ALLL Applications Asset Quality Flashcards
ALLL
Provides for estimated credit losses. Must maintain an appropriate ALLL and reasonable, documented methodology.
How often should the ALLL be evaluated?
At least quarterly
In evaluating adequacy of ALLL, assess
- classifications, 2. level of volume/trend 3. underwriting practices 4. reasonable of mgmts ALLL methodology
Provision for ALLL is listed on the _____ as an _____
income statement as an expense
ASC Topic 310 (FAS 114)
Accounting for individual impaired loans
Three measurement standards for impairment
1) PV of expected future CF, discounted at effective interest rate. 2) Loan’s observable market price. 3) FV of collateral, if loan is collateral dependent.
ASC Topic 450-20 (FAS 5)
Accounting for contingencies, quantitative and qualitative factors
All federally insured depository institutions must maintain an ALLL, except for federally insured branches and agencies of foreign banks.
TRUE
SR 11-7
Guidance on ALLL methodology
Under no circumstances can loan or lease losses be charged directly to ‘‘retained earnings’’ and capital.
TRUE
Increase ALLL
Debit Provision for Loan Losses (expense acct) Credit ALLL (contra-asset acct)
Charge-off loan loss
Debit ALLL Credit Loans (note that P&L is not impacted)
Future Recovery on a previously charged-off loan
Debit Cash Credit ALLL
Applications processed by the FRB
- membership 2. acquisition of a bank by a BHC 3. acquisition of a non-bank subsidiary 4. commencement of non-bank activities
When assessing new branch applications, the FRB considers the financial condition of…
financial condition and mgmt, capital adequacy, convenience and needs of community, and compliance with 24A (investment in bank premises)
A company holding at least 25% of a bank’s stock automatically classifies the company as
a BHC
Charters
State (FRB (state member bank) FDIC (state non-member)) National = OCC
Reg Y
BHC and change of control
Reg H
State member bank membership, investment limitations, governs branching
Section 3(a)(1) application
filed with FRB to acquire control of a bank or BHC. Directly or indirectly owning controlling, or having power to vote 25% or more of any class of voting security
Section 3(a)(3) application
Application filed to directly or indirectly aquire control more than 5% of any class of bank or BHC voting shares. Continue to file until it owns more than 50% of bank or BHC
Section 3(a)(5)
application filed when two or more BHC merge or consolidate.
Section 4c(8)
filed to engage in nonbanking activities
Non-banking activities
institutions must receive prior approval; unless, BHC is well capitalized, well managed, activites are closely related to banking. If so, BHC may submit written notification within 10 days of commencing activity.
To qualify as a FHC, all depository insititutions
well managed, well capitalized, receive a CRA rating of satisfactory or better, and must submit written declaration
BHC Stock Redemptions
Provide prior notice to repurchase shares if gross consideration for purchase plus the net consideration paid in during the preceeding 12 months equals 10% or more of consolidated net worth. EXEMPT if BHC is well capitalized before and after purchase, well managed and not subject to unresolved supervisory issues
SLHC Applications
H-e1= creation of new SLHC through aquistion of 1 savings association H-e1-S = reorganization into a SLHC structure H-e2 = SLHC indirectly or directly controlling more than 1 savings assoc
SLHC Dividend notice (not Mutual SLCH)
30 days prior to declaring
Supervisory LTVs
Raw land = 65%
Land development, including improved land loans = 75%
Construction:
Commercial, multifamily, and other nonresidential = 80%
One- to four-family residential = 85%
Improved property = 85%
Owner-occupied one to four-family and home equity = None
Asset Classification Categories
Pass, Special Mention Adversely Classified: Substandard, Doubtful, Loss
5 P’s of lending C’s
People - Character (measures borrowers willingness to pay ex financial stmts, paymt history) Payment - Capacity (ex payment source, income/debt service ratio) Prospects - Condition (borrower’s circumstances within the industry) Protection-Collateral (what is pledged as collateral?) Purpose - Capital (how was the money used)
Good measure of future charge-offs
Noncurrent LN&LS / Gross LN&LS ratio varies between 1-4% with 1-2% being normal.
