Economic Value of Equity Model

Many of you have heard my soapbox speech about the foolishness of Economic Value of Equity calculations and models. I have recent reports of examiners who acknowledge the minimal value of the models but fall back on the “Washington says we have to check and see if you have one” line. In most examinations, it appears that EVE is a “check the box” issue. If you have an EVE report, the examiners don’t take the time to see what it says or how it was calculated. They are happy to be able to mark it off their list and move on to other tasks.

We have been working on an EVE report worthy of the APC logo, and I think we have come up with
a viable product. I plan to introduce it using September 2011 data and make it a quarterly or annual report (your preference). We will have most of the necessary data in our files but will need a new securities report that provides shocked market values. We will be calling soon to request the data and give you information on acquiring it from your portfolio accounting firm.

Bank Policies

There are a few field examiners in our area (the gulf south) who have become enamored with reviewing bