UCE QOTD

The law requires that loans between a bank and its affiliates be secured, and it prescribes margin requirements based on the type of collateral. Other debt instruments, including receivables require _____ % margin. A) 100% B) 110% C) 120% D) 130% E) No limit

C) 120%

What is the investment limit per issuer as a percentage of capital for a Type V security? A) 10% B) 20% C) 25% D) 100% E) Unlimited

C) 25% I always remember this in order of the type of securities. No, 10, 10, No, 25.

Up to what limit can a thrift lend on nonresidential real property loans? A) 75% of total capital B) 150% of total capital C) 400% of total capital D) Thrifts are not allowed to make nonresidential real property loans.

C) 400% of total capital 12 CFR 160.30 lists the general lending and investment powers of Federal savings associations.

For a Federal Savings Association to meet the standard under the "Qualified Thrift Lender" (QTL) test, what percentage of portfolio assets must be held in "Qualified Thrift Investments" (QTIs)? A) 25 percent B) 50 percent C) 65 percent D) 80 percent

C) 65 percent Study the NB vs Thrifts guide: HOLA/QTL test - Must hold at least 65% of portfolio assets in QTL investments (QTI/port assets>65%)- this ratio is called ATIP which stands for actual thrift investment percentage - Two categories of QTI assets: assets that are includable w/o limit and assets includable up to 20% of portfolio assets (so bank needs at least 45% of unlimited category QTI) - Portfolio assets= TA minus goodwill and other intangibles, office property, and liquid assets up to 20% of TA Do not get this confused with the 60% requirement if the bank is using the DLBA test.

XYZ Bank holds all its assets until maturity. Which of the following would have the greatest sensitivity to a change in interest rates? A) A $100M, 30 year floating rate mortgage (no cap on rate changes) B) A $50M, 15 year fixed rate mortgage with a two year balloon C) A $75M, 5 year treasury bond D) A $25M, 5 year fixed rate auto loan with monthly payments

C) A $75M, 5 year treasury bond Rationale A) has the least amount of sensitivity since the mortgage is variable rate. Hence, with any FOMC rate changes, the interest rate on the mortgage would adjust accordingly. With no caps up or down, the mortgage would always be in line with market rates, so the underlying price of the mortgage wouldn't change drastically B) the two year balloon term protects on the long side, so there isn't much sensitivity there. C) and D) are both fixed-rate assets with the same maturity, so I assume the answer key went with C) due to its larger amount ($75M vs. $25M) and due to its less frequent coupon payments (semiannual vs. monthly for the auto loan).

The fair market value of a repossessed car is $5,500. The recorded investment in the loan is $4,000. Which of the following accounting entries accurately reflect the repossession. A) Credit loans for $5,500; debit repossessions for $5,500 B) Debit loans for $5,500; credit repossessions for $5,500 C) Credit loans for $4,000; debit repossessions for $4,000 D) Debit loans for $4,000; credit repossessions for $4,000

C) Credit loans for $4,000; debit repossessions for $4,000 Debits increase assets; so crediting the loan balance for the amount of the investment is the correct entry. This was the best answer given the possible answers, it is not the entire entry that would have to be made.

The OCC identifies banks with significant CRE concentration risk as bank's that have construction & land/land development loans of 100% of Total Risk Based Capital (TRBC), total CRE loans of 300% of TRBC and bank's who's portfolio __________. A) Contains predominately non owner occupied properties. B) Contains more than 75% of TRBC in condo loans. C) Has increased by 50% or more during the prior 36 months. D) Has increased by 35% or more during the prior 24 months.

C) Has increased by 50% or more during the prior 36 months. You will find this is OCC Bulletin 2006-46. A couple things to note: the bulletin is only concerned with non-owner occupied type properties and the percentages listed in the bulletin of 100% for C&D, 300% total CRE, and 50% growth in the last 36 months are NOT LIMITS, they are thresholds in which we expect enhanced risk management practices surrounding concentrations.

Bank investments are accounted for at amortized cost when they are: A) Available for sale B) Trading C) Held to maturity D) Speculative in nature

C) Held to maturity Available for sale: The accounting treatment for AFS is similar to trading securities as they are recognized at fair value (market to market). The changes in value are recorded under stockholder's equity. Unrealized gains for AFS securities are not included in Net Tier One Capital Investment in debt securities are classified as held to maturity and measured at amortized cost in the statement of financial position only if the reporting enterprise has the positive intent and ability to hold those securities to maturity. When any type of investment is sold, the "realized" gain or loss is included in operating income. Trading securities are securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) shall be classified as trading securities. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on short-term differences in price.

Which of the following is a characteristic of a repurchase agreement? I. Negotiations usually take place directly between the buyer and the seller II. Maturities can vary from overnight to several months. III. The seller remains entitled to receive all interest and principal payments on the security sold IV. The agreement can be terminated at any time due to the existing secondary market A) I and III only B) II only C) I, II, and III only D) II and IV only

C) I, II, and III only OCC Bulletin 98-6; Red book. There is no secondary market

Which of the following are TRUE statements regarding deferred taxes? I. The cumulative tax effect of all timing differences is reported as either a net-deferred tax asset or liability II. If a bank's tax expense is less than the actual tax due, the difference maybe be a deferred tax asset III. Deferred tax assets (liabilities) are reported as off-balance sheet items on the call report IV. Deferred tax asset (liabilities) represent the tax effects of income or expense items that are reported in one period for financial statement purposes and in another tax purpose A) I and IV only B) II and IV only C) I, II, and IV only D) I, II, III, and IV

C) I, II, and IV only You can review the call report instructions for details and I also found some details in the BAAS.

YTM differs from the zero coupon rate because: A) It can be used to calculate yields on annuities. B) It is appropriate for cash flows of maturities greater than five years. C) It is single discount rate through maturity. D) It cannot be accurately calculated

C) It is single discount rate through maturity.

XYZ Bank's Gap report showed: Rate sensitive 30-day 60 day 90 day 180 day 360 day Assets $15MM $4MM $7MM $8MM $5MM Cumulative 15MM 19MM 26MM 34MM 39MM Rate sensitive 30-day 60 day 90 day 180 day 360 day Liabilities $12MM $8MM $17MM $12MM $6MM Cumulative 12MM 20MM 37MM 49MM 55MM How would you describe XYZ Bank's position? A) Highly rate sensitive B) Asset sensitive C) Liability sensitive D) Balanced.

