2. To ask a question during the webinar, feel free to enter
it into the chat box along the right hand side of your
screen. Slides are available there, too.
Link to download slides
Area to ask questions
3.
Financial information company that provides credit
and risk management solutions to financial
institutions
Provides banking industry resources including
whitepapers, webinars, templates and videos on
SageworksAnalyst.com
Awards
Named to Inc. 500 list of fastest growing privately held
companies in the U.S.
Named to Deloitte’s Technology Fast 500
4. Chuck Nwokocha
Sr. Risk Management
Consultant
Ed Bayer
Managing Director
Mr. Nwokocha is an expert credit & risk
management consultant helping financial
institutions manage their loan portfolio,
focusing on the ALLL, Stress Testing, Credit
Analysis, Risk Rating and Loan
Administration. With subject-matter
expertise, he helps banks understand and
comply with federal accounting guidance.
Mr. Bayer is the managing director in
Sageworks’ financial institution division. He
previously served as a senior risk
management consultant, with a primary
focus on ALLL and stress testing loan
portfolios. In that role, he consulted with
institutions ranging in size from $50M in
assets to several billion, helping them
implement defensible and effective
methodologies.
5.
6. Stress
1.
2.
3.
4.
Test
What the Examiner’s are asking
Interpreting the Reports
The Results
Actionable Steps
a.
b.
c.
d.
e.
Portfolio Management
Market Analysis
Credit Underwriting Standards
Board and Management Oversight
Info systems and tools
5. Bankers’ Advice
7.
What examiners are asking community banks to
stress
How to interpret the reports
How the analysis leads to actionable steps for the
bank
10.
Return on Average Assets (ROAA): Net income divided by average assets. This is
the primary profitability indicator and measures the bank’s efficiency in using its
assets to generate profits.
11.
Return on Equity (ROE): Net income divided by equity capital. Investors use this
ratio to measure the return on the shareholders investment. This ratio is also
important when calculating the bank’s value to potential investors.
12.
Net Interest Margin (NIM): Interest income less interest expense divided by
average earning assets. This ratio reflects the traditional business of banking, i.e.,
the results of a bank’s efforts to buy funds and reinvest them profitably.
13.
Net Noninterest Expense to Average Assets: Total noninterest income less total
noninterest expense divided by average assets. This ratio indicates the impact of
all noninterest expenses (such as personnel, occupancy, or other costs) on the
bank’s earnings and can provide a measure of the bank’s efficiency in generating
earnings.
14.
Tier 1 Capital to Average Assets (Leverage Ratio): this ratio indicates how
much Tier 1 capital is available to support bank assets and future growth.
(Tier 1 capital is common equity plus noncumulative perpetual preferred
stock plus minority interests in unconsolidated subsidiaries less ineligible
deferred tax assets and ineligible intangibles).
15.
Tier 1 Capital to Average Assets (Leverage Ratio): this ratio indicates how
much Tier 1 capital is available to support bank assets and future growth.
(Tier 1 capital is common equity plus noncumulative perpetual preferred
stock plus minority interests in unconsolidated subsidiaries less ineligible
deferred tax assets and ineligible intangibles).
16.
Non-Accrual Loans to Total Loans: This ratio relates to the level of non
performing loans (loans that are past due at least 90 day, are in nonaccrual
status, or have been renegotiated – TDRs) to the total loan portfolio. A high
level of non performing loans may suggest, for instance, poor underwriting
practices or inadequate monitoring of changes in borrower’s financial
conditions.
17.
Net Losses to Average Total Loans: Loan losses after recoveries divided by
average total loans. This ratio is another indicator of asset quality. An
increasing ratio may indicate the allowance for loan and lease losses (ALLL)
is being depleted by increasing losses; thus, additional provisions to the
ALLL may be necessary.
18.
With capital levels under stress calculated, the institution can
estimate appropriate ratios
Tier 1 capital ratio = (Total Equity - Revaluation Reserves) / Risk Based
Assets
Total capital ratio = (Tier 1 Capital + Tier 2 Capital) / Risk Based Assets
Minimum
Well
Capitalized
Adequately
Capitalized
Undercapitalized
Significantly
Undercapitalized
Tier 1 capital
ratio
4.0%
≥ 6.0%
≥ 4.0%
< 4.0%
< 3.0%
Total capital
ratio
8.0%
≥ 10.0%
≥ 8.0%
< 8.0%
< 6.0%
Current
19.
If stress tests indicate capital ratios could fall below
thresholds, the institution would have to make a plan that
might include:
1.
2.
3.
4.
5.
6.
7.
closer monitoring of market information,
adjusting strategic and capital plans to mitigate risk,
changing risk appetite and risk tolerance levels,
limiting or stopping loan growth or adjusting the portfolio mix,
adjusting underwriting standards,
raising more capital,
selling or hedging loans to reduce the potential impact from such
stress events.
26. Strategic Planning for the Loan Portfolio
What proportion of the balance sheet the loan portfolio should
comprise
Goals for loan quality
Goals for portfolio diversification
How much the portfolio should contribute to the bank’s
financial objectives
Loan product mix
Loan growth targets by product, market and portfolio segment
Product specialization
What the bank’s geographic markets should be
Targeted industries
Targeted market share
General financial objectives (e.g., increase fee income)
27.
28.
“Be proactive and start this before they ask.”
“Make sure to cover all call codes.”
“Lenders and Board member may not like it, but examiners
love stress testing. They want to see the breaking point.”
“Make sure stress tests fit into capital plans.”
“Be consistent and document where all your numbers come
from.”
“Stress test for rate increases and be sure to include
documentation.”
“After stress testing is completed the Bank must have a plan
about what to do in relation to what the Stress Test results
indicate.”
“Big focus from the OCC on all loans including HELOC,
Consumer and Commercial.”
