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Flashcards in Pitts Cards Deck (98):

What are some possible adjustments to Capital?
(3 Examples)

- Accrued timing adjustments
- Sound banking values no on books
- ASC 320 Adjustments (market value of AFS securities)


Definition of "Affiliate' per 23A?
-Also list 5 ways to become an affiliate

-Common Ownership
-Common Directors
- Wholly Owned
-Presumption of control
* Business that is owned or controlled by the same individual(s) who also owns, controls, the bank or holding company


Why is it best that bank polices be in written form?
(2 reasons)

-to provide clear objectives for the bank's daily management.
-Policies have been reviewed and approved by eh BOD making management accountable for working within policy guidelines.


What is the primary purpose of 23B?

To ensure extensions between affiliates are made on terms that are substantially the same as those prevailing at the time for comparable transactions with non affiliate companies


Define "Subsidiary"

With respect to a specified company, a subsidiary is a company that is controlled by such specified company.


What businesses are excluded from being an affiliate under 23A?
(5 examples)

1. Non bank subsidiary of a bank
2. A company engaged solely in conducting safe deposit business.
3. A company engaged solely in holding obligations of the US Treasury, its agencies or the securities guaranteed by same as to principal & Interest
4. A company where control results from debt previously contracted action.
5. A Company engaged solely in holding bank premises


1. Which method is used to account for the sale of ORE when an acceptable down payment cannon be made?
2. What are the 5 methods of account for ORE?

1. Installment method

2 Full Accrual, Installment, Cost Recovery, Reduced Profit, Deposit


What constitutes Current Assets (4)?

Marketable securities < 1YR
Accounts Receivable


What Constitutes Current Liabilities(5)?

Notes Payable
Current Portion of Long Term Debt
Accounts Payable,
Accrued Expenses,
Taxes Payable


What Constitutes Working Capital ?

Current Assets less Current Liabilities


Who can call a special shareholders meeting

Directors; or upon written notice of the owners of a majority of the stock


A bank makes a loan to an affiliate. Bank Holding company stock is used to secure the loan.

Is this a violation of 23A?

Can not use stock of an affiliate to secure loans to an affiliate.


Section 362.265 RSMo allows the Directorate to decrease the number of directors by a 2/3 majority vote.

True or False

False - only shareholder can decrease the directorate

-- During a regular or special Board meeting the directors, w/ 2/3 majority vote can temporarily increase the number of directors until shareholders can approve.


Bank of Smith and First National Bank of Main are both wholly owned by Smith Bancshares. Are the banks affiliates per section 23B?

No, section 23B excludes banks as affiliates


Part 365:
1. Limits
2. Reporting
3. Exceptions (6 exceptions)

1. All loans above limits should not exceed 100% of Total Capital.
- Commercial, Ag, Multi-Fam Residential above limits should not exceed 30% of Total Capital
2. Reported to BOD quarterly
3. Gty by Fed, State or Local Gov, Held for immediate sale, Refi/ renew w/o new money, Financed ORE, Restructured Troubled Debt, Abundance of Caution


Give 2 reasons for segregation of duties

Ensure accuracy

Diminish possibility of fraud


What is the limit for aggregate covered transactions to all affiliates?

20% of unimpaired capital


What is the limit for an individual covered transaction to an affiliate?

10% of unimpaired capital


1 What is the max lending to individual insider per Reg. O.
2 Max to all insiders?

1. 15% of unimpaired capital if not fully secured, 25% if fully secured by readily marketable security.

2. 100% of unimpaired capital for all insiders, total deposits < $100MM can increase to 200% by Board Resolution.


1. What are the limits established under Section 362.170(5) RSMo for loans to salaried officers?

2. Are there any other requirements for loans to salaried officers.

1. Aggregate of loans to any one salaried officer is limited to 10% of unimpaired capital: 25% to all salaried officers.

2. Prior approval from Board or Executive Committee & must be documented in the minutes.


VP Smith owes bank $250M. Of which $200M is in loans and $50M in leases. Unimpaired Capital is $2,300M.

Is this a violation of the LLL for salaried officers?

No. b/c leases are not aggregated with loans according to 362.170 RSMo.


Are wholly owned, non bank, subsidiaries considered an affiliates under 23A?



If a corporation is a general partner in a limited/ general partnership would a loan to partnership be attributed to the corporation for LLL.



What is the maximum lending amount for "other purpose" loans to executive officers per Reg O.