C) Liability sensitive Although liability sensitive, GAP report does not display a significant mismatch

The bank recently completed a fair lending risk assessment. What should they do with it? A) Do not allow examiners to review it. B) Report the full results to the examiners. C) Notify the examiners if violations were found as a result of the risk assessment.

C) Notify the examiners if violations were found as a result of the risk assessment. Fair lending handbook is a good place to review all the requirements for fair lending. This was listed as one of the questions that is likely to show up on the actual MC test.

What is the risk rating of an open ended loan 133 days past due? A) Pass B) Special Mention C) Substandard D) Loss

C) Substandard

What is the risk rating of a closed end loan 92 days past due? A) Pass B) Special Mention C) Substandard D) Doubtful E) Loss

C) Substandard Refer to OCC Bulletin 2000-20 "retail credit classification". The rating for both close-end and open-end loans at 90 days is substandard except in certain circumstances. If this close-end loan was a residential real estate loan with LTV ratios of 60% or less, the bank could keep the loan on pass at the 90 day mark. If it is a HE loan it would depend on if the bank also held the 1st lien, if so it could also keep the pass rating if together they are 60% or less LTV. See the bulletin for full details.

What is the correct risk rating of an open ended retail loan 133 days past due? A) Pass B) Special mention C) Substandard D) Loss

C) Substandard This always seems counterintuitive to me. Close end loans are loss at 120 days and open end loss at 180 days. Refer to OCC Bulletin 2000-20

What is the effect of a coupon payment on a bond's duration. A) At the time of a coupon payment, the bond's duration will sharply decrease B) At the time of a coupon payment, the bond's duration will sharply increase C) There will be no change in the bond's duration as the result of a coupon payment D) The bond's duration will increase in line with the benchmark

C) There will be no change in the bond's duration as the result of a coupon payment Duration measures how long it takes, in years, for an investor to be repaid the bond's price by the bond's total cash flows. At the same time, duration is a measure of sensitivity of a bond's or fixed income portfolio's price to changes in interest rates. In general, the higher the duration, the more a bond's price will drop as interest rates rise (and the greater the interest rate risk). As a general rule, for every 1% change in interest rates (increase or decrease), a bond's price will change approximately 1% in the opposite direction, for every year of duration. If a bond has a duration of five years and interest rates increase 1%, the bond's price will drop by approximately 5% (1% X 5 years). Likewise, if interest rates fall by 1%, the same bond's price will increase by about 5% (1% X 5 years). Since this question did not talk about rate changes and asked about the "regular coupon payment" as compared to the "coupon rate", "C" is the best choice here.

Which of the following components of interest rate risk involves changes in the relationship between interest rates of different maturities within the same index or market? A) Repricing risk B) Basis risk C) Yield curve risk D) Option risk

C) Yield curve risk See IRR Handbook, pg 9

Use the following September 30, 2018 UBPR information: Net Income $1,365 Total Assets $194,300 Dividends $464 Average Assets $186,753 What is the bank's ROAA? A) 0.64 B) 0.73 C) 0.94 D) 0.97

D) 0.97 *** DON'T FORGET TO ANNUALIZE*** (several questions on MC UCE in this format) (($1,365/3)*4)/$186,753 = 0.97. In general, income and expense items on the UBPR are shown for year-to-date periods. Income and expense ratios on pages 1, 3, 7, and 11 of the UBPR are annualized to allow ratio comparison between quarters. See User's Guide for UBPR

Which of the following loans or extensions of credit are not subject to the lending limits? A) Loans to leasing companies B) Loans secured by real estate C) Bankers Acceptances D) A and C E) B and C F) None of the above

D) A and C Please refer to 12 CFR 32.3(c) 1 through 12 for a full list of extensions of credit that are not subject to the lending limit.

Which of the following are components of Tier 1 capital? A) Surplus B) Undivided Profits C) Non-cumulative perpetual preferred D) All of the above are in tier 1 capital.

D) All of the above are in tier 1 capital.

Which of the following is not an attribute of a marketable security? A) Registration under the Securities Act of 1933 B) Can be sold with reasonable promptness at a price that corresponds reasonably to its fair value C) Is offered and sold pursuant to SEC Rule 144A and rated investment grade or the credit equivalent D) Can be purchased at a negotiated price without sustaining a loss

D) Can be purchased at a negotiated price without sustaining a loss Marketable securities can be sold at a loss. All of the others are attributes of a marketable security. See 12 CFR 1.2(f)

Which of the following business entities may not file for an exempt status under the BSA? A) Bars/restaurants B) Retail businesses C) Government agencies D) Commodity brokers/dealers

D) Commodity brokers/dealers

Due to low loan demand, Hurting for Profit, N.A. plans to purchase $1 million in additional investment securities. Which security would have the least impact on risk-based capital ratios? A) FHLB 5-year, non-callable bond B) AAA-rated, 10-year corporate bond C) FNMA collateralized mortgage obligation (CMO) D) GNMA pass-through mortgage-backed security (MBS) E) AA-rated General Obligation (GO) 20-year bond, callable in 5 years

D) GNMA pass-through mortgage-backed security (MBS) GNMA pass-through MBS. MBS issued by GNMA receive a 0% risk-weight when calculating risk-based capital. See 12 CFR 3 "subpart d - risk-weighted assets - Standardized approach" You can also review the attachment on table 4 which starts on page 10. Knowing the difference between a government sponsored agency and a government agency was important for the test.

