FARM test prep Flashcards
Review p 10 of UBPR. Know which ratios pertain to liquidity
net noncore funding dependence core deposits/total deposits brokered deposits/total deposits loans/deposits pledged securities/total securities appreciation/depreciation of investment securities
UBPR p. 10 pledged securities to tot sec
Liquidity- if security is pledged, then not available to provide liquidity. you do not want all your securities to be pledged
UBPR p. 10 net non core fund dep
non core liab less short term investments/ long term assets
the lower or even negative, the better
you want the numerator to be low, because this means that the non-core liabilities such as hot money, or volatile funds are low.
ideally you want the long term assets to be matched with stable long term liabilities such as deposits.
UBPR p..1 Earnings look at ROAA, page 1
ROAA net income/ average assets
Margin analysis - NIM nit income to Avg earning Assets
ROAA
interest income - interest expense= net interest income \+non interest expense -non interest expense -provision=pre tax operating income \+gains/losses on sale of securities = net income
in BHCPR know that page 1-19 is consolidated information
page 20 forward is parent only information
parent company capital BHCPR page 21 = consolidated capital BHCPR page 6
largest asset in BHC balance sheet is investment in subsidiaries
parent net income = consolidated net income
parent net income = dividends received +parent operating income - parent expenses + EUE equity on undistributed income
cash dividends paid by sub, and received by parent + sub income not sent to shareholders multiply by ownership interest in sub = EUE
parent owns 85% of the bank sub
parent
1000 dividend received
3400 EUE
Bank 5000 net income (1000) dividend paid =4000 net income * 85% interest in sub =3400 EUE flow to parent
EUE equity in undistributed earnings
amount of income from subsidiary not sent to shareholders as dividends times (*) ownership interest in the subsidiary.
BHCPR look at p. 22 under coverage analysis to review cash flow ratio for parent only
cash flow match ratio
numerator: cash flow from operations+noncash items+noncash items + operating expense /
denominator: operating expense + dividends
BHCPR look at p. 22 under coverage analysis to review cash ratios for parent only
BHC fees and other income ratio
if over 100% than the parent may be over charging the subs. the parent should only collect enough management fees to cover their basic overhead
numerator = fees + other income from subsidiaries denominator = salaries + other expenses
impact rating in RFIC/D
need to know how to assess whether there will be negative impact based on risk management factors and financial factors
likelihood of negative impact on the depository institution
Impact financial factors
non depository: capital distribution, intra group exposure, CAEL ratings approach
parent company: leverage, cash flow, liquidity
assess whether the parent company’s leverage is minimal, moderate or high
leverage is the use of debt to supplement equity, similar to using a credit car
advantage of leverage
raise funds quickly
shifts financial risk from stockholder to lenders
improves the parent’s liquidity
interest is deductible
does not dilute existing shareholders/ improves ROE
less expensive
disadvantages of leverage
high debt levels place burden on subsidiaries
high debt levels may prevent new investment opportunities for parent
lenders may pose restrictive covenants
Leverage ratios
double leverage could put added stress in the sub
debt / equity
debt / tangible equity. this ratio is more realistic
double leverage ratio - parent takes on debt and pushes down to the bank
double leverage payback ratio - number of years to pay back to bring to zero. negative means that there is no double leverage
leverage large BHC > 150MM
high >30%
moderate 10-30%
minimal <10%
remember that large BHC is bigger so even 30% is also bigger in dollar value
leverage small BHC <150MM
high >100
moderate 30-100
minimal < 30
100% of a small figure is still small,
leverage key point
a holding company’s ability to service its debt in a timely manner is more important
than the actual amount of the debt.
debt to tangible equity ratio
computed for holding companies that have a significant level of intangible assets, such as goodwill. This ratio measures the amount of debt against the company’s tangible equity. It is calculated by dividing total debt by equity, less intangibles.
non bank CAELS
what impact would they have on the bank
Financial condition Big F
consolidated financial strength including the depository institution, parent and nonbank subsidiaries
intra group exposure
can potentially negatively expose the financial condition of bank
Checking accounts at the bank – must be handled appropriately
Loan repayments. Sub is receiving funding from parent to fund their loans to external customer
Loans between affiliates – lines of credit
Big R BOPMI
know what is in each category
board oversight
policy procedure limits
mis
internal controls
internal controls
audit
segregation of duties
fixed charge coverage ratio (FCCR)
not in BHCPR - need to include in your write up
board and senior management oversight
stable team, conservative philosophy understanding of the risk profile adjust risk management appropriately policies, limits and tracking reports are appropriate, understood and reviewed effective supervision of staff
policies procedures and limits
cover all major business areas
thorough and up to date
consistent with institution’s goals
any deficiencies or gaps are minor in nature
MIS
cover major risk risk and business areas
valid assumptions that are periodically tested
distributed to appropriate decision makers
accurate and timely
internal controls
control functions independent from business lines
appropriate segregation of duties
accuracy of recordkeeping practices and reporting systems
board or its audit committee reviews the effectiveness of internal audits
Is it okay not to have internal audit – small under 500MM
must be low risk, and don’t need that internal control to mitigate that risk
Total classification ratio
total classified assets / tier 1 capital +ALLL
weighted classification ratio
substandard 20% + doubtful 50% + loss 100% / tier 1 capital + ALLL
Loan loss reserve – ASC310 and ASC 450
310- individual loans- evaluate then measure for impairment
If impaired – additional provision is not always needed if the collateral value exceeds the unpaid balance. There may be a prior charge off, or the value of the collateral is high
450 – if not impaired in 310, then 310 individual loan is included in the 450 pool
current assets/ current liabilities is current ratio
need to be able to calculate when given a chart
0-30 days
31-90 days
91-365 days
attempt to maintain a current ratio >100% or 1:1. if current assets are less than current liabilities this indicates that there will not be enough available to cover liabilities coming due
Concentrations Credit CRE- commercial real estate 1-4 family Investment securities Liabilities Can be bad. Okay to have concentrations, but you will need risk management practices. must be able to measure, monitor, control
Denominator is Tier 1 capital (exclude ALLL). NOT total equity capital
In evaluating concentrations, an examiner needs to be aware of the potential risk posed by nondepositories on
the depositories through concentrations that represent a material amount of capital, generally 25%.