Cannot exceed, the greater of 2.5% of unimpaired capital, or $25M. Can never exceed $100M


A bank may loan money to purchase its own stock if secured by collateral of at least ____ % of the Loan.

115 percent


Push Down accounting must be used when there is a _____ % change in control of voting stock.

- 95 percent
- can be used used with > 80% but must be used @ 95% change

** Personal question : Change of what? voting stock


is an unfunded loan commitment an extension of credit for 23A?

Yes, if the agreement is formal and legally binding


when does a security agreement attach?
-3 requirments

- debtor & creditor agree
- value is given
- debtor has rights in collateral


List characteristic of a standby letter of credit (4)

- Labeled as standby LOC
- limited in amount
- specific time period
- indicate relevant info to be presented to bank before draws will be honored due to account party's failure to perform.


what constitutes a fully funded loan loss reserve?

a balance adequate to absorb anticipated loan losses


List 5 factors for determining the adequacy of the ALLL

1. Volume & mix of existing loan portfolio
2. trend for loan growth
3. local economic conditions
4. previous loan history; relationship & trend of recoveries as % of prior yr charge offs
5. available outside information including peer group


What is a stand by letter of credit?

Two area of risk involved

- an irrevocable commitment on the part of the issuing bank to make payment to a designated beneficiary if the banks customer defaults on an obligation
- credit risk, funding risk


Short term working capital loans are repaid by?

Converting inventory & accounts receivable into cash


When Appraisals requirements per 323
(5 examples)

1. Non business loan > $250M
2. Business loan > $1,000M (all)
3. Business loan > $250M but < $1,000M and repayment is dependent on sale or rent of RE
4. Renew or refi & there is a material change in market or the physical condition of the RE that could jeopardize the collateral protection
5. Principal resident >$250M


- A banks right to net a deposit against a loan is called?

- Debt must be between _____ ______ _____ in right & _____.

-- Right of setoff

--The Same Party & capacity


$100M security @ pare value plus accrued interest of $4,250 receives $5,000 1 month later.

What are the entries?

Debit: Cash $5,000
Credit: Accrued Interest Purchased $4,250
Credit: Int Inc on Securities $750


List the concentration of Total Capital for each percentage percentage

25% - 4 examples

100% - 5 examples

- individual borrower
- Small interrelated group
- single repayment source w/ normal credit risk
- Individual project
- Industry
-Product Line
- Type of Collateral
- Participation Purchased from single institution
- out of territory


What is a curtailment program?

Agreed upon minimum principal reduction of floor plan loan..


What are the requirements for Part 363?

Banks > $500,00,000 must have an annual audit & have an audit committee.


What is unearned discount?

Internet collected no earned added to the BV of a loan; netted against loans on the Call Report.


Define " joint custody " and provide examples

-- 2 or more people equally accountable for the physical protection of certain items or records.
- cash in vault, 2 people sign & 2 keys need to gain entry


1. What is the most common form of blanket bond insurance

Financial Institutions Crime Bond


What " cash exposure" in regards to fidelity insurance?

Excess cash on hand above the insurance coverage


What is the primary importance of a bank's insurance program.

Protection against catastrophic losses


1. S 1/2 of NW 1/4 of NW 1/4 of SW 1/4 = how many acres?

2. How do you brake down Acres of Land/ section?

640 acres in a Section
1 Section is 1 square Mile
1 acres 43,560 sq ft


What safeguards should a loan policy include for floor plan lending? (5 examples)

1. Determine collateral value at inception
2. Frequent review of dealer financial statements
3. Frequent inspections
4. Curtailment requiremnts
5 Title Agreement.


What percentage of the Board is required to be a Missouri Resident

A Majority: however, any director residing within a 100 mile radius of the banking house even if that is out of state is considered a resident


What makes up "Unimpaired Capital" per 362.170?
(5 items + a portion of something else, on occasion)

1. Common & Preferred Stock
2. Capital Notes
3. Surplus
4 Undivided Profits
5. Reserves (ALLL)
& 10% of Goodwill (for LLL calculation)


What would a high volume of charge offs & few recoveries imply.?

Management is not recognizing losses in a timely manner or they're not collecting charge offs


-When a bank leases premises to an insider for the purpose to operate an insurance agency, what condition must apply?

Lease no longer than 1 yr & at least 20% of commissions generated must go to the bank.


Why do examiners check security invoices?
(3 reasons)

1. verify amount paid and Interest received
2. verify full description
3. ensure proper amount of premium & accretion of discount.


1. what are the entries to book $200M bond @ 102:08 on January 1, 1992; due on July 1, 1993?
2. What are the entries to amortize the premium.

