Communicator Archives: September 2001

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What Your Board Needs to Know about Assets Quality

In order to identify, measure, monitor and control asset quality, Directors must insure that underwriting standards are reflective of the Bank's risk tolerance, sound credit administration practices are in place and that risk identification comes in a timely and standardized manner.

Assets quality is a function of credit risk associated with the existing and potential loan and investment portfolio. In evaluating the assets quality of the bank, Directors need to be certain that loan loss allowances are adequate, concentrations of credit are in line with the philosophy of the bank, and that delinquent, non-performing or restructured debt is monitored closely.

Directors need to review the following standardized measurements on a quarterly basis for signs of increases in credit risk:

Non-Performing Assets to Total Loans - Measures the percentage of the loan portfolio that is not performing according to contract. This figure represents loans and leases that are at least 90 days past due, non-accruing loans, OREO and other foreclosed loan collateral divided by the total end-of-period loan balance.

Allowance for Loan Losses to Total Loans - Amount reserved to cover potential losses in the loan portfolio divided by the end-of-period balance of total loans.

Net Charge-Offs to Total Loans - Amount of loans charged off divided by the end-of-period balance of total loans.

Total Security Market Value Premium - The difference between the total market value of securities and the amortized cost of securities divided by the total amortized cost of the securities.

Net Loans Present Value Premium - The difference between the present value of the total loan portfolio and the net carrying value of total loans divided by the net carrying value of total loans.

Total Securities to Total Assets - End-of-period balances for securities divided by end-of-period balances for total assets.

Total Loans to Total Assets - End-of-period balances of total loans divided by end-of-period balances for total assets.

Loan growth - Annualized growth rate of loans from the previous period.

Directors should look for the following indicators that assets quality is deteriorating:

• Increasing levels of past due, non-performing loans and/or charge-offs.
• Stable or declining trends in allowance for loan losses while net loan losses are increasing.
• Increases in allowance for loan loss provisions.
• Net charge-offs that exceed the balance in allowance for loan losses.
• Allowance for loan losses that are significantly different from peers.
• Any changes in allowance for loans losses in relation to historical, projected or peer performance.
• Increases in loans/total assets ratio
• Increases in security/total asset ratio
• Decreases in present value premiums of securities and/or loans

The A/L Benchmarks Board Report was designed to assist directors in the task of maintaining an acceptable level of assets quality within the bank. The Report is available on a quarterly basis and uses standardized measurements and historical trends in order to identify, measure, monitor and control the Bank's risk levels in asset quality.

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AGENCY STATEMENT ON TEMPORARY BALANCE SHEET
GROWTH AND REGULATORY CAPITAL
Federal bank and thrift regulators issued a joint statement late last week regarding temporary balance sheet growth that could result from market responses in the aftermath of the terrorist attacks. Such growth could occur they said if corporate borrowers make unusual draws on existing lines of credit or request new lines because of a desire for extra liquidity, or if a bank receives larger than normal deposit inflows.

Banks that experience significant asset growth could see a decline in their regulatory capital ratios as a result. The agencies encouraged banks facing this possibility to contact their primary regulator to discuss how best to address the situation.

Each of the agencies also separately issued statements encouraging banks to work with borrowers impacted by Tuesday's events and to provide adequate grace periods for late loan payments due to slowed mail service or other circumstances.

RESERVISTS ENTITLED TO LOWER INTEREST RATES
Banks with customers who are called to active duty as reservists are reminded that under the Soldiers and Sailors Civil Relief Act of 1940 lenders must reduce to six percent the interest charged to reservists on loans made before they are called to duty. Foreclosures and other legal action must also be suspended while the military emergency lasts.

Reservists qualify for the debt relief if their active duty wages are lower than their income before they were called up, and if the loss of income has affected their ability to pay their bills. Enlisted Army Reserve personnel receive active-duty pay of about $960 a month.

RELIEF FOR FHA BORROWERS AFFECTED BY ATTACKS
HUD has announced a series of measures to provide relief for FHA borrowers affected by the terrorist attacks. FHA lenders have been directed to provide flexibility and not pursue foreclosure for at least 90 days. They have also been asked to waive late fees and suspend reporting delinquencies to credit bureaus. In an unprecedented step, HUD Secretary Mel Martinez also asked all major mortgage lenders to consider providing relief on non-FHA-insured mortgages as well.

Ginnie Mae securities, which are backed by FHA mortgages, will not be affected by the forbearance of mortgage payments because Ginnie Mae will continue to make payments to securities holders.

AGENCY TASK FORCE KEEPS ON TOP OF DEVELOPMENTS
Federal bank regulators in Washington have been in close contact with each other, coordinating communication twice a day since the terrorist attacks to assess, monitor and report on conditions in the banking industry, and trouble shoot any problem areas. Supervisors have been on the lookout for liquidity problems and are monitoring payment and settlement systems. Regional offices are also coordinating with each other to keep on top of local situations.

Most disruptions have been in the New York area where several large banks had offices in or near the World Trade Center area and have had to activate back-up sites and implement their disaster contingency plans. All are up and running and have found ways to work around problems, John Lane, associate director for supervision at the FDIC, told the American Banker.

Federal bank regulators have also been part of the President's Working Group on Financial Markets that has been meeting regularly since last week.

Links to these important regulatory announcements can be found on the home page of ICBA's website: http://www.icba.org

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The staff of Olson Research extends their deepest sympathies to the families and friends of the victims of the September 11th terrorist attacks.