The Dodd-Frank Act implements changes that: I. Introduce more stringent regulatory capital requirements. II. Reform the regulation of credit rating agencies. III. Require registration of advisers to certain private funds. IV. Effect significant changes in the securitization market. A) II only B) I and III C) I, II, and III D) I, II, III and IV

D) I, II, III and IV

All national banks must maintain a security program. Which of the following is required as a part of the security program? I. Procedures for opening and closing for business II. Procedures that will assist in identifying persons committing crimes against the bank III. Initial and periodic training of employee responsibilities IV. Selecting, testing, operating, and maintaining appropriate security devices A) IV only B) I and II C) I, II, and IV D) I, II, III, and IV

D) I, II, III, and IV A bank's security program should include all of the above. See 12 CFR 21.3

Which of the following are examples of embedded options? I. Fixed assets a bank includes in its Gap report II. Borrower's ability to repay fixed rate loans III. Depositor's early withdrawal rights on time deposits IV. Caps on interest rates for variable rate loans. A) I only B) II and IV only C) III and IV only D) II, III, and IV only

D) II, III, and IV only An embedded option is a special condition attached to a security and, in particular, a bond, that gives the holder or the issuer the right to perform a specified action at some point in the future. An embedded option is an inseparable part of another security, and as such does not trade by itself. Nevertheless, it can affect the value of the security of which it is a component.

Which of the following is not included in overhead expense? A) Personnel expense B) Occupancy expense C) Goodwill impairment D) Net losses on AFS securities

D) Net losses on AFS securities Actual net losses on AFS securities is a non-interest expense and unrecognized losses on AFS securities are recognized through accumulate other comprehensive income (AOCI). You can find this info in the call report instructions and the UBPR user guide.

What values are used to calculate noncore funding dependence? A) Non-core liabilities, short-term assets, and deposits B) Total liabilities, short-term investments, and long term assets C) Total liabilities, short-term investments, and deposits D) Non-core liabilities, short-term investments, and long term assets

D) Non-core liabilities, short-term investments, and long term assets PPM 5000-34

The conversion of input data to output data using a predefined system of procedures is called: A) Storage B) Programming C) Flowcharting D) Processing E) Information

D) Processing Storage - a device that captures retains and supplies data. Programming - the process of preparing a list of instructions for the computer to use in solving a problem. Flowcharting - a programming tool to graphically present a procedure by using symbols to designate the logic of how a problem is solved. Information - is the collection of data, while processing is the conversion of input data to output data using a predetermined system of procedures (program). These definitions are found in the FFIEC Information Systems Handbook - Glossary.

Is an appraisal, evaluation, or neither required for the following situation: (Use new appraisal standards) A $1.2MM loan to a timber operation, taking the real estate and timber rights as collateral. The bank indicates that the timber operations is profitable and supports the loan. They only took the real estate to ensure access to the timber should the customer default.

Neither. Because there is another exception in the reg stating that you don't need neither because the RE is being taken to get to the collateral. 12 CFR 34.43(a)(4). The bank does need an evaluation on their collateral (timber rights).

Which three loans are required to be on nonaccrual? A) A residential real estate loan is 95 days PD, but the borrower has been making timely payments for five months. B) CRE loan with a LTV of 50% is PD 119 days. The borrower filed for bankruptcy and repayment is uncertain. C) An unsecured commercial loan is 87 days PD and they anticipate payment from an insurance settlement in 30 days. D) A commercial loan is 85 days PD. Collateral is sufficient to cover the loan's principal balance, but the bank expects to charge-off $3M in interest and $400 in accrued late charges. E) A $20M single-payment commercial note secured by machinery and equipment has renewed annually for the last 10 yrs with no principal reduction. The loan is current, but the relationship is rated substandard.

Which three loans are required to be on nonaccrual? B) CRE loan with a LTV of 50% is PD 119 days. The borrower filed for bankruptcy and repayment is uncertain. D) A commercial loan is 85 days PD. Collateral is sufficient to cover the loan's principal balance, but the bank expects to charge-off $3M in interest and $400 in accrued late charges. E) A $20M single-payment commercial note secured by machinery and equipment has renewed annually for the last 10 yrs with no principal reduction. The loan is current, but the relationship is rated substandard. A is incorrect, because there is no requirement per OCC Bulletin 2000-20 that retail loans be put on non-accrual. But management must be able to prove that they are not materially mis-stating income by keeping the loan on accrual. C is incoffrect because the loan is only 87 days, and is well secured and in the process of collection. C was a little vague because I didn't specify that it would be paid in full, but since B,D, and E are required to be put on non-accrual based on the stated facts, it is not a correct selection.

Ownership of FNB Rockport is widely held with Ms. Jean Smith being the largest individual shareholder with 9% of the bank's outstanding stock. Her husband owns 6% and her infant daughter owns 2% of the bank. Is Jean Smith a principal shareholder?

Yes. For purposes of determining whether a person is a principal shareholder (i.e., a person who controls, directly or indirectly, individually or in concert with others, more than 10 percent of any class of the bank's voting securities) any shares controlled by a member of that person's immediate family are considered to be held by that person. See 12 CFR 215.2(m)(1).

Effective Board and senior management oversight of the bank's interest rate risk activities is the cornerstone of an effective risk management process. What is the responsibility of the Board of Directors? (pick all that apply) A) Establish effective internal controls B) Develop and implement procedures and practices C) Establish and guide the bank's direction and tolerance D) Oversee the implementation and maintenance of management information systems

A) Establish effective internal controls B) Develop and implement procedures and practices D) Oversee the implementation and maintenance of management information systems *There were tons of these types of questions on the MC test*

Commercial paper is a debt instrument issued by companies that generally has a term of ________? A) Less than 1 year B) 2 to 5 years C) Greater than 5 years D) Trick question - commercial papers is not a debt instrument

A) Less than 1 year Probably something very unlikely you will see in community banks. Commercial paper is generally highly liquid and only issued by large corporations. See commercial credit handbook for additional details.