1. 102:08 = 102.25% (8/32) x $200M = $204,500
Debit Securities = $200M
Debit Unamortized Prem = 4,500
Credit Cash $ 204,500

2. 4,500 / 18 months = 250/ month
Debit Amortization Exp $250
Credit Un-Amortized Prem = $250


How is a participation sold with recourse shown on the Call Report?

Seller -- as a borrowing from purchase

Purchaser - as a loan to seller


Max amount of loan valuation reserves included in Risk Based Capital?

Up to 1.25% of Risk weighted assets


Division of Finance Capital guidelines
1. Non Problem Bank
2. Problem bank with inadequate level
3. New Bank (De Novo)

1. 6% with fully funded reserve
2. 8% with fully funded reserve
3. Greater of 8% of total assets for First 3 yrs of operation, or $2MM & 6% after 1 yr of operations
$3MM Metro Area
$5MM St Louis Area


List 8 examples of "Other Assets"

1. Prepaid Exp
2 Artwork
3. Repossession
4. Computer software
5. Income earned not collected
6. Net deferred income taxes
7 cash surrender value of life ins.
8. Equity securities w/o readily determined market value


Define " Subordination Agreement"

A document that give one creditor interest in collateral a lower priority than another creditor


List 4 reasons when you must include loan writeups in the Report Exam.

1. Special mention
2. Classified insider
3. Management disagrees with classification
4. Participation downgrade
5. any credit "newly extended" in a problem bank


What are the 6 "Ps".



Is there a limitation on the type of mutual funds a bank can invest in? Explain

Yes, The fund must contain only assets which the bank is legally allowed to purchase directly.


Define "Special Mention"

- An asset that has potential weaknesses that deserve managements close attention. If uncorrected, may result in the deterioration of repayment prospects for the asset or in the institution's credit position at some point in the future.
-Special mention assets are not adversely classified & do not expose an institution to sufficient risk to warrant adverse classification.


List Legal Loan Limit percentages & be able to apply them to work problems ( based on size)

1 to 7000 = 25%
7M to 99M = 20%
over 100M = 15%
* % of unimpaired Capital & Reserves
-All 1 & 2 rated banks revert to 25% regardless of population


Each bank must have a ____ & he/ she must serve on the ___ ..

CEO, Board


What are 5 examples of perfection taken by possession?
(hint: types of collateral)

1. Cash
2. Gold
4. Jewelry
5., Fine Art


What makes up overhead Expenses?
(3 examples)

1. Personnel Expenses
2. Occupancy Expenses
3. Other operating expenses


What is the time period goodwill should be amortized over?

Good will should be tested for impairment annually, never amortized


Telephonic conference counts as attendance provided that ...(3 requirements)

1. Composite 1 or 2
2. No regulators attending meeting
3. Directors phoning in sign an affidavit to the flowing:
-director received formal notice & waived such notice
-received board packet
-was alone during the meeting


What are the Retail Credit Classifications thresholds for consumer loans?

Closed end
> 90 days PD = Sub
>120 days PD = Loss

Open end
> 90 days PD = Sub
>180 days PD = Loss


List 5 major components of an investment policy

1. Quality
2. Maturity
3 Diversification
4. Marketability
5. Income


Can real estate taxes , maintenance & insurance be capitalized at the time of foreclosure Other Real Estate.?

Expense everything else after foreclosure.


Define "Doubtful"

An asset classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions & values highly questionable and improbable.


Insider per Reg O

Executive officer, Director, Principal Shareholder & related interest of each


What are the requirements to be a director? (4)

1. US Citizen
2. Majority of Directors must reside in the State (100 mile radios of banking house)
3. All non-resident members must file a consent to service with the president of the bank
4. No one can serve as a Director if the bank holds a judgment agaist them.


When is consent service form needed?

When a director is a non resident of the state of MO. Including those w/ in a 100 mile radius, but outside the state of MO


What are the 4 functions Capital?

1. Provide protection to depositors & protects the FDIC Insurance funds.
2. Absorbs Losses
3. Promotes public confidence
4. Restricts excessive growth.


Where should a lender file a UCC if:
1. All places of business are in Jackson County MO
2. Same as #1 but equipment is located in Bates County.
3. Farm equipment is located in Vernon Co.
4. Same as # but farmer lives in another state.

1. MO Secretary of State
2. MO Secretary of State
3. MO Secretary of State
4. MO Secretary of State & Home state of Farmer


Define Substandard

Inadequately protected by the current sound worth & paying capacity of the obligor or of the collateral pledge, if any. Loans so classified must have a well defined weakness(es) that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if not corrected.


