Flashcards in FARM test prep Deck (58)
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31
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
32
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
33
Total classification ratio
total classified assets / tier 1 capital +ALLL
34
weighted classification ratio
substandard 20% + doubtful 50% + loss 100% / tier 1 capital + ALLL
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
450 – if not impaired in 310, then 310 individual loan is included in the 450 pool
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
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
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
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.
38
SR 95-51
MC ROLL
market
credit
reputation
operation
liquidity
legal
39
GAP Schedule - measure sensitivity
not good if you are only doing this. does not take into account optionality and only short term
40
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%
41
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
42
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
43
review mini income statement
you will need to assess which is a better bank based on ratios
44
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
45
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
46
what do you want? long term debt or short term debt?
short term debt comes due earlier and is less favorable for parent liquidity
47
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
48
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
49
define tier 1 capital
common stock + surplus + retained earnings
50
define tier 2 capital
ALLL up to 1.25% of risk weighted assets (RWA) plus subordinated debt
51
what is the driver for CAMELS
asset quality. you can't review earnings in a silo without looking at asset quality
52
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
53
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
54
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
55
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
56
tier 1 capital
stockholders equity + non cumulative perpetual preferred stock + minority interest in consolidated subsidiaries less goodwill and all other intangible assets
57
tier 2 capital
ALLL+ perpetual preferred stock + hybrid capital instruments + term subordinated debt
58
