FARM test prep

Question 1

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

Answer 1

net noncore funding dependence
core deposits/total deposits
brokered deposits/total deposits
loans/deposits
pledged securities/total securities
appreciation/depreciation of investment securities

Question 2

UBPR p. 10 pledged securities to tot sec

Answer 2

Liquidity- if security is pledged, then not available to provide liquidity. you do not want all your securities to be pledged

Question 3

UBPR p. 10 net non core fund dep

non core liab less short term investments/ long term assets

Answer 3

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.

Question 4

UBPR p..1 Earnings look at ROAA, page 1

Answer 4

ROAA net income/ average assets

Margin analysis - NIM nit income to Avg earning Assets

Question 5

ROAA

Answer 5

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

Question 6

in BHCPR know that page 1-19 is consolidated information

Answer 6

page 20 forward is parent only information

Question 7

parent company capital BHCPR page 21 = consolidated capital BHCPR page 6

Answer 7

largest asset in BHC balance sheet is investment in subsidiaries

Question 8

parent net income = consolidated net income

Answer 8

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

Question 9

parent owns 85% of the bank sub

parent
1000 dividend received
3400 EUE

Answer 9

Bank
5000 net income
(1000) dividend paid
=4000 net income
* 85% interest in sub
=3400 EUE flow to parent

Question 10

EUE equity in undistributed earnings

Answer 10

amount of income from subsidiary not sent to shareholders as dividends times (*) ownership interest in the subsidiary.

Question 11

BHCPR look at p. 22 under coverage analysis to review cash flow ratio for parent only

cash flow match ratio

Answer 11

numerator: cash flow from operations+noncash items+noncash items + operating expense /
denominator: operating expense + dividends

Question 12

BHCPR look at p. 22 under coverage analysis to review cash ratios for parent only

BHC fees and other income ratio

Answer 12

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

Question 13

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

Answer 13

likelihood of negative impact on the depository institution

Question 14

Impact financial factors

Answer 14

non depository: capital distribution, intra group exposure, CAEL ratings approach

parent company: leverage, cash flow, liquidity

Question 15

assess whether the parent company’s leverage is minimal, moderate or high

Answer 15

leverage is the use of debt to supplement equity, similar to using a credit car

Question 16

advantage of leverage

Answer 16

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

Question 17

disadvantages of leverage

Answer 17

high debt levels place burden on subsidiaries
high debt levels may prevent new investment opportunities for parent
lenders may pose restrictive covenants

Question 18

Leverage ratios

double leverage could put added stress in the sub

Answer 18

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

Question 19

leverage large BHC > 150MM

Answer 19

high >30%
moderate 10-30%
minimal <10%

remember that large BHC is bigger so even 30% is also bigger in dollar value

Question 20

leverage small BHC <150MM

Answer 20

high >100
moderate 30-100
minimal < 30

100% of a small figure is still small,

Question 21

leverage key point

Answer 21

a holding company’s ability to service its debt in a timely manner is more important
than the actual amount of the debt.

Question 22

debt to tangible equity ratio

Answer 22

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.

Question 23

non bank CAELS

what impact would they have on the bank

Answer 23

Financial condition Big F

consolidated financial strength including the depository institution, parent and nonbank subsidiaries

Question 24

intra group exposure

Answer 24

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

Question 25

Big R BOPMI | know what is in each category

Answer 25

board oversight policy procedure limits mis internal controls

Question 26

internal controls

Answer 26

audit | segregation of duties

Question 27

fixed charge coverage ratio (FCCR)

Answer 27

not in BHCPR - need to include in your write up

Question 28

board and senior management oversight

Answer 28

``` 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 ```

Question 29

policies procedures and limits

Answer 29

cover all major business areas thorough and up to date consistent with institution's goals any deficiencies or gaps are minor in nature

Question 30

MIS

Answer 30

cover major risk risk and business areas valid assumptions that are periodically tested distributed to appropriate decision makers accurate and timely

Question 31

internal controls

Answer 31

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

Question 32

Is it okay not to have internal audit – small under 500MM

Answer 32

must be low risk, and don’t need that internal control to mitigate that risk

Question 33

Total classification ratio

Answer 33

total classified assets / tier 1 capital +ALLL

Question 34

weighted classification ratio

Answer 34

substandard 20% + doubtful 50% + loss 100% / tier 1 capital + ALLL

Question 35

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

Answer 35

450 – if not impaired in 310, then 310 individual loan is included in the 450 pool

Question 36

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

Answer 36

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

Question 37

``` 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

Answer 37

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.

Question 38

SR 95-51 | MC ROLL

Answer 38

``` market credit reputation operation liquidity legal ```

Question 39

GAP Schedule - measure sensitivity

Answer 39

not good if you are only doing this. does not take into account optionality and only short term

Question 40

EVE - takes into account long term | measure sensitivity

Answer 40

``` 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% ```

Question 41

if a bank is well capitalized, then does is it automatically rated a 1?

Answer 41

no PCA guidelines have nothing to do with the capital rating

Question 42

5199b - regarding dividends current year earnings plus prior years net income less dividends

Answer 42

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

Question 43

review mini income statement

Answer 43

you will need to assess which is a better bank based on ratios

Question 44

efficiency ratio- how efficient is it running overhead expense / net interest income + non interest income benchmark is 60%

Answer 44

if managed well, you want this to be lower

Question 45

if you are given liquidity information such as ST liab (non core liab) and ST investments

Answer 45

you should be able to calculate the net non core funding dependency ratio

Question 46

what do you want? long term debt or short term debt?

Answer 46

short term debt comes due earlier and is less favorable for parent liquidity

Question 47

if you have an institution that is liability sensitive and rates go up, is it bad? yes

Answer 47

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

Question 48

for the risk matrix market risk is matched with sensitivity credit risk is matched with asset quality

Answer 48

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

Question 49

define tier 1 capital

Answer 49

common stock + surplus + retained earnings

Question 50

define tier 2 capital

Answer 50

ALLL up to 1.25% of risk weighted assets (RWA) plus subordinated debt

Question 51

what is the driver for CAMELS

Answer 51

asset quality. you can't review earnings in a silo without looking at asset quality

Question 52

ROAA - takes into account the provision

Answer 52

adjusted ROAA takes into account actual losses. you want to be able to assess whether the provision is being used to over/understate earnings

Question 53

which bank is "cleaning up" asset quality

Answer 53

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

Question 54

which bank has significant asset quality problems

Answer 54

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

Question 55

other than capital ratios, the primary factor influencing capital is

Answer 55

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

Question 56

tier 1 capital

Answer 56

stockholders equity + non cumulative perpetual preferred stock + minority interest in consolidated subsidiaries less goodwill and all other intangible assets

Question 57

tier 2 capital

Answer 57

ALLL+ perpetual preferred stock + hybrid capital instruments + term subordinated debt

Question 58

when analyzing earnings, the first ratio an examiner should look at is ROAA

Answer 58

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