRUE

Question 40

The proceeds of parent company long‐term debt may be advanced to banking subsidiaries as debt.

Answer 40

Simple Leverage

Question 41

Increases in the asset categories are reported as negative values on the cash flow statement because they represent a use of cash

Answer 41

TRUE

Question 42

double leverage payback ratio

Answer 42

(Equity Investment in Subsidiaries - Parent Company Equity) / (Net Income - Dividends)

Question 43

Double leverage, in conjunction with the increased asset base of the bank, can lower the company’s consolidated capital ratios since it increases the amount of consolidated assets without a corresponding increase in the amount of capital at both the parent and consolidated levels

Answer 43

TRUE

Question 44

Primary Disadvantages of Leverage

Answer 44

May cause undue reliance on a company’s subsidiaries to service the debt; High debt levels may strain cash flow and force poor operating decisions; Leverage may prevent investment in other profitable opportunities; Lenders may impose restrictive covenants

Question 45

For small bank holding companies (consolidated assets of less than $150 million)

Answer 45

"100% or greater is “highly leveraged,” 30% to 100% is “moderately leveraged,” and less than 30% is “minimally leveraged.”"

Question 46

Because depreciation and amortization expenses are an income statement item, it is added back as an adjustment to reconcile net income to net cash provided by operating activities

Answer 46

TRUE

Question 47

Primary advantages of leverage

Answer 47

Allows a company to raise funds quickly to fund a project; shifts the financial risk of a project to the lender; Long‐term debt improves liquidity; Interest payments are tax deductible; increases the rate of return on investment

Question 48

debt‐to‐tangible‐equity ratio

Answer 48

Total debt / (equity - intangibles)

Question 49

This represents the period of time in years that a bank holding company is expected to repay its double leverage based on current earnings performance

Answer 49

double leverage payback ratio

Question 50

double leverage ratio

Answer 50

Equity Investment in Subsidiaries / Parent Company Equity

Question 51

The proceeds of parent company long‐term debt invested inbanking subsidiaries as equity

Answer 51

Double Leverage

Question 52

For large bank holding companies, (consolidated assets of at least $150 million)

Answer 52

"30% or more is “highly leveraged,” 10% to 30% is “moderately leveraged,” and less than 10% is “minimally leveraged.”"

Question 53

Parent Company Income is the same as _____?

Answer 53

Consolidated Income

Question 54

"BHCs tax deduction for | dividends received from its subsidiaries"

Answer 54

100% tax deduction when received from an affiliate in which the parent has an 80% or more ownership interest. An 80% dividend deduction is available when a subsidiary is between 20%‐80% owned, and a 70% dividend eduction is available when ownership in a subsidiary is less than 20%.

Question 55

Disadvantages of BHCs

Answer 55

Minority shareholders are those that own less than 50% of stock; Additional Federal Reserve Regulations; Possible Securities Law Regulation (>500 shareholers); Possible Dealings with Minority Shareholders

Question 56

The normal range for the ratio of “Bank Net Income/Parent Net Income”

Answer 56

90% to 105%. A ratio below this range (i.e., 85% or below) may indicate that the BHC is heavily relying on its nondepository subsidiaries for income. a ratio in excess of 105% may indicate that small nondepository subsidiaries are incurring losses or the BHC is incurring losses and undercharging for the use of intercompany funds

Question 57

Parent Company capital is the same as _____?

Answer 57

Consolidated Capital

Question 58

For small BHCs, the policy statement requires that the amount of acquisition debt should not exceed ___ percent of the purchase price of the bank(s) to be acquired?

Answer 58

75 Percent

Question 59

Bank Holding Company Act of 1956

Answer 59

BHC is a company that has direct or indirect control of a bank

Question 60

Small bank holding companies are required to reduce their parent company debt consistent with the requirement that all debt be retired within how many years of being incurred?

Answer 60

25 years

Question 61

Small bank holding companies are required to reduce their parent company debt consistent with the requirement that all debt be retired withinhow many years of being incurred?

Answer 61

25 years

Question 62

A small bank BHC whose debt-to-equity ratio is greater than what is generally not expected to pay dividends?

Answer 62

Ratio of 1.0 to 1

Question 63

Two conditions must be met by the nondepository subsidiary to qualify for Federal Reserve System approval to operate within a bank holding company structure

Answer 63

produce benefits to the public and activity must be closely related to banking

Question 64

BHCs may file a consolidated tax return with the IRS

Answer 64

If it own 80% or more of a subsidiary bank

Question 65

BHCs fund their asset portfolio in one of three ways:

Answer 65

short?term debt; long?term debt; or equity capital

Question 66

BHCs major source of operating income

Answer 66

dividends received from its subsidiaries

Question 67

This describes the bank holding company (BHC) rating system

Answer 67

SR 04-18

Question 68

BHCs that are noncomplex and are $1 billion or less will typically be assigned only

Answer 68

Consistent with SR 02-1 Risk mangement and Composite ratings

Question 69

Three main areas to analyze a BHC’s dependence on its subsidiaries

Answer 69

Balance Sheet Dependence; Income Statement Dependence - Cash Flow Dependence

Question 70

This describes the bank holding company (BHC) rating system

Answer 70

SR 04?18

Question 71

BHCs that are noncomplex and are $1 billion or less will typically be assigned only

Answer 71

Consistent with SR 02?1 Risk mangement and Composite ratings

Question 72

A company that is not chartered as a bank and is engaged in activities other than banking

Answer 72

A nondepository entity

Question 73

Who is responsible for issuing the assertion of the adequacy of internal controls on behalf of their company’s bank subsidiaries?

Answer 73

holding company CEOs and CFOs

Question 74

What is defined as the use of debt to supplement the equity in a company’s capital structure?

Answer 74

Leverage

Question 75

What is unsecured debt that is junior (subordinate) to senior claims against the company, such as deposits and taxes payable to tax authorities?

Answer 75

Subordinated Debentures

Question 76

A company can retire (repay) subordinated debt in a variety of ways

Answer 76

Build cash reserve, refinance debt, or convert debentures into equity

Question 77

debt-to-equity ratio

Answer 77

Total debt / total equity capital (including both common and preferred stock)