Self Examination Program For Commercial Banks Arkansas-Books Download

SELF EXAMINATION PROGRAM FOR COMMERCIAL BANKS Arkansas
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Self Examination, Program,For Commercial Banks, CONTENTS. The Self Examination Program 1,The Ratios and Performance Indicators 2. Profitability 3, Return on Average Assets 3, Return on Average Equity 3. Net Interest Margin 4, Non Interest Expense Overhead Expense Average Assets 4. Non Interest Income Average Assets 4, Average Collection of Interest Days 4.
Loan and Lease Yield 5, Investment Securities Yield Book 5. Cost of Funds Total 5, Interest Expense on Deposits 6. Interest Expense on Borrowed Funds 6, Break Even Yield 6. Efficiency 7, Earning Assets Total Assets Intangible Assets 7. Average Assets Per Employee Million 7, Net Income Per Employee Thousand 7.
Efficiency Ratio 7, Risk Asset Quality 9, Equity Capital Average Assets 9. Reserve for Loan Losses Total Loans 10, Reserve for Loan Losses Non Performing Loans X 10. Overdue Loans Total Loans 10, Ninety Day Overdue Loans Total Loans 10. Nonaccrual Loans Total Loans 11, Problem Assets Ratio 11. Liquidity Asset Liability Management 12, Income Statement Gap 12.
Net Loans Total Deposits 15, Net Loans Total Deposits and All Other Funds 15. Other Borrowed Money Total Assets 15, Dependency Ratio 16. Growth 17, Deposit Growth Rate 17, Asset Growth Rate 17. Capital Growth Rate 17, Other Performance Indicators 18. Provision for Loan Losses 18, Loans Charged Off 18.
Loan Recoveries 18, Profit Loss From Sale of Securities 18. Other Real Estate Owned 18, Dividends Declared 18. Capital Injections 18, Capital Adjustments Related to Prior Periods 18. Accumulated Other Comprehensive Income 19, Number of Overdue Loans 19. Return on Average Assets Unadjusted 19,The Input Reports.
Balance Sheet 21, Income Statement 22, Other Data 22. Assets Repriceable Within 1 Year 23, Liabilities Repriceable Within 1 Year 23. Other Performance Indicators 23, Reporting Guidance 24. The Output Reports, Report 1 Peer Group Comparison 28. Report 2 Trend Analysis 29, Report 3 Trend Analysis All Banks 30.
Report 4 Exceptions Report 31, Report 5 Peer Group Report 32. Report 6 Geographic Peer Groups 33, Report 7A Agri Peer Comparison 34. Report 7S Subchapter S Comparison 35, Appendix, Geographic Peer Map 37. Geographic Peer Listing of Counties 38, Computation Worksheets 39. Return on Average Assets 39, Return on Average Assets Banks with Subchapter Selection 40.
Return on Average Equity 41, Return on Average Equity Banks with Subchapter Selection 42. Net Interest Margin 44, Non Interest Expense Overhead Expense Average Assets 45. Non Interest Income Average Assets 46, Average Collection of Interest Days 47. Loan and Lease Yield 48, Investment Securities Yield Book 49. Cost of Funds Total 50, Cost of Funds Deposit Expense Only 51.
Cost of Funds Borrowed Funds Only 52, Break even Yield 53. Earning Assets Total Assets Intangible Assets 54, Average Assets Per Employee Million 54. Net Income Per Employee Thousands 55, Efficiency Ratio 55. Equity Capital Average Assets 56, Reserve for Loan Losses Total Loans 57. Reserve for Loan Losses Non Performing Loans X 57. Overdue Loans Total Loans 57, Ninety Day Overdue Loans Total Loans 57.
Nonaccrual Loans Total Loans 58, Problem Assets Ratio 58. Income Statement Gap 59, Net Loans Total Deposits 60. Net Loans Total Deposits and All Other Funds 60, Other Borrowed Money Total Assets 60. Dependency Ratio 61, Deposit Growth Rate 61, Asset Growth Rate 62. Capital Growth Rate 62, THE SELF EXAMINATION PROGRAM.
The Arkansas State Bank Department is responsible to the citizens of the State of Arkansas for the supervision of. state chartered banks to ensure the safety and soundness of operations The Department is required by law to. examine each bank at least once within every 24 month period however the 24 month period may be extended to. 36 months if an interim thorough examination is performed by the bank s primary Federal regulatory authority . Due to the possibility of an extended State examination frequency the Self Examination Program has become more. important to both bank management and the Department . The Self Examination Program originated from the desire of the Department to establish a timely and effective off . site program to monitor the performance and condition of the state s banks between on site examinations The. program was first introduced in March 1986 and gained immediate acceptance by bankers as an effective. management report The program thus served a twofold purpose an off site monitoring program for the. Department and an effective management report for bank managers and directors . In January 1987 the Department introduced the second edition of the program which featured a comprehensive. manual designed to explain information presented in the monthly reports Although no significant changes. resulted a better understanding of the key financial data was gained through the Self Examination Manual . Changes in banking dictate that both bank managers and regulators monitor key performance indicators on an. ongoing basis The Self Examination Program is not static On the contrary the program periodically is revised to. accommodate the constant change that occurs in the banking industry . The Self Examination Program is not intended to replace the examination process or a comprehensive managerial. program It is designed to supplement both For the Department the program lessens the impact of extended. periods between examinations of both sound and troubled institutions For the bank manager it provides timely . accurate and meaningful information to assist in recognizing and understanding the bank s strengths and. weaknesses and in effectively planning the bank s successful operation The program allows the regulator and the. bank manager to detect problem areas and trends before they are allowed to develop into unmanageable situations . thereby affording an opportunity to seek solutions and prevent further deterioration In effect the program serves. as an early warning indicator , The information provided by program participants will enable the Department to produce reports that reflect a. bank s month by month performance a comparison of its performance to banks within its peer group and. exceptions to established parameters Though strongly recommended participation in the program is voluntary for. most banks Participation in the program is a requirement for de novo banks and banks under any type of. enforcement action The information provided and the reports produced are regarded as STRICTLY. CONFIDENTIAL and will not be made available to the general public the news media or any private publication . The personnel of the State Bank Department strongly believe that the Self Examination Program is an important. and effective monitoring tool for bank managers and regulators in a volatile and changing banking environment . Self Examination Input Reports should be submitted on line at www ark org bank exam index html For. security purposes there is no link from our public web site The Department has also assigned user names and. passwords to each bank as an additional security measure . Inquiries may be made by contacting the Arkansas State Bank Department 400 Hardin Road Suite 100 Little. Rock Arkansas 72211 3502 Telephone 501 324 9019 E mail finanalysts banking state ar us . Revised October 2019 1, THE RATIOS AND PERFORMANCE INDICATORS. The primary tools of financial analysis are ratios Ratios are quantified concepts and comparisons that allow one. entity to be evaluated relative to its peers Two important factors must always be kept in mind when evaluating a. ratio the level and trend of each ratio It is fundamentally important to constantly distinguish between level and. trend and attempt judgments as to both , An important characteristic of ratio analysis is that it is future oriented The goal of ratio analysis is to use past and. present performance characteristics to assess prospects for the future under various scenarios . Other raw data performance indicators can provide further insight into specific or unusual changes within an. institution Areas specifically affected by management s discretionary actions must be evaluated against other. performance indicators to effectively evaluate the condition of an institution . Asset and geographical peer ratios are derived by averaging the ratios of all banks in each peer group Prior to. May 1 2004 peer ratios were skewed by the performance of banks that elected Subchapter S status and were. not taxed at the corporate level Beginning May 1 2004 the Self Exam Program began estimating income. taxes for Subchapter S banks at a tax rate of 34 percent This was done to provide a method to adequately. evaluate and compare Subchapter S banks to other banks To reflect a change in the corporate tax rate the. estimated rate used for comparison purposes was amended to 21 percent beginning January 1 2018 . Parameters have been established for most ratios Parameters are suggested or industry accepted guidelines It is. important to keep in mind that for some ratios the exceeding of a parameter noted on the Exceptions Report. Report 5 is not necessarily a negative indication Many ratios cannot be validly analyzed without looking at. other ratios or without knowing a bank s business plan . For example a bank that exceeds the parameter for the ratio non interest expense to average assets may be. expanding its branch network Such expansion can result in an increasing non interest expense ratio due to the. hiring of additional employees and the depreciation expense associated with new fixed assets At the same time . however an expanding branch network can result in a higher net interest margin due to increases in loan volume. and or lower cost core deposits Alternatively a non interest expense ratio might be above parameter if a bank. operates one or more sizable subsidiaries Typically however subsidiaries generate additional non interest. income which can offset the higher overhead , Another example of the relationship of ratios and strategy is a bank with a loan to deposit ratio that exceeds. parameter This can indicate on the one hand pressure on funding ability or an increase in credit risk On the. other hand a bank with a high loan to deposit ratio may have sufficient borrowing capacity and credit underwriting. administration resources in place to mitigate the risks indicated by a high ratio . Finally a bank with an asset growth rate above parameter generally would not be cause for concern if additional. capital is injected to support the growth and staff size and expertise are maintained to adequately manage the. growth However there would be cause for concern if asset growth is followed by an increase in overdue and. nonaccrual ratios In fact for a community bank weakening asset quality ratios that exceed parameter by a sizable. margin cannot readily be supported by other ratios the level of the bank s capital or the bank s strategy . Revised October 2019 2, PROFITABILITY, The most important point to begin the analysis of any bank is earnings From this point an analysis trail begins.
that ultimately leads to all areas of the bank Specifically an analysis of earnings should address the level and trend. of earnings the composition of earnings and management s ability to control the different aspects of the income. and expense structure of the institution , The Self Examination Program reviews the profitability of a bank through the analysis of the bank s return on. average assets and equity net interest margin non interest expense non interest income average days collection of. interest yield on loans yield on investment securities cost of funds and the break even yield . Many ratios in the Self Examination Program are affected by acquisitions and mergers Profitability ratios are. most affected since the earnings of a bank are reported for a certain period of time The Self Examination. Program uses January through December as the standard fiscal year If your institution is acquired by another. institution during the reporting fiscal year and push down accounting is used for financial statement purposes . no income or expense for the period of the calendar year prior to the acquisition date should be included in. subsequent self examinations , Extraordinary items and other one time adjustments to income also affect many ratios This input item is used to. adjust financial results that otherwise would be inconsistent with normal operating results An extraordinary item . is a material event or transaction that is both unusual and infrequent This item should be reported net of income. taxes Treatment of this item in the Self Examination should parallel call report treatment For additional. guidance refer to the Instructions for Preparation of Consolidated Reports of Condition and Income . 1 RETURN ON AVERAGE ASSETS, Earnings of a bank are considered essential to absorb loan losses finance the internal growth of capital and to. attract investors to supply new capital The retention of earnings is the best method by which a bank can maintain. an adequate capital account The best single indicator of the level of bank earnings is the return on average assets. ratio Banks are basically in the yield business Accordingly the concept of return on assets is in keeping with. this fundamental method by which bankers appraise their performance as lenders investors and managers . Return on average assets is calculated by dividing annualized net operating income after taxes including realized. gain or loss on investment securities by average assets Extraordinary items and other adjustments are factored out. prior to annualization but then added back to the annualized numerator As previously discussed banks which have. elected Subchapter S status are taxed at a rate of 21 percent for estimation purposes Traditionally in Arkansas a. 1 00 percent return on average assets has been considered good The Self Examination Program parameter is. established at 1 000 ,2 RETURN ON AVERAGE EQUITY, One of the primary reasons for operating a bank is to generate income for the benefit of stockholders An important. measure of a bank s success in this regard is to evaluate the rate of return on a stockholder s investment by use of. the return on average equity ratio This ratio is computed by dividing annualized net operating income after taxes . including realized gain or loss on investment securities by average total equity Extraordinary items and other. adjustments are factored out prior to annualization but then added back to the annualized numerator Subchapter S. banks are taxed at a rate of 21 percent for estimation purposes . Revised October 2019 3, This ratio is affected by the level of capitalization of the institution and while it is a good tool in evaluating return.
