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Flashcards in FARM test prep Deck (58):

Review p 10 of UBPR. Know which ratios pertain to liquidity

net noncore funding dependence
core deposits/total deposits
brokered deposits/total 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



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

1000 dividend received
3400 EUE

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


know what is in each category

board oversight
policy procedure limits
internal controls


internal controls

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



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


CRE- commercial real estate
1-4 family
Investment securities
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



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