Which of the following is the correct accounting category for "overdrafts"? A) Loans B) Other Assets C) Due from Banks D) Fixed Assets

A) Loans

Under the six percent rule, the servicemember's notice to the creditor A) Must be made no later than 180 days following the termination of the servicemembers military service or release from military service B) Must be made no later than 1 year following the termination of the servicemembers military service or release from military service C) Is not subject to time limits D) Must be made while the servicemember is in military serviceE: Must be made simultaneously with entry into military service

A) Must be made no later than 180 days following the termination of the servicemembers military service or release from military service

At the recent shareholder's meeting, a director and a teller were appointed proxies. Are these persons legally permitted to serve as proxies? A) No, only the director can serve as proxy B) Yes, both may be proxies C) No, only the teller can serve as proxy D) Neither can be proxies

A) No, only the director can serve as proxy 12 CFR 7.2002 states " SH may vote by proxies duly authorized in writing. However, - Officers, clerks, teller or bookkeepers of the bank cannot act as proxy. - Directors and attorneys may be designed to act as a proxy. However, a national bank director cannot vote by proxy. - If a shareholder's liability (loan) is past due and unpaid, the SH cannot be allowed to vote

Delta, gamma, vega or kappa, theta and rho are the primary measures of: A) Options risk B) Yield curve risk C) Repricing risk D) Basis risk

A) Options risk See page 21 of the PDF of the Comptrollers Risk Management of Financial Derivatives Handbook

Which of the following is true of a standby letter of credit? Choose all that apply A) Represents an obligation of the bank to a third party, contingent upon the failure of the bank's customer, to perform under the terms of the contract B) Drafts will be drawn when the underlying transactions is consummated as intended C) Beneficiary will be paid when the terms of the letter are met and the required documents are submitted to the paying bank D) Drafts will be drawn only when the underlying event fails to occur as intended

A) Represents an obligation of the bank to a third party, contingent upon the failure of the bank's customer, to perform under the terms of the contract D) Drafts will be drawn only when the underlying event fails to occur as intended Answer choices B and C apply to commercial letters of credit. The primary difference between the two is that a standby letter of credit is contingent. It is used when the bank's customer defaults or is nonperforming on the intended contract, similar to a guarantee. See Trade Finance Handbook, pg. 8-11 and Call Report Glossary, pg. A-53 and 54

What types of reviews are not required per 12 CFR 9? A) Review of all accounts, at least annually. B) Review of all fiduciary accounts, at least annually. C) Pre-acceptance review of all new accounts. D) Initial post-acceptance review. E) All of these reviews are required.

A) Review of all accounts, at least annually.

Every director of a national bank must own in his or her own right shares of the capital stock of the bank. How much does he or she need to own? A) The aggregate fair market value of $1,000 B) The aggregate market value of $500 C) The aggregate par value of $500 D) 1000 shares of stock

A) The aggregate fair market value of $1,000 Per 12 CFR 7.205, a qualifying equity interest includes common or preferred stock of the bank or of a company that controls the bank that has not less than an aggregate par value of $1,000, an aggregate shareholders' equity of $1,000, or an aggregate fair market value of $1,000.

Following an internal loan review, a national bank made a significantly large provision to the ALLL two months after filing its Call Report. As a result, the bank's PCA category is now undercapitalized. An OCC examination is due in two months. For PCA, which statement accurately indicates the bank's PCA"notice of capital category" status? A) The bank must notify the OCC of the reduction in its capital position within 15 days after the provision was made. B) The bank must notify the OCC of the reduction in its capital position within 30 days after the provision was made. C) The bank waits for notification from the OCC during its upcoming examination D) The bank meets its requirements by accurately filing its next Call Report, indicating the reduction in capital.

A) The bank must notify the OCC of the reduction in its capital position within 15 days after the provision was made. 12 CFR 6.3(c)(1).

Anytown National Bank provides safe deposit services to its customers. What is the bank expected to do to protect a customer's property? A) The bank must provide the same care that would be taken by a reasonably prudent and careful person engaged in the same business B) The bank must provide a place that is secure from theft, flood, and other natural disasters C) The bank must provide a dual locking box where the customer has a key and the bank maintains a second key and both are required for entry D) The safe deposit boxes must be located in a secure area with restricted access for bank personnel not associated with this function.

A) The bank must provide the same care that would be taken by a reasonably prudent and careful person engaged in the same business Consigned Items Handbook June 1996

According to OCC Bulletin 2000-20, the term "reage" means returning a delinquent, open end account to current status without collecting the total amount of principal, interest, and fees that were contractually due? A) True B) False

A) True

Independent trust banks must pay the general assessment fee as well as an independent trust bank assessment fee A) True B) False

A) True

A director of a national bank must be a U.S. citizen? A) True B) False

A) True NB director: (12 USC 72) - Be a US Citizen - Majority of directors reside in state, territory, or district as main branch, or 100 miles for at least one year preceding their election, and 100 miles of location during continuance in office - Must own, in his or her own right, stock with price of not less than $1,000 or an equivalent interest in a company which has control of the bank (12 CFR 7.2005) If capital does not exceed $25,000, only have to own $500 in stock - If they don't meet requirements, must vacate their place

Independent trust banks must pay the General Assessment fee as well as an additional Independent Trust Bank Assessment fee. A) True B) False

A) True The law that pertains to fees is 12 CFR 8, "Assessment of Fees". Every year the OCC posts the assessment fees that are applied to each bank. https://www.occ.treas.gov/topics/examinations/assessments-and-fees/fees-notice.html

Can a director serve as a member of the Trust Audit and Trust Committees? A) Yes, as long as a majority of the audit committee doesn't have conflicting duties B) No C) Yes, always D) Yes, with OCC approval E) Yes, if the bank has less than $100MM in trust assets F) Yes, if the bank has less than $500MM in trust assets

A) Yes, as long as a majority of the audit committee doesn't have conflicting duties 12 CFR 9.9(c)

An examiner reviews an appraisal for $1,350M on an office building at ABC National Bank. The appraisal was not prepared for ABC, but for another national bank nearby. In addition, the appraiser is not on ABC's approved list. Can the bank use this appraisal? A) Yes, if it documents that the appraisal was acceptable B) Yes, because the other bank is a national bank C) No, the appraiser must be on the bank's approved list D) No, the bank must order a new appraisal

A) Yes, if it documents that the appraisal was acceptable Refer to 12 CFR 34.45(b)(2)(i) and (ii) - This is ok as long as the appraisal is received directly from the other financial institution and the bank documents that the appraisal conforms to the appraisal standards and the banks standards

ABC bank has a small investment portfolio that consists entirely of US Treasury Securities. To boost earnings, management decides to divest half of these holdings and reinvest in FNMA MBS issues. What impact will this have on risk based capital? A) no impact. B) will increase. C) will decrease.

