Issues to look into when buying a community bank
To understand the overall condition of a bank, several points need to analyze in terms of risk management. A look into the earnings will give an idea whether capital is sufficient to support operations and augment capital. If capital is on declining trend it cannot adequately absorb future losses. The volume of adversely classified assets if moderately high will also show that there are weaknesses in loan administration.
Proper funds management should also be looked into to understand interest rate risk, if it is in need of enhanced management oversight and overview. Liquidity, Capital, Asset Quality, Management, Earnings, Liquidity, Sensitivity to Market Risk, Information Technology and CAMEL rating should be thoroughly analyzed.
While doing risk management earning power should be amply analyzed, so as to understand its relations for the accretion of capital and the ALLL. The high cost of funds in combination with low earning asset yields can result in low net interest margin (NYSE:NIM). Additional factors which can contribute to low loan yields can be short-term nature of the portfolio and high level of variable rate loans. Provision expenses should also be kept in mind while doing a risk management analysis.
Board oversight particularly regarding with compliance with policies and procedure should adequately being monitored and managed. Bank policies such as liquidity and IRR should be well in detailed; however, management should also fully comply with the guidelines and preparation of various reports or ratios. Risk management procedures need to be improved in several areas including loan administration, administration, liquidity, and interest rate risk. Management should be also fully aware in case of risk exposure from funding loans secured by the stock of other institutions.
Bank committees, particular Asset-Liability Committee (NASDAQ:ALCO) senior management committee in a bank or thrift institution and Audit, should demonstrated adequate monitoring of their respective areas. A review of the board and ALCO minutes should provide sufficient information or documentation with regard to the loan review, funds management reporting and ensuring audit recommendations have been implement and corrected. The Board should understand the importance that ALCO committee oversight provides in managing, monitoring and implementing procedures to minimize risk exposure to the bank. The board should periodically formulate a new strategic plan before the present one is about to expire that correlates to current and future plans of the bank. Internal routine and controls should monitored by the audit committee.
Asset quality should always be satisfactory. Credit administration and risk management practices should be continuously improved.
These are just few of the steps in terms of risk management.
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