Bank Analysis School Case Study

Sunny State Bank

EARNINGS - PROVISIONS & BOND GAINS/LOSSES

Provisions/Average Assets

0.28%

0.25%

20X0 Q4 20X1 Q1 20X1 Q2 20X1 Q3 20X1 Q4 20X2 Q1 20X2 Q2 20X2 Q3 20X2 Q4 20X3 Q1 20X3 Q2 20X3 Q3 20X3 Q4 20X4 Q1 20X4 Q2 20X4 Q3 20X4 Q4 20X5 Q1

0.24%

0.24%

0.20%

Metrics

0.15%

0.15%

0.16%

Bank State All Banks

0.12%

0.08%

0.06%

0.04%

0.03%

20X0 Q4

20X2 Q4

20X3 Q4

20X4 Q4

20X5 Q4

20X1 Q4

Realized Bond Gains/Losses to Average Assets

0.34%

0.35%

0.30%

0.27%

0.25%

0.20%

0.15%

0.13%

0.10%

0.04%

0.05%

0.06%

0.00%

20X1 Q4

20X0 Q4

20X2 Q4

20X3 Q4

20X4 Q4

20X5 Q4

• When assessing the amount of provisions, examiners need to determine whether the level of the ALLL is appropriate to absorb estimated credit losses inherent in the loan and lease portfolio. An ALLL that is not at an appropriate level may be due to any one or a combination of reasons. For example, an ALLL that is below an appropriate level may be caused by a decline in loan quality identified during the examination, an inaccurate ALLL methodology, or an attempt by management to manipulate earnings. If the ALLL is deemed to be materially insufficient during the examination, management will be required to take an additional provisions to bring the ALLL to an appropriate level, thereby increasing the bank’s expenses and adversely affecting earnings • Realized gains on bond sales are generally considered to be non-core earnings. When not part of a bank’s core earnings, examiners should eliminate the gains or losses adjusted for taxes so as to not distort core operating results.