A) no impact. If you are reading the question quickly, you could easily get the incorrect answer. Changing from US Treasuries (which have a 0% risk weight) to FNMA MBS (which have a 20% risk weight) will have an impact on risk-weighted assets, but will not affect risk based capital (assuming no AOCI ramifications). So in the above case; RBC doesn't change, RWA increase, and risk-based capital ratios would decrease (assuming everything else is held constant)

Which three supervisory actions can the OCC subject a bank to that is undercapitalized per Prompt Corrective Action (PCA) regulations? (Choose all that apply) A) restrict the growth of the bank's assets B) require the submission of a capital restoration plan C) restrict payments on the bank's subordinated debt D) restrict payments of capital distributions and management fees

A) restrict the growth of the bank's assets B) require the submission of a capital restoration plan D) restrict payments of capital distributions and management fees Refer to 12 CFR 6 for all actions that can be taken as banks become less than well capitalized. Each different category the bank falls into allows regulators to take different and more restrictive types of actions.

Is an appraisal, evaluation, or neither required for the following situation: (Use new appraisal standards) A $900M construction loan to build a medical office building. The loan is to a limited partnership that is comprised of three doctors. The building is the only asset of the limited partnership. The offices of the three doctors will comprise 45% of the building, with the remaining being leased to non-related medical practitioners. The expectation is that the doctors would each lease space from the partnership. Latest financial statements on the doctors' practices indicate that the practices could service the debt if necessary.

Appraisal. Dependent on rental income >50% and less than $1MM to a limited partnership (permanent financing). If it was not to a limited a appraisal would not be required. (12 CFR (a)(5)(i) and (ii) - I can not find any reference to the >50% rule in the reg, but there is some reference in the commercial real estate handbook. Our office has generally taken the approach that "dependent on sale or income" to mean >50% and that was also reinforced in LPM school.

XYZ Bank's Gap report showed: Rate sensitive 30-day 60 day 90 day 180 day 360 day Assets $15MM $4MM $7MM $8MM $5MM Cumulative 15MM 19MM 26MM 34MM 39MM Rate sensitive 30-day 60 day 90 day 180 day 360 day Liabilities $12MM $8MM $17MM $12MM $6MM Cumulative 12MM 20MM 37MM 49MM 55MM Using the information provided above, what is bank's cumulative gap ratio at the 90 day interval? A) 0.41 B) 0.70 C) 1.42 D) 1.52

B) 0.70 Assets (26) / Liabilities (37)

The allowable amount of the ALLL for inclusion in Tier 2 Capital is limited to ____% of risk weighted assets? A) 1.00% B) 1.25% C) 1.50% D) 1.75% E) no limit

B) 1.25% You can find this rule in both the call report instructions and 12 CFR 3.20(C)(3)

The aggregate amount of covered transactions with an affiliate is limited to ____% of member bank capital. A) 5% B) 10% C) 15% D) 25%

B) 10% Just make sure you are being careful with these questions. Is it asking about the covered transaction with one affiliate or all affiliates because the percentage is different for each.

XYZ Bank would like to make a loan to its President for 75M so he can open a restaurant for his wife to run. The President also wants to borrow 225K to buy a new house to live in. The bank's capital is 10MM. What is the maximum they can lend to the President based on this request? A) 75M B) 100M C) 250M D) This is blatant fraud and the OCC should file a SAR. E) Lending limit of 150M

B) 100M These were the answers available so you had to pick the best one. The bank could make the $75M loan and the $225M for a house to live in. Primary residence is one of the exceptions in Regulation O. See 12 CFR 215.5 for additional restrictions of executive officers as well as the exceptions available to them.

A closed-end loan on a 1-4 family residential home should be charged off when the loan is ______ days past due. A) 90 B) 120 C) 150 D) 180

B) 120 This rule has always been counterintuitive to me. A close-end loan needs to be charged off or charged down to the collateral value minus cost to sell at 120 days, but open end lines like a HELOC or credit card is at 180 days. These are all outlined in the retail credit classification guidance detailed in OCC Bulletin 2000-20

First National Bank purchased a $1,000,000 state tax-exempt municipal bond with a yield of 4.5%. What is the tax equivalent yield if the bank's state marginal tax rate is 8%? A) 2.5% B) 4.89% C) 5.62% D) 4.17%

B) 4.89% The pretax yield that a taxable bond needs to possess for its yield to be equal to that of a tax-free municipal bond. This calculation can be used to fairly compare the yield of a tax-free bond to that of a taxable bond in order to see which bond has a higher applicable yield. Tax Equivalent Yield = Tax Free Municipal Bond Yield / (1-Tax Rate) [.045] / [1-.08] = 0.0489

In the event a bank is undercapitalized, how many days does the bank have to file a written capital restoration plan? A) 30 days B) 45 days C) 60 days D) 90 days

B) 45 days Refer to 12 CFR 6.5(a)

A national bank must control what percentage of a subsidiary for it to be considered an operating subsidiary? A) 26% B) 51% C) 81% D) 100%

B) 51% 12 CFR 5.34 deals with operating subsidiaries. Also some other information you should know is an affiliate is if a company owns or controls atleast 25% of the bank, operating subsidiary is when a bank owns more than 50% of the subsidiaries voting stock, and a sister bank is a bank that owns or controls 80% of the voting shares of a member bank.

The supervisory LTV limit on raw land is ________. A) 60% B) 65% C) 70% D) 75%

B) 65% 12 CFR 34 "Appendix A to Supart D" Remember, if they go over the limits, our expectation is that management track and report these exceptions to the board, at least quarterly. Since it is an appendix to the law, it is NOT a violation of law.

John Smith passes away, and under the terms of his will, a trust is established for his grandchildren. What type of trust is this? A) A living trust. B) A testamentary trust C) A guardianship D) A spendthrift trust E) None of the above

B) A testamentary trust You can find the different types of trusts as well as examples in the trust handbook. There weren't many questions on trust on the test, so just having a general understanding of trust is probably appropriate.

National banks are required to develop and implement a security program that equals or exceeds the standards prescribed in 12 CFR 21 - Subpart A, Minimum Security Devices and Procedures. One of the minimum security devices is a vault. What are three other security devices all national banks must have at the main office and every branch? A) Bait money B) An alarm system C) Appropriate security on all computers that have PII or access to the bank network D) Tamper resistant locks E) A lighting system if the vault is visible outside the banking office

B) An alarm system D) Tamper resistant locks E) A lighting system if the vault is visible outside the banking office See 12 CFR 21.3(b) 1-5

Define Subsidiary: A) Reporting of assets and liabilities on a net basis in the balance sheet. B) An organization owned entirely, or only part, by a bank. C) An existing condition, situation, or set of circumstances that involves uncertainty as to possible loss that will be resolved when one or more future events occur or fail to occur. D) A bank that owns another organization.

B) An organization owned entirely, or only part, by a bank. There are several different types of subsidiaries; financial, operating, and statutory. Just by the definition, most subsidiaries are also affiliates. This is important to know when you start reviewing Reg W and making determinations for restricted transactions between the bank and its affiliates. There are special rules when a bank owns or controls ≥ 80% of the company or bank (sister bank). The OCC has a "related organizations" handbook available. You can also review 23 CFR 5 and 12 CFR 223 for more details. I had a handful of questions related to affiliates and subsidiaries on my UCE MC test so you should know the rules.

In constructing a cash flow statement, which of the following is not considered an outflow of cash? A) Increase in Asset(s) B) Decrease in Asset(s) C) Decrease in Liabilities D) Decrease in Equity E) None of the above

B) Decrease in Asset(s) A decrease in assets would cause an in flow of cash. An example would be the sale of a fixed asset.

A national bank has municipal general obligation bonds in its investment portfolio of the city of Anytown, USA. Your review discloses that these bonds are in default and the market for these issues remains unstable. Which of the following classifications is appropriate? A) Book value of the securities classified as substandard assets of the bank. B) Fair value is substandard, and impairment {i.e. depreciation] is classified loss. C) Market value of the securities classified as doubtful. D) Book value in excess of market value will be classified as loss, and the remainder classified as doubtful. E) Book value of the securities listed as loss.

B) Fair value is substandard, and impairment {i.e. depreciation] is classified loss. See OCC 2013-28. When you have a defaulted security, the depreciation is other than temporary and should be charged off against earnings. We revised the guidance to make sure it was consistent with GAAP (FAS 115).

A director of a FSA must be a U.S. citizen? A) True B) False

B) False

12 CFR 371 prohibits banks from selling classified loans to an affiliate bank. A) True B) False

B) False 12 CFR 371 does not prohibit the bank from selling problem assets to affiliates, but the law does prohibit the affiliate from selling problem loans to the bank.

A vacancy on the bank's board shall be filled by appointment by the bank's president and that director so appointed will hold that director position until the next election. A) True B) False

B) False Appointed by the remaining directors - 12 USC 74.

What investments are reported in RC-B of the call report? A) Federal Home Loan Bank B) Fannie Mae Mortgage Backed Securities C) Federal Reserve Stock D) All of above

B) Fannie Mae Mortgage Backed Securities The other two are reported as other assets, see call report instructions

How many people does the law require to form a bank? A) Two as long as they have the means to raise capital B) Five people is the minimum number to form a bank C) No more than 10 people may be involved in forming a bank D) There is no established minimum number of people to form a bank

B) Five people is the minimum number to form a bank 12 USC 21

Which statement is correct: (Choose all that apply) A) MOU, Formal Agreement and civil money penalties are formal administrative actions B) Formal enforcement actions are public C) Board Resolution, Commitment Letter and Capital Directive are informal administrative actions D) Formal Agreement and Cease and Desist Orders are enforceable in federal court E) A and B are correct

B) Formal enforcement actions are public Formal enforcement actions are published monthly by the OCC. An MOU is an informal action. Capital Directive is a formal action. Formal Agreement is not enforceable in federal court. OCC may assess CMPs for noncompliance with a formal agreement. Refer to An Examiner's Guide to Problem Banks, pages 28-32.

Which of the following would cause a decline in interest income? I. An increase in the level of nonaccrual loans II. Failure by management to adequately price loans III. Large loan growth IV. Depreciation in the investment portfolio A) II only B) I and II only C) II and IV only D) I, III, and IV only

B) I and II only An increase in the level of nonaccrual loans - This will result in non-earning assets Failure by management to adequately price loans - Failure to price loans appropriately will cause for lower income Large loan growth - Not applicable; if priced right this could increase interest income Depreciation in the investment portfolio - Not applicable

John is a U.S. citizen who volunteers for duty in the Canadian Air Force in their (hypothetical) war against Greenland. Canada is an ally of the U.S. Which of the following is true? A) John is not eligible for protection under the SCRA because he is not in military service for one of the armed forces of the U.S. B) John is eligible for protection under the SCRA, because Canada is an ally of the U.S. C) John is eligible for protection under the SCRA only if the President specifically designates him as eligible D) John is eligible for protection under the SCRA, because he is in military service and it makes no difference which country is the focus of his military service (i.e. does not matter if the country he is helping is an ally or not)

B) John is eligible for protection under the SCRA, because Canada is an ally of the U.S.

Which of the following would cause a bank's net interest margin to decline? A) Asset sensitive and rates are rising B) Liability sensitive and rates are rising C) Asset sensitive and rates are steady D) Liability sensitive and rates are declining

B) Liability sensitive and rates are rising If rate sensitive assets/rate sensitive liabilies is >1 the bankis asset sensitive and will benefit in a rising rate enviornment because the asset side of the balance sheet will repice faster than the cost of funds (liabilities). And of course the reverse is true.

The term "evergreen loan" refers to: A) A loan to a Christmas tree farmer B) Loans which receive no principal reduction C) A loan to a wholesale nursery D) A loan which is past due for interest

B) Loans which receive no principal reduction You can find the term evergreen in our CRE handbook. This can also apply to loans that have only had very little paydown over a long period of time. We also start to look at this when a revolving LOC has been maxed out for several years and the bank continues to renew the loan with interest only. These loans can also be considered evergreen.

A national bank must control what percentage of a subsidiary for it to be considered an operating subsidiary? (please note the answer changes) A) More than 25% B) More than 50% C) More than 80% D) 100%

B) More than 50% An operating subsidiary is a corporation, LLC, or similar entity that engages in activities that are part of, or incidental to, the business of banking as determined by the OCC or other statutory authority. The bank must either (1) own more than 50 percent of the voting or similar type of controlling interest, or (2) otherwise control the subsidiary when no party controls more than 50 percent (or a percentage greater than the bank's interest) of the voting or similar type of controlling interest. Operating subsidiaries are governed by 12 CFR 5.34. FSAs are governed by 12 CFR 5.38

Director Smith is wealthy and has many deposits with the bank. In reviewing the report of $100,000 + CD's you notice his rate is consistently 75 basis points higher than any others on the list. Is this a violation of Regulation O? A) Yes B) No

B) No However, it is a violation of 12 USCC 376, which does address insider deposits. Section 376 prohibits the payment of preferential interest on deposits to any director, officer, attorney, or employee of the bank.

A bank makes a loan on March 31st that is within its LLL. On June 30th, the bank's capital decreases, and as result, the loan is now above the recalculated LLL. Is this a legal lending limit violation? A) Yes B) No

B) No Loan is considered a non-conforming loan (12 CFR 32.6). Also, per 12 CFR 32.6(b) the bank must use reasonable efforts to bring the loan or extension of credit that is nonconforming into conformity with the bank's or savings association's lending limit unless to do so would be inconsistent with safe and sound banking practices. You should also be aware of the non-qualifying commitment LLL rule. In this instance the bank has committed to a loan that would be over the LLL, but the borrower has not drawn the loan above the LLL; this is not a VOL, unless it is a Reg O office, then it would be considered a VOL.

A bank has a lending relationship with a borrower. Total outstanding equals $2,000M. The bank's LLL is $2,500M. The board approves a $1,000M commercial construction mortgage to the borrower. To date only $250M has been funded. Does the relationship constitute a LLL violations? A) Yes B) No

B) No This is not considered a violation of law, it is considered a non-qualified commitment to lend - refer to 12 CFR 32.2(t). **NOTE - If this loan was made to an insider it would be considered a violation of law because for the LLL purposes, all loans to insiders are considered fully funded at origination (refer to appendix to 12 CFR 32 to find this rule). If this loan was to an insider it would be a VOL under 12 CFR 215.2(i), not 12 CFR 32

What is net non-core funding dependence ratio? (commonly missed question on the online quiz) A) Non core liabilities - long term investments / long term assets B) Non core liabilities - short term investments/ long term assets C) Non-core liabilities/ long term assets D) None of the above are right

B) Non core liabilities - short term investments/ long term assets Best place to find this info is the UBPR User Guide - This provides calculations to several of the UBPR ratios. Because this is also a CANARY ratio you can find it in PPM 5000-34 pg 22.

Which of the following would generally result in placing ALL loans to a particular borrower on nonaccrual? A) They are all classified B) The PSOR is the same for all loans C) They are all guaranteed by the same person D) Bankruptcy

B) The PSOR is the same for all loans For this question you have to assume the secondary source of repayment is the same since no other information was provided. Also keep in mind the question says generally, not always. A is wrong because not all classified loans must be on non-accrual. The well-defined weakness identified in a classified loan does not always mean full payment of P&I on contractual terms is in doubt. C is wrong because the guarantor is normally the secondary or tertiary source of repayment, all repayment sources should be considered before placing a loan on non-accrual. As for D, bankruptcy by itself, is not a valid reason to put a loan on non-accrual, but with all other factors could provide a strong case.

A bank has a loan to a business secured by accounts receivable and inventory. The business is defunct and management cannot locate the borrower or the collateral. The loan is now 150 days past due. Which statement is true? A) The loan is doubtful until the bank can establish the value of the accounts receivable and inventory. B) The loan is a loss and should be charged off. C) The loan should be rated substandard until the borrower is found. D) The loan should be placed on non-accrual.

B) The loan is a loss and should be charged off. In this case, the loan is unsecured since they can not locate the collateral or the borrower. Additionally, the company is out of business and the loan is 150 days past due. Clear cut loss here.

What is a day count fraction? A) The number of days from the trade date to the settlement date, divided by the number of days in the year B) The number of days from the last interest payment date to the settlement date, divided by the number of days in the interest period C) The number of days from the settlement date to the next interest payment date, divided by the number of days in the interest period D) The number of days left remaining until maturity divided by the number of days since the issue date

B) The number of days from the last interest payment date to the settlement date, divided by the number of days in the interest period

In reviewing a commercial real estate loan file, you see the leases on office space is a "net lease" or "net, net net". This means: A) The lessor will pay all expenses such as maintenance, insurance and taxes B) The tenant will pay all expenses such as maintenance, insurance and taxes C) The tenant pays rent directly to the bank D) The tenant must deposit 3 months rent in advance

B) The tenant will pay all expenses such as maintenance, insurance and taxes Refer to real estate lending handbook

A national bank has the following capital ratios: Tier One Risk Based 7%; Total Risk Based 11% and Leverage 5%. The correct PCA category is: A) well capitalize B) adequately capitalized - per current standards C) under capitalized D) severely under capitalized

B) adequately capitalized - per current standards The total risk based capital ratio and leverage ratios fall within the well-capitalized bucket, but the tier-1 risk based capital ratio falls within the adequately capitalized bucket. There were several of these types of questions on my UCE MC test.

An effective interest rate risk model validation process must address which components? A) information input, processing, and recovery B) information input, processing, and reporting C) information reporting, recovery, and simulation D) information processing, reporting, and duration

B) information input, processing, and reporting This questions is missed about 50% percent of the time on the online quizes. There was a question very similar to this on the UCE test, so make sure you know it.

