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Stress Tests Completed: Now What?
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Stress Tests Completed: Now What?


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  • 1. Chuck Nwokocha, Senior Risk Management Consultant Ed Bayer, Managing Director, Sageworks
  • 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 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. 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
  • 6.    What examiners are asking community banks to stress How to interpret the reports How the analysis leads to actionable steps for the bank
  • 7.  Assets
  • 8.  Assets
  • 9.  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.
  • 10.  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.
  • 11.  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.
  • 12.  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.
  • 13.  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).
  • 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.  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.
  • 16.  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.
  • 17.  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
  • 18.  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.
  • 19.  Target Ratios: DSCR and LTV
  • 20. 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)
  • 21.         “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.”
  • 22. Chuck Nwokocha Sr. Risk Management Consultant (919) 851-7474 ext. 637 Ed Bayer Managing Director 866.603.7029 ext. 651