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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