Earnings Savior

Question 1

What is a profit plan and what does it address?

Answer 1

A profit plan is the overall forecast of the income statement for the period based on management’s decisions, intentions, and their estimation of economic conditions. Should cover a period of 2 years.

• Level & Volatility of interest rates
• Local Economic Conditions
• Funding Strategies
• Asset Mix
• Pricing
• Growth Objectives
• Interest Rate & Maturity Mismatches

Question 2

What are some UFIRS considerations for earnings?

Answer 2

• The level of earnings, including trends and stability
• Ability to provide for adequate capital through retained earnings
• The quality and sources of earnings
• The level of expenses in relation to operations
• The adequacy of budgeting systems, forecasting processes, and management information systems
• Adequacy of provisions to maintain the ALLL
• The earnings exposure to market risk

Question 3

What are extraordinary items?

Answer 3

Items that are both unusual (highly abnormal or clearly unrelated to ordinary and typical activities of the bank) and infrequent (event not reasonably expected to occur in the foreseeable future). The ROA includes extraordinary items and other non-core activities (like gains on the sales of securities).

Question 4

What is the difference between Adjusted ROA and ROA?

Answer 4

Adjusted ROA removes provision expenses and replaces it with charge-offs. If the bank had significant charge-offs, but did not provision accordingly, there would be a large difference between adjusted ROA and ROA.

Question 5

What is a profit plan and what does it address?

Answer 5

A profit plan is the overall forecast of the income statement for the period based on management’s decisions, intentions, and their estimation of economic conditions. Should cover a period of 2 years.

• Level & Volatility of interest rates
• Local Economic Conditions
• Funding Strategies
• Asset Mix
• Pricing
• Growth Objectives
• Interest Rate & Maturity Mismatches

Question 6

What are some UFIRS considerations for earnings?

Answer 6

• The level of earnings, including trends and stability
• Ability to provide for adequate capital through retained earnings
• The quality and sources of earnings
• The level of expenses in relation to operations
• The adequacy of budgeting systems, forecasting processes, and management information systems
• Adequacy of provisions to maintain the ALLL
• The earnings exposure to market risk