Risk Management Manual of Examination Policies - FDIC

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EARNINGS Section 5.1 or profit plan. All banks, regardless of size, should be encouraged to prepare a profit plan and budget that addresses the current year and the next operating year. The degree of sophistication or comprehensiveness of a budget and profit plan may vary considerably based on the size of the institution and the complexity of the assets and income sources. The FDIC issued Part 364 entitled Standards for Safety and Soundness. Appendix A of Part 364 outlines standard procedures that banks should employ periodically to evaluate and monitor earnings, thereby ensuring that earnings are sufficient to maintain adequate capital and reserves. At a minimum, management’s analysis of earnings should: • Compare recent earnings trends relative to equity, assets, or other commonly used benchmarks to the institution’s historical results and those of its peers; • Evaluate the adequacy of earnings given the size, complexity, and risk profile of the institution’s assets and operations; • Assess the source, volatility, and sustainability of earnings, including the effect of nonrecurring or extraordinary income or expenses; • Take steps to ensure that earnings are sufficient to maintain adequate capital and reserves after considering asset quality and growth rate; and • Provide periodic earnings reports with adequate information for management and the board of directors to assess earnings performance. A bank's profit plan and budget should be reviewed for reasonableness with particular attention paid to the underlying assumptions. The forecast and assumptions should be consistent with what is known about the bank such as the volume of classified assets, nonaccrual and renegotiated debt levels, the adequacy of the ALLL, and other examination findings that have earnings implications. Comparison between the bank's forecast for the previous year to actual performance as displayed in the bank's own reports and in the UBPR can provide a reasonableness check. Any material discrepancies should be discussed with management; and, if the explanation is unreasonable, the bank’s forecast may need to be adjusted to determine the effect of more reasonable assumptions. If there is no bank plan or budget, examiners may need to develop their own forecast to aid in their judgments. In any case, it will normally be necessary to discuss future prospects with management. Care should be taken in these discussions not to present the examiner's forecast as absolute, or to recommend specific strategies or transactions to management based on an examiner's forecast. Planning is properly the function of management. Examiner efforts are only an attempt to discover any undue risk and highlight any factors that may significantly impact future performance in either a positive or negative manner. Deficiencies in the profit plan or budget, or the lack thereof, should be documented in the appropriate section of the examination report. EVALUATION OF EARNINGS PERFORMANCE Earnings Component Rating Under the Uniform Financial Institutions Rating System, in evaluating the adequacy of a financial institution's earnings performance, consideration should be given to: • The level of earnings, including trends and stability, • The ability to provide for adequate capital through retained earnings, • The quality and sources of earnings, • The level of expenses in relation to operations, • The adequacy of the budgeting systems, forecasting processes, and management information systems in general, • The adequacy of provisions to maintain the ALLL and other valuation allowance accounts, and • The earnings exposure to market risk such as interest rate, foreign exchange, and price risks. RATING THE EARNINGS FACTOR Earnings rated 1 are strong. Earnings are more than sufficient to support operations and maintain adequate capital and allowance levels after consideration is given to asset quality, growth, and other factors affecting the quality, quantity and trend of earnings. Generally, banks rated 1 will have earnings well above peer group averages. Earnings rated 2 would be satisfactory and sufficient to support operations and maintain adequate capital and allowance levels after consideration is given to asset quality, growth, and other factors affecting the quality, quantity and trend of earnings. Earnings that are relatively static, or even experiencing a slight decline, may receive a 2 rating provided the institution’s level of earnings is adequate in view of the assessment factors listed above. Earnings rated 3 may need to improve. Earnings may not fully support operations and provide for the accretion of DSC Risk Management Manual of Examination Policies 5.1-7 Earnings (12-04) Federal Deposit Insurance Corporation
EARNINGS Section 5.1 capital and allowance levels in relation to the institution’s overall condition, growth, and other factors affecting the quality, quantity, and trend of earnings. A rating of 4 indicates earnings that are deficient. Earnings are insufficient to support operations and maintain appropriate capital and allowance levels. Institutions so rated may be characterized by erratic fluctuations in net income or net interest margin, the development of significant negative trends, nominal or unsustainable earnings, intermittent losses, or a substantive drop in earnings from the previous years. A rating of 5 indicates earnings that are critically deficient. A financial institution with earnings rated 5 is experiencing losses that represent a distinct threat to its viability through the erosion of capital. DSC Risk Management Manual of Examination Policies 5.1-8 Earnings (12-04) Federal Deposit Insurance Corporation
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DSC Risk Management Manual of Exami
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INDEX Section 0.1 Policies, Procedu
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INDEX Section 0.1 Liquidity Managem
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INDEX Section 0.1 Introduction 14.1
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BASIC EXAMINATION CONCEPTS AND GUID
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CAPITAL Section 2.1 INTRODUCTION Pu
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CAPITAL Section 2.1 Interests in As
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CAPITAL Section 2.1 the holder prio
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CAPITAL Section 2.1 • Qualifying
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CAPITAL Section 2.1 application sub
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CAPITAL Section 2.1 may leave the b
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CAPITAL Section 2.1 procedures empl
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CAPITAL Section 2.1 growth and rema
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ASSET QUALITY Section 3.1 INTRODUCT
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LOANS Section 3.2 INTRODUCTION The
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LOANS Section 3.2 Qualifications of
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LOANS Section 3.2 to the ALLL), an
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LOANS Section 3.2 PORTFOLIO COMPOSI
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LOANS Section 3.2 • Require reaso
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LOANS Section 3.2 Internal Controls
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LOANS Section 3.2 continue to suppo
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LOANS Section 3.2 board of director
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LOANS Section 3.2 the institution's
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LOANS Section 3.2 such as for lives
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LOANS Section 3.2 Classification Gu
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LOANS Section 3.2 checks; terms in
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LOANS Section 3.2 • Sublicensee B
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LOANS Section 3.2 similar propertie
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LOANS Section 3.2 policies and proc
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LOANS Section 3.2 Moreover, since t
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LOANS Section 3.2 generally should
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LOANS Section 3.2 exercise control
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LOANS Section 3.2 Problems in this
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LOANS Section 3.2 that reveal other