OCC Bulletin 2000-20 Classification

Basic: - Open- and (non RE secured) closed-end loans PD 90 days or more Substandard - Closed-end loans (non RE secured) PD 120 days or more Loss - Open-end loans PD 180 days or more Loss Closed-end 1-4 Family: - 1st Lien If LTV is < 60% and 90 days PD Pass - 1st Lien If LTV > 60% and 90 days or more PD Substandard - 2nd Lien (only) If 90 days or more PD, regardless of LTV Substandard - 1st Lien If 180 days or more PD, regardless of LTV Assess value and C/O shortfall Installment Loans: - If 90 days or more PD Substandard - If 120 days or more PD Loss Credit Cards and Open-End Credits (HELOCs): - If 90 days or more PD Substandard - If 180 days or more PD Loss In lieu of charging off the entire loan balance, loans with non-real estate collateral may be written down to the value of the collateral, less cost to sell, if repossession of collateral is assured and in process. Bankruptcy filed- LOSS w/in 60days written notification Fraudulent loans- LOSS w/in 90days discovery Death- LOSS immediately Re-aging: 1x in 12mos, 2x in 5yrs Account open 9months Bank substantiate ability and willingness to repay 3-full payments prior

First National Bank holds several securities based on "reliable estimates." The balance sheet reported $456 million in total assets, $50.5 million in capital, and $188 million in the investment portfolio. How much can the institution invest in this type of security? A) No limit - just prudent judgement B) $5.05 million or 10 percent of capital C) $2.53 million or 5 percent of capital D) $5.6 million or 5 percent of the investment portfolio E) The bank cannot invest any amount of its capital in securities based on reliable estimates

C) $2.53 million or 5 percent of capital The limitation is 5 percent of capital for securities held based on "reliable estimates." See 12 CFR 1.3(i)

On a 9/30/XX UBPR, Net income is reported as $1,635M; dividends declared are $442M; total assets are $194,909M; and average assets are $177,727M. The ROAA is: A) 0.83 B) 0.90 C) 1.23 D) 0.92

C) 1.23 ($1635/3)*4 = $2,180 <Do this step to annualize earnings (CAN NOT FORGET THIS STEP) $2,180/177,727 = 1.23

Which of the following is not an appropriate risk-weighting for risk-weighted asset? A) 0% B) 20% C) 50% D) 75%

D) 75% The risk-weights used on schedule RC-R include 0%, 20%, 50%, and 100%. See Call Report instructions

What would be contained in a CPA engagement letter? I. Qualifications of the CPA firm II. Reports to be generated by the firm. III. Period of time to be covered by the audit. IV. Scope of activities to be reviewed. A) II and III only B) I, II, and III only C) I, III, and IV only D) II, III, and IV only

D) II, III, and IV only The qualifications would have been covered during the due diligence process prior to hiring the firm.

A bank's balance sheet contains the following information: Net Loans $17,000M ALLL $200M Capital $1,900M Surplus $1,900M AOCI $ -700M Preferred Stock $300M Retained earnings ($300M) TYD earnings $60M net The bank has opted out of the AOCI computation. What is the bank's general Legal Lending Limit? A) $645M B) $600M C) $564M D) $555M E) $609M

E) $609M ($200 + $1900 + 1900 +$300 -$300 + $60) X .15 = $609 I added preferred stock and AOCI to this question to add a little more complexity. Since the bank opted out, AOCI is deducted from Tier 1, but is added back. The preferred stock is not included in tier 1, but can be included in tier 2. If it was non-cumulative perpetual preferred stock it would be included in tier 1. Either way, preferred stock is included in tier 2 and should be included in the calculation.

In regards to transactions with affiliates, which of the following would not be considered a "low-quality" asset? A) A loan that is nonaccrual B) A loan that is more than 30 days past due C) A pass loan whose terms have been renegotiated due to financial deterioration D) A loan classified as substandard E) All of the above are "low-quality" assets

E) All of the above are "low-quality" assets Banks may not purchase a low-quality asset from affiliates unless the bank committed to purchase the asset, pursuant to an independent credit evaluation, before the time the asset was acquired by the affiliate. See 12 CFR 223.3(v).

Which 2 of the following are not enforceable in a federal court? A) Cease and Desist order B) Formal Agreement C) Memorandum of Understanding D) Both A & B E) Both B & C

E) Both B & C Refer to PPM 5310-3 "Enforcement Action Policy"

Is an appraisal, evaluation, or neither required for the following situation: (Use new appraisal standards) A $900M construction loan to build a medical office building. The loan is to a limited partnership that is comprised of three doctors. The building is the only asset of the limited partnership. The offices of the three doctors will comprise 55% of the building, with the remaining being leased to non-related medical practitioners. The expectation is that the doctors would each lease space from the partnership. Latest financial statements on the doctors' practices indicate that the practices could service the debt if necessary.

Evaluation. This is a business loan under $1 million and rental income is less than 50%.

True or False? For legal lending limit purposes, substantial financial interdependence exists between borrowers when at least 25 percent or more of a borrower's gross receipts and 50 percent of more of expenses are derived from transactions with the other borrower?

False This is one test of the Common Enterprise methodology for the LLL to determine if loans should be aggregated. Substantial financial interdependence exists when 50 percent or more of gross receipts OR gross expenditures are derived from the other borrower. These thresholds also include any intercompany loans, dividends or capital contributions. Another test for a common enterprise is common control. See 12 CFR 32.5(c)

National NB has a legal lending limit of $1,000,000. The bank had a $950,000 loan to Billy Builder to build an apartment complex. The loan is secured by the apartment complex. The apartment complex has been constructed but remains vacant and Billy fell behind in paying the property taxes, insurance and utilities. The bank advanced $200,000 to pay the delinquent taxes, insurance and utilities. Is there a legal lending violation? If not, why not?

The $200,000 advance is NOT as violation as long as the advance was necessary to preserve the value of the apartment complex; protected the bank's interest in the apartment complex; and was consistent with safe and sound banking practices. 12 CFR 32.2(q)(2)(i) specifically states that payment of property taxes, insurance and utilities are not considered extensions of credit for LLL purposes if the advance meets the requirements stated earlier in this paragraph.

Can cumulative preferred stock and relates surplus or trust preferred securities be included in tier 1?

The answer here is that it depends. You can find the answer in 12 CFR 3. Non-Qualifying Capital Instruments and Tier 1 Capital: The proposal would have required trust preferred securities (TruPS) and cumulative perpetual preferred stock to be phased out of tier 1 capital. The new rule exempts depository institution holding companies with less than $15 billion in total consolidated assets as of December 31, 2009, or organized in mutual form as of May 19, 2010, from this requirement. Capital instruments that were issued prior to May 19, 2010, by these institutions and that are currently in tier 1 capital, including TruPS and cumulative perpetual preferred stock, are grandfathered in tier 1 capital, subject to limits. More specifically, consistent with the current requirements, these instruments are limited to 25 percent of tier 1 capital elements, excluding any non-qualifying capital instruments and after all regulatory capital deductions and adjustments have been applied to tier 1 capital.