3 Reason why it is important to analyze earnings before securities gains or losses

1. One time event, not indicative of future performance.
2. Numerous gains/ losses indicate speculative investment portfolio.
3. Gains/ losses are controllable by management.


What are the 4 reports the Board must review and the minimum amounts.

1. New Loans Greater of $10M or 5% of the LLL
2. Aggregate indebtedness - Greater of $50M or 5 xs the new loan list
3. Director, Officer, and employee loans
4. Past due Greater than 30 days
** must be reviewed at each board meeting and documented in minutes.


List components of Funds Management Policy (8 components)

1. Establish objective for Liquidity, IRR, Earnings
2. Periodic review of asset/ liability structure
3. Method to measure and monitor liquidity
4. Contingency Liquidity Plan
5. Control & review of Off Balance sheet activities
6. Control exposure with correspondent banks
7. Set lines of authority
8. Establish an ALCO


Define " Attachment"

A point when creditors legal rights in debtors property come into existence. Property is legally bound by creditors security interest.


ASC 360:20, Deposit Method to finance ORE

1. No sale or loan recorded
2. no profit or interest income recognized
3. Payments received are reported as a liability until another method may be used.


List 6 titles automatically considered executive officers unless otherwise excluded by Board resolution or bylaws.

1. Chairman
2. President
3. Vice President (all VPs)
4. Cashier
5. Secretary
6. Treaurer


List 3 security categories regarding ASC 320

1. Available for Sale
2. Held to Maturity
3. Trading


What are the supervisory LTV limits for each loan type, per 365? (6 total)

1. Raw Land -- 65%
2. Land Development -- 75%
3. Construction: Commercial, Multi family and other non-residential 80%
4. Construction 1-4 Family 85%
5. Improved Property 85%
6. Owner Occupied 1-4 Family and Home Equity -- None

**loans exceeding 90% LTV; banks should require mortgage insurance or readily marketable collateral


List 6 precautions Directors can take to protect themselves from Liability

1. Attend meetings
2. Record "no" votes
3. Obey laws & regulations
4. Remove incompetent officers
5. Refrain from insider abuse
6. Review the 4 required reports
7. Resign if disagreement persists


The existence of a Bank Holding Company can affect an earnings analysis in what ways? (4 examples)

1. Level of management fees
2. Dividend payments
3 Income tax payments - upstreamed
4. types of earning assets employed


What is the primary regulatory purpose of Capital

To Protect depositors


Define " Amortization"


Amortization; the periodic reduction of a premium

Accretion: the periodic write-up of a discount


Legal Lending Limit
The banks LLL is $1,500M. John Doe has loans totaling $1,375M & his wholly owned Corporation has a loan of $200M.

Do you cite a violation of RSMo 362.170? Why or Why not?

No, unless the aggregation rule applies.
ie. the source of repayment must be the same.


1. Define " liquidity ratio"/
2. How is it calculated?
3. What is a desired percentage?

1. the ability of unencumbered liquid assets to cover withdrawals of unsecured funding liabilities.
2 Net cash + ST marketable securities/ Net deposits + ST Liabilities (FFP, FHLB Borrowings, Other Borrowings, Time Deposits < 1 yr)
3. >= 25%


Define "Certificate of Compliance"

A statement signed by an authorized officer that states the bank is looking to borrower for payment when paper is purchased with recourse


Define " Loss"

Uncollectible & of such little value that continuance as a bankable asset is not warranted. Classification does not mean that the asset has no recovery or slvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery maybe collected in the future.


List 5 indicators of loan probelms

1. Overlending
2. Frequent rewrites and extensions
3. incomplete credit information
4. No formal repayment plan
5. Sloppy loan files


Define " purchase money security interest"

A security interest in collateral which takes precedence over previously filed liens if proceeds are used to purchase collateral and previous lienholders are notified


List 4 short term liabiities

1. Time deposits < 1 year
2. Federal funds purchased
3. FHLB borrowings < 1yr
4. other borrowed money < 1 yr


A low quality asset is defined as any asset that is .. 4 examples per 23A

1. Adversely classified or special mention at previous exam
2. non-accrual status
3. PD > 30 days on Principal or interest
4. Restructured Troubled Debt


Define " Hypothecation agreement"

An agreement whereby the owner of a property grants a security interest in collateral to the bank to secure the indebtedness of a 3rd party.