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LOANS Section 3.2 Other loans of qu
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LOANS Section 3.2 be determined whe
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LOANS Section 3.2 time period elaps
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LOANS Section 3.2 individual apprai
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LOANS Section 3.2 controls over its
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LOANS Section 3.2 consistent with t
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LOANS Section 3.2 such funds, the m
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LOANS Section 3.2 security interest
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LOANS Section 3.2 unambiguous terms
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LOANS Section 3.2 Trustees are sele
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LOANS Section 3.2 be valid but cert
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LOANS Section 3.2 Overview of the S
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LOANS Section 3.2 Although some ins
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LOANS Section 3.2 • Portfolio gro
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LOANS Section 3.2 pricing decisions
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LOANS Section 3.2 trends, condition
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LOANS Section 3.2 provide additiona
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SECURITIES AND DERIVATIVES Section
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CASH AND DUE FROM BANKS Section 3.4
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CASH AND DUE FROM BANKS Section 3.4
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PREMISES AND EQUIPMENT Section 3.5
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PREMISES AND EQUIPMENT Section 3.5
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OTHER REAL ESTATE Section 3.6 Under
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OTHER ASSETS AND LIABILITIES Sectio
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OFF-BALANCE SHEET ACTIVITIES Sectio
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MANAGEMENT Section 4.1 INTRODUCTION
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MANAGEMENT Section 4.1 consequently
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MANAGEMENT Section 4.1 overdue, ren
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MANAGEMENT Section 4.1 money launde
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MANAGEMENT Section 4.1 management l
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MANAGEMENT Section 4.1 • An adequ
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MANAGEMENT Section 4.1 • Troubled
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MANAGEMENT Section 4.1 management i
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INTERNAL ROUTINE AND CONTROLS Secti
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BANK SECRECY ACT, ANTI-MONEY LAUNDE
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BANK FRAUD AND INSIDER ABUSE Sectio
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SUSPICIOUS ACTIVITY AND CRIMINAL VI
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INTERNATIONAL BANKING Section 11.1
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APPLICATIONS Section 12.1 Effective
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APPLICATIONS Section 12.1 for compa
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APPLICATIONS Section 12.1 be tantam
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APPLICATIONS Section 12.1 accept sh
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APPLICATIONS Section 12.1 consideri
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APPLICATIONS Section 12.1 accepted
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APPLICATIONS Section 12.1 The FDIC
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APPLICATIONS Section 12.1 employee
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APPLICATIONS Section 12.1 including
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APPLICATIONS Section 12.1 Branch cl
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APPLICATIONS Section 12.1 its accep
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APPLICATIONS Section 12.1 examinati
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MEMORANDUMS OF UNDERSTANDING Sectio
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CIVIL MONEY PENALTIES Section 14.1
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CMP MATRIX (Continued) Points Sugge
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FORMAL ADMINISTRATIVE ACTIONS Secti
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REPORT OF EXAMINATION INSTRUCTIONS
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BANK OF ANYTOWN ANYTOWN ANY COUNTY
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Examination Conclusions and Comment
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Risk Management Assessment 99999 1.
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Violations of Laws and Regulations
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Information Technology Assessment (
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Fiduciary Activities Assessment (Co
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Comparative Statements of Financial
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Recapitulation of Securities 99999
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Items Subject to Adverse Classifica
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Analysis of Loans Subject to Advers
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Assets with Credit Data or Collater
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Capital Calculations 99999 Tier 1 C
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Comparative Statements of Income an
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Extensions of Credit to Directors/T
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Confidential - Supervisory Section
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In-House Information Technology 999
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Directors/Trustees and Officers 999
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INTERNATIONAL REPORT PAGES AND WORK
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Analysis of the Country Exposure Ma
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International Loans, Acceptances, a
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Position Analysis - Other Currencie
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Revaluation and Income/Loss Analysi
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Policy and Procedures 99999 1. (a)
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Policy and Procedures (Continued) 9
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Audit and Internal Controls - Inter
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Parallel-Owned Banking Organization
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REPORT OF INVESTIGATION INSTRUCTION
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Description of the Transaction INVE
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FINANCIAL HISTORY AND CONDITION Ass
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FINANCIAL HISTORY AND CONDITION (Co
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ADEQUACY OF THE CAPITAL STRUCTURE G
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ADEQUACY OF THE CAPITAL STRUCTURE (
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FUTURE EARNINGS PROSPECTS Assess th
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FUTURE EARNINGS PROSPECTS (Continue
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GENERAL CHARACTER OF THE MANAGEMENT
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IV. GENERAL CHARACTER OF THE MANAGE
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Interview Comments IV. GENERAL CHAR
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RISK TO THE FUNDS As a general matt
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VI. CONVENIENCE AND NEEDS OF THE CO
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OTHER PERTINENT INFORMATION If appl
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Source: Application for Federal Dep
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Service Continuity & Monitoring OTH
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Risk Management Manual of Examination Policies - FDIC

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