to the stockholders it is not considered an effective measure of earnings performance from the bank s standpoint . No parameter has been established in the Self Examination Program and peer group comparisons are not. meaningful due to the wide variance of equity capital levels in banks . 3 NET INTEREST MARGIN, The net interest margin is the net yield that earnings from interest represent on earning assets The net interest. margin must be computed on a tax equivalent basis This adjustment takes into account interest earned on tax . exempt assets , The net interest margin ratio is calculated by dividing annualized net interest income interest income on a tax . equivalent basis less interest expense by average earning assets A net interest margin of less than 3 00 percent. generally is reflective of a bank with a large volume of non earning or low yielding assets The Self Examination. Program parameter is established at 3 500 , 4 NON INTEREST EXPENSE OVERHEAD EXPENSE AVERAGE ASSETS. Non interest or overhead expense is the normal operating expense associated with the daily operation of a bank It. consists of salaries and benefits expense of premises and fixed assets and other non interest expense Provisions. for loan and lease losses realized losses on securities and income taxes should not be included in non interest. expense It is essential to monitor overhead expense as it directly reduces profitability and is normally substantially. greater than non interest income , The ratio is computed by dividing non interest expense annualized by average assets The Self Examination. Program parameter is 3 000 ,5 NON INTEREST INCOME AVERAGE ASSETS.
Non interest income is income derived from fee based banking services It is used as a supplement to interest. income and enhances profitability Non interest income consists of service charges on deposit accounts consulting. and advisory fees rental of safe deposit boxes and other fee income Income from fiduciary brokerage and. insurance activities also is included Realized gains on securities are not a component of non interest income . The ratio is computed by dividing non interest income annualized by average assets The Self Examination. Program parameter is 0 725 ,6 AVERAGE COLLECTION OF INTEREST DAYS . To understand the significance of the comparison of accrued interest receivable to total interest income one. must first recognize that accrued interest receivable is a non earning asset An analogy can be made to the. days sales in inventory at the local grocery store or shoe store which is an indicator of the store s exposure to. excessive inventory levels Inventory on hand produces no income Similarly the days interest uncollected is. an indicator of the extent of interest income recorded but not converted to cash that can be reinvested in an. earning asset The comparison is expressed as the number of days interest on earning assets remains. uncollected much like a retailer calculates the number of days inventory remains on hand . The proper structuring of earning assets affords a bank the opportunity to maximize earnings through the. conversion of a non earning asset accrued interest receivable to an earning asset For example a measure of. 60 days indicates interest is collected on average every other month and is a good indicator that loans and. other earning assets have been structured to pay interest in a relatively short period of time . Revised October 2019 4, An upward movement in this measure might indicate the volume of overdue loans is increasing or repayment. terms are being extended to accommodate a borrower s inability to properly service debt An overdue loan and. or frequent extensions always have been considered to be the first signs that a borrower is experiencing cash . flow problems If this indeed is the reason the ratio is rising an increase in nonaccrual loans and 90 day. overdue loans might result On the other hand if overdue loans and excessive extensions are not prevalent a. measure reflecting a large number of days might indicate that loans or investment securities have been. structured to pay interest at longer intervals The bank therefore might not be optimizing its return since it. takes longer to reallocate the interest it receives . A bank can fully maximize its earnings potential not only by making sound lending and investment decisions. but also by properly structuring earning assets and collecting interest when due Average collection of interest. days is calculated by dividing accrued interest receivable by annualized interest income and multiplying the. result by 365 The Self Examination Program parameter is 75 days . 7 LOAN AND LEASE YIELD, The loan and lease yield ratio represents the average yield on all loans and leases The ratio is computed by. dividing annualized interest and fees on loans and lease financing receivables by average total loans and lease. financing receivables The Self Examination Program does not establish a parameter for this ratio . 8 INVESTMENT SECURITIES YIELD BOOK , The investment securities yield ratio represents the average yield on all securities This ratio is computed by. dividing annualized interest and dividend income on investment securities by the average book value of total. investment securities The Self Examination Program does not establish a parameter for this ratio The balance. of and income from equity securities without readily determinable fair values should not be included in this. ratio ,9 a COST OF FUNDS TOTAL , The Self Examination Program views the bank as an institution that services a wide variety of liability accounts.
used as funding sources but groups all the different types of account activities into a single function The program. analyzes the cost associated with this funds function The objective is to provide approximate costs rather than to. provide sophisticated and precise cost data on individual fund accounts . The average cost of funds ratio is the bank s cost of all of its investable funds It must be remembered that the. average cost of funds always is based on historical costs and historical interest rates and will result in an unreliable. estimate of today s cost of funds The funds that enter into the calculation of the average already have been. invested The average funds rates can be related only to average investments and average loans already on the. bank s books The next loan will be made at the marginal rate and will be covered by marginally obtained funds . Theoretically the marginal cost of funds is the bank s cost of obtaining the next dollar of investable funds . Practically speaking it is the rate at which the bank can obtain money on any given day to meet an unexpected. obligation that day A bank s marginal cost of funds therefore can be thought of as the rate being paid on. short term 90 and 180 day certificates of deposit on the date an investment is made i e the funding of a loan or. the purchasing of a security , The average total cost of funds ratio is computed by dividing annualized interest expense on all interest bearing. obligations by the average of all the obligations that generated those expenses The Self Examination Program. does not establish a parameter for this ratio , Revised October 2019 5. 9 b INTEREST EXPENSE ON DEPOSITS, The average interest expense on deposits is computed by dividing annualized interest expense on all deposits by the. average of the obligations that generated those expenses The Self Examination Program does not establish a. parameter for this ratio ,9 c INTEREST EXPENSE ON BORROWED FUNDS. The average interest expense on borrowed funds is computed by dividing annualized interest expense on all. borrowed funds by the average of the obligations that generated those expenses The Self Examination Program. does not establish a parameter for this ratio ,10 BREAK EVEN YIELD.
The break even yield reflects the yield on earning assets required to cover all interest expense and net overhead. expenses The break even yield effectively places a floor on the pricing of earning assets A bank cannot afford to. lend or invest funds at a lower rate of interest and expect to generate a profit . The break even yield is computed by adding interest expense the provision for loan and lease losses and net. overhead expenses non interest expense less non interest income and then dividing by average earning assets . The numerator must be annualized Extraordinary items and other adjustments are factored out prior to. annualization but then added back to the annualized numerator The Self Examination Program does not establish. a parameter for this ratio , Revised October 2019 6. EFFICIENCY, The ever changing banking environment continues to place a strain on bank profits as new products and services. are introduced and competition increases from a wide variety of sources Bank managers must monitor efficiency . a critical factor when considering the introduction of a new product or implementation of a new service . Salary expense is the largest single non interest expense for a bank While it may not be valid to measure salaries. in differing markets it is appropriate to measure efficiency based on the number of employees . These measurements will be different for each bank depending on market factors sophistication and growth. factors Bank managers should measure performance in the following ratios by comparing the bank to its. respective peer group and to past performance ,1 EARNING ASSETS TOTAL ASSETS INTANGIBLE ASSETS . Generally speaking an earning asset is any asset generating interest income Earning assets are derived by totaling. investment securities loans and leases net of unearned income federal funds sold securities purchased under. agreements to resell assets held in trading accounts and interest bearing balances Banks having equity securities. without readily determinable fair values may include this asset as well Nonaccrual loans and debt securities are. subtracted from this sum , The ratio is calculated by dividing month end earning assets by month end total assets less all intangibles The. parameter has been set at 91 500 ,2 AVERAGE ASSETS PER EMPLOYEE MILLION .
The ratio average assets per employee measures the average volume of assets in millions of dollars allotted per. employee The ratio is a common benchmark among banks to measure the efficient use of personnel Monitoring. of this key ratio is accomplished through comparison with past performance and the bank s peer group The ratio is. calculated by dividing average assets by the number of full time equivalent employees and then dividing by 1 000. to convert to millions of dollars The Self Examination Program does not establish a parameter for this ratio . 3 NET INCOME PER EMPLOYEE THOUSAND , The ratio net income per employee measures the amount of net income allotted to each employee The ratio is. expressed in thousands of dollars and is monitored through comparison with past performance and the bank s peer. group Improvement in this area will be accomplished in small increments but should result in increased bank. profitability The ratio is calculated by dividing annualized net income by the number of full time equivalent. employees Extraordinary items and other adjustments are factored out prior to annualization but then added back. to the annualized numerator The Self Examination Program does not establish a parameter for this ratio . 4 EFFICIENCY RATIO, The efficiency ratio can be used to evaluate an institution s overhead structure and profitability expense. control Research reveals several different methods to calculate this ratio However all calculations focus on. net interest income non interest income and non interest expense as the primary components The calculation. utilized in the Self Examination Program appears to be the most widely accepted method . Based on information reviewed the Department has adopted the following efficiency ratio calculation Total. non interest expense divided by the sum of net interest income calculated on a tax equivalent basis and non . interest income Efficiency ratios reflected in Self Examination reports may be enhanced for internal reporting. and monitoring purposes by making appropriate income and or expense adjustments unique to your institution . Revised October 2019 7, Examples of fine tuning adjustments include amortization expenses of intangible assets significant non . recurring non interest expenses and significant non recurring non interest revenues Efficiency increases as. the ratio decreases , Bank efficiency ratios generally are reduced by increasing net interest income increasing non interest revenues. and or reducing operating expenses Banks with securities portfolios that represent a large percentage of assets. will tend to have lower ratios due to lower personnel costs Significant amounts of intangible assets and or. other real estate will tend to increase efficiency ratios due to amortization and write down expenses associated. with these assets Banks that generate a significant amount of non interest income generally will have lower. efficiency ratios unless that income is offset by higher personnel and occupancy expenses As previously. stated internal adjustments to the standard calculation may be appropriate to enhance monitoring of unique. situations for your institution , The efficiency ratio parameter established for the Self Examination Program is 65 00 Although a parameter.
has been established it may be more meaningful to focus on trend comparisons for your institution instead of. peer and parameter comparisons , , Full time equivalent employees is defined as the number of full time equivalent employees rounded to the. nearest whole number on the payroll of the bank and its consolidated subsidiaries as of the end of the month RI. Memoranda Item 5 in the call report , Revised October 2019 8. RISK ASSET QUALITY, An analysis of asset quality must be made from several perspectives First the overriding determinant of asset. quality is the existence of and compliance with well constructed loan and investment policies These policies. should fully detail the administration of these asset categories Second it is necessary to evaluate and assess the risk. and quality of existing assets as to the level severity and trend of classified overdue or nonaccrual assets Finally . it must be determined if workout procedures for problem assets and the bank s ability to absorb inherent losses are. sufficient All of these factors combine to give an overall perspective of asset quality . The Self Examination Program monitors risk and asset quality by means of an ongoing assessment of a bank s. capital position and an analysis of the adequacy of the reserve for loan losses account Monitoring of non . performing loans and leases and other assets also is emphasized . The capital of a bank serves three functions it demonstrates ability to absorb unanticipated losses it preserves the. ability of the bank to meet the growing needs of its community and it measures ownership . The primary function of bank capital is to demonstrate to the public and bank regulators a bank s ability to absorb. losses When a loan or other investment is deemed uncollectible the bank must remove it from the asset side of the. balance sheet and from the reserve for loan losses account or an appropriate expense account If losses become. large enough to deplete reserves and undivided profits the bank is in danger of becoming insolvent that is . creditors claims soon may exceed the assets of the bank In this event bank regulators stipulate that the bank must. be closed Thus capital protects depositors and other bank claim holders by serving as a cushion that absorbs. losses , Bank capital therefore serves as a financial shield to lessen the possibility that uninsured depositors and other. claim holders might lose funds if a bank is closed and liquidated The amount of capital a bank has relative to its. assets and deposits thus serves as an outward demonstration of strength and thereby helps to mitigate the adverse. impact that external events and or poor management might have on a bank . A prerequisite for opening a bank is to have adequate facilities and for most banks the first use of funds raised. through the issuance of common stock is to purchase fixed assets Thus capital provides operating funds for the. acquisition of fixed assets and initial operating expenses . The State Bank Department believes a strong capital account is the benchmark of a strong bank Banks with an. inadequate capital structure will be required to formulate capital maintenance plans and to find means with which. to improve the capital position of the bank ,1 EQUITY CAPITAL AVERAGE ASSETS.
Equity capital is defined as the total of common stock surplus perpetual preferred stock undivided profits and. capital reserves In the Self Examination Program intangible assets other than mortgage servicing assets are. deducted from equity capital Also excluded are net unrealized holding gains losses on available for sale. securities , The ratio is expressed as a percentage of equity capital to average assets adjusted for disallowed intangibles A. four month moving average is used to calculate the denominator The Self Examination Program parameter is. established at 6 500 This ratio should approximate the Tier One Leverage Capital ratio in the Uniform Bank. Performance Report UBPR , Revised October 2019 9, 2 RESERVE FOR LOAN LOSSES TOTAL LOANS. Perhaps the most unpredictable item affecting the income of a bank is the reserve for loan losses account which is. primarily dependent on actual and anticipated losses The impact of large loan losses on a bank s income can and. should be lessened by systematic increases to the reserve for loan losses account even though such increases might. not be supported by a tax deduction An adequately funded reserve for loan losses account provides a cushion that. enhances the stability of an income stream , Regular review of a bank s loans is necessary in establishing an adequate reserve for loan losses account and should. provide a bank with the most accurate estimate for such a reserve account The traditional benchmark of 1 percent. of total loans or the more traditional experience method may not be adequate in today s banking environment A. periodic review of each loan or line of credit will provide a bank with the best method of establishing the reserve at. an adequate level , The Arkansas Bank Department requires that all state chartered banks maintain a reserve for loan losses in an. amount commensurate with the risk inherent in the bank s loan portfolio The regulation further requires a bank s. board of directors to analyze the risk in the bank s loan portfolio and make appropriate provisions to the reserve for. loan losses account on at least a quarterly basis Such reviews should be noted in the minutes of the board. meetings An overview and recommendations for an effective ALLL methodology can be found in Administrative. Policy 003 , For this ratio the reserve for loan losses is expressed as a percentage of loans and leases net of unearned income .
Notwithstanding previous statements the Self Examination Program parameter is established at 1 000 . 3 RESERVE FOR LOAN LOSSES NON PERFORMING LOANS X , The ratio reserve for loan losses to non performing loans provides an indication of reserve coverage of a bank s. highest risk credits The ratio is calculated by dividing the reserve for loan losses by the sum of loans 90 days or. more overdue and still accruing and nonaccrual loans The ratio is stated in terms of number of times and not as. a percentage The Self Examination Program does not establish a parameter for this ratio since estimated credit. losses associated with these loans likely will vary from bank to bank . 4 OVERDUE LOANS TOTAL LOANS, The delinquency of a loan generally is considered the first indication that a borrower is experiencing financial. difficulty An inordinate volume of overdue loans can indicate that credit underwriting standards are inappropriate . lending practices are too liberal or collection procedures are inadequate A function of management is to monitor. the ratio of overdue loans to total loans on a regular basis and to determine the proper course of corrective action . i e review lending practices improve collection procedures or replace liberal lending officers . The ratio is calculated by dividing the dollar balance of loans 30 days or more past due by total loans The dollar. balance of loans 30 days or more past due includes loans 30 89 days past due loans 90 days or more overdue and. still accruing and nonaccrual loans which are 30 days or more past due Loans on nonaccrual that are less than 30. days overdue are not included The Self Examination Program parameter is established at 3 000 . 5 NINETY DAY OVERDUE LOANS TOTAL LOANS, Any loan that is 90 days or more past due and still accruing interest must be both well secured and in the process of.


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