Past Due Loans and Non-Current Loans
Pastdue: 30-89 days delinquent (*INUBPR: past dues are 30 days past due + nonaccruals). Noncurrent: 90 days + past due or non-accrual status. Nonaccrual is a seriously delinquent loans 90 days past due and not in the process of collection.
Substandard Asset
Inadequately protected by the current sound worth and paying capacity of the obligor; must have a well defined weakness; bank will sustain some loss if deficiencies are not corrected
Doubtful Assets
has all weaknesses inherent in a substandard loan with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable
Loss
Assets classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.
Special Mention
Asset has potential weaknesses that deserve mgmts close attention.
Total Classified Asset Ratio
Total Classified Assets / Tier 1 Capital + ALLL
Weighted Classified Asset Ratio
(Substandard 20% + Doubtful 50% + loss 100%) / Tier 1 Capital + ALLL
Assignment of AQ rating using Weighted Classified Asset Ratio
0 - 5% = 1; 5 - 15% = 2; 15 - 30% = 3; 30 - 50% = 4; 50%+ = 5
Changes in asset quality will most directly affect which components?
Capital and Earnings.
This is responsible for mitigating the operational risk associated with loan related transactions?
Loan Administration.
Commercial LoC
bank guaranteeing pymt to 3rd party on behalf of customer once conditions are met. Used primarily in international trade. Can be revocable or irrevocable.
Standby LoC
guarantees bank will make pymt to beneficary of customer does not meet contractual obligations. Financial standby LoC = pay if customer defaults Performance standby LoC = pay of customer fails to perform contractual obligation
UBPR pg 7a
Loan portfolio composition
UBPR pg 8
$ amt of delinquent loans by type
TDR
loan restructuring due to customer’s financial difficulties. Loan remains TDR until paid off, sold, or charged-off. Report on Call Rpt quarterly, unless loan in compliance w/modified terms and yields an interest rate comparable to loans of similar risk (dnt report after the year in which restructuring took place)
Uniform Retail Credit Classification and Account Management Policy (Consumer Debt)
Closed-end: Pass_0-89 days; Substandard_90 - 119 days; Loss_120 days Open-end: Pass_0-89 days; Substandard_90 - 179 days; Loss_180 days
The Primary factor when evaluating credit application is
cash flow
Loan concentration occurs when loans =
25% or more of Tier 1 Capital + ALLL
An unused line of credit is an example of
an off balance sheet item = contingent liability
A concentration of assets classified as substandard would result in a weighted classified asset ratio that is______
Lower
Sequence of perfecting a security interest (perfecting means securing a 1st lien)
- search 2. attach 3. perfect 4. search
Continuation of a UCC-1 (financing statement)
File w/in 6 months prior to expiration date, starting with expiration of 1st 5 year period
Termination of UCC-1 (financing statement)
Must be filed by secured party within 30 days after obligation has been extinguished or within 10 days following written demand by debtor
Three methods for perfecting security interest?
Possession, Purchase money security interest in consumer goods, public filing
A full loan write-up is required
If mgmt disagrees with the disposition or the institution will be rated composite 3 or worse
Transactions excluded from Supervisory LTV Limits
Loans guaranteed or insured by the U.S. gov’t or its agencies; Loans backed by the full faith and credit of a state gov’t; Loans guaranteed or insured by a state, municipal, or local gov’t or agency; Loans sold promptly (within 90 days) after origination; Renewed, refinanced, or restructured w/out advancement of new monies; In which a lien on real property is taken through an abundance of caution
FAS 140 ‘‘Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
If a securitization transaction meets FAS 140 sale or servicing criteria, the seller must recognize any gain or loss on the sale of the pool immediately and carry any retained interests in the assets sold (including servicing rights or obligations and interest-only strips) at fair value
SR 99-24
General guidelines for loan write-ups
Non-conforming Loans
Loans in excess to supervisory LTV limits
Components of Sound Lending Policy
ALLL; Collections & Charge-offs; Concentrations of Credit; Consumer Credit Compliance; Credit File Maintainence; Financing ORE; Lending diversification; Geographic limits; Exceptions to Loan Policy; Lending Authority; Loan Pricing; LTV
Loan to Value Limits
65% for raw land, 75% for land development or finished lots, 80% for commercial construction, and 85% for 1 to 4 fam residential construction and improved property. None for Owner occupied 1 to 4 fam.
