Interest Rate Sensitivity
A bank typically uses three tools to measure its balance sheet and earnings sustainability in changing interest rate environments: Gap, EAR, and EVE. We use +/- 100 and 200 basis point standard shock environments and +/- 300 and 400 basis point stress test shock environments (resulting in an instantaneous and parallel shift in the yield curve) to estimate interest rate repricing and earnings scenarios for the bank.
Gap
Measures the amount of assets maturing/repricing versus the amount of liabilities maturing/repricing in a given time frame (can be cumulative or periodic in nature).
Earnings at Risk (EAR)
Short term risk measure typically gauged at the 12 month period, calculated using the changes from base case in net interest income as a result of the shocked interest rate scenarios. We also calculate earnings at risk for 3 month, 24 month, and 60 month periods. Expressed in dollars or as a percentage change from Base Case.
Economic Value of Equity (EVE)
Long term risk measure that gauges the difference in the market value of assets less the market value of liabilities. This estimation of risk is based on the change in the mismatch between the duration of a bank's assets and the duration of the bank's liabilities in the shocked rate environments when compare to base case. Expressed as a dollar change or as a percentage change from Base Case.
Duration
A measure of the sensitivity of the price change of a financial asset or liability to movements in interest rates. Duration is calculated by discounting the time-weighted cash flows for each instrument over various interest rate environments.
Asset Sensitive
Net Interest Margins and earnings rise as interest rates increase.
Liability Sensitive
Net interest margins and earnings rise as interest rates decrease.
Convexity
A measure of how the rate of change in duration varies with changes in interest rates.
Negative Convexity
Occurs as the change in duration or price declines more in a rising rate scenario than its duration or price will increase in a falling rate scenario.
Liquidity
Measures the bank's ability to cover and repay its debts. Typically, compares the institution's assets, cashflows, and available borrowing capacity to liability cashflows.
Peer Group
A set of banks used for comparing performance levels. The Peer Group data is typically composed of all banks headquartered in the state and reporting to the FDIC.
Well Capitalized
Refers to the result of a measured ratio that is above the optimal calculated capital ratio.
Adequately Capitalized
Refers to the result of a measured ratio that is below the suggested capital level but is above a minimally accepted level. A result below this level would indicate the institution is under capitalized from a regulatory perspective.
Efficiency Ratio
This is a measure of non-interest expense compared to total operating revenue, expressed as a percentage. A trend downward in this ratio would indicate that management is controlling overhead expenses and improving revenue.
Return on Assets (ROA)
An annualized performance measure of the bank's earnings performance adjusted for its asset base.
Return on Equity (ROE)
An annualized performance measure of the bank's earnings performance adjusted for its equity base.
Equity to Assets
A measure of the bank's capital funding compared to its asset base.
Loans to Deposits
Used to measure what extent of the bank's loan portfolio is funded by its core deposits. The higher the ratio the more reliant the bank is on non-core funding.
Net Non-Core Funding Dependence
A ratio used to measure the bank's reliance on secondary funding sources. The higher the ratio the greater the dependence and the higher the bank's sensitivity to credit, price, and liquidity exposures.
Short Term Securities to Total Assets
A liquidity measure used to approximate the percentage of the bank's most liquid assets compared with the total balance sheet.
Volatile Liabilities Dependence
A measure of the bank's reliance on wholesale funding sources to fund interest earning activities.
Loan Loss Allowance to Total Loans
A measure of loan quality and exposure to poor lending habits.
Non-Current Loans to Total Loans
A measure of loan quality and exposure to non-accruing loans.
Loan Loss Provision to Total Loans
A measure of the bank's expectation for loan portfolio to perform as contracted.
Regulatory Liquidity
Broad liquidity measure used to determine the ability of the bank to cover its core and short term liabilities with its most liquid assets. The higher the ratio the lower the bank's potential exposure to a funding liquidity shortfall.
Liquidity Coverage
A measure of the bank's ability to meet immediate liquidity concerns in a potential stressed environment.
Crisis Coverage
A measure of the bank's ability to meet immediate liquidity concerns in a potential worst-case environment.
Leverage Ratio (Core Capital Ratio)
A measure of bank's use of borrowed funds in order to grow its base to achieve higher earnings growth.