Risk concentrations can take many forms, including exposures to one or more counterparties or related entities,
industry sectors, and geographic regions. For risk concentrations, the holding company supervisor is uniquely
positioned to understand the combinations of exposures within an organization as well as across all legal entities. This understanding is critical at the group level – risk concentrations that are prudent on a legal entity basis may aggregate to an unsafe level for the consolidated organization.
SR 95-51
MC ROLL
market credit reputation operation liquidity legal
GAP Schedule - measure sensitivity
not good if you are only doing this. does not take into account optionality and only short term
EVE - takes into account long term
measure sensitivity
assets duration 4.5 yrs liability duration 3.3 years equity duration 1.2 years if rates rise 1% then EVE fall 1% if rates fall%, then EVE rise 1%
if a bank is well capitalized, then does is it automatically rated a 1?
no PCA guidelines have nothing to do with the capital rating
5199b - regarding dividends
current year earnings plus prior years net income less dividends
year net income- dividends pd = r/e
2014 = 4000 - 0
2013 = 3000-2000 = 1000
2012 = -3500 net loss-1250 = (4750)
4750 retain loss + 1000 retain earn = 3750 less 4000 income = 250
review mini income statement
you will need to assess which is a better bank based on ratios
efficiency ratio- how efficient is it running
overhead expense / net interest income + non interest income
benchmark is 60%
if managed well, you want this to be lower
if you are given liquidity information such as ST liab (non core liab) and ST investments
you should be able to calculate the net non core funding dependency ratio
what do you want? long term debt or short term debt?
short term debt comes due earlier and is less favorable for parent liquidity
if you have an institution that is liability sensitive and rates go up, is it bad? yes
what could you do to reduce sensitivity in a liab sen scenario
asset sensitive 100
liab sensitive 300
convert long term securities to short term to increase the balance of 100 to 300. you could sell long term assets and buy short term assets
or reduce the balance of volatile liab. shore up more core deposits
for the risk matrix
market risk is matched with sensitivity
credit risk is matched with asset quality
earnings is not really matched with a specific risk. Earnings is driven by NII, which can be from market, liquidity and credit
if a loan goes bad then it will be changed to non-accrual, thus affect interest income, then affects NIM
define tier 1 capital
common stock + surplus + retained earnings
define tier 2 capital
ALLL up to 1.25% of risk weighted assets (RWA) plus subordinated debt
what is the driver for CAMELS
asset quality. you can’t review earnings in a silo without looking at asset quality
ROAA - takes into account the provision
adjusted ROAA takes into account actual losses. you want to be able to assess whether the provision is being used to over/understate earnings
which bank is “cleaning up” asset quality
the bank that appears to be charging off old subquality loans. the bank that has low non current loans to gross loans and high net loan losses/total loans
non current loans to gross loans - low
net loan losses to total loans - high
the non current balance is low so the delinquent loans have already been written off
bank is charging off so the loss is high
which bank has significant asset quality problems
the usual range of recoveries to prior period losses is 20-35%. lower ratios of 10-15% may indicate a tendancy to delay recognition of losses, or an inability to collect problem loans
recoveries are low, thus a collection problem
also non current loans to gross loan which is high will signal high delinquency
other than capital ratios, the primary factor influencing capital is
asset quality. capital is not rated more than one number above asset quality. asset quality is the most frequent cause of capital depletion and bank insolvency
tier 1 capital
stockholders equity + non cumulative perpetual preferred stock + minority interest in consolidated subsidiaries less goodwill and all other intangible assets
tier 2 capital
ALLL+ perpetual preferred stock + hybrid capital instruments + term subordinated debt
when analyzing earnings, the first ratio an examiner should look at is ROAA
the primary ratio that examiners consider when analyzing the strength of a bank’s net income is ROAA. it is the best indicator of a bank’s level of earnings. The ratio puts earnings into perspective with regard to the assets size of the bank and allows examiners to compare earnings between periods and among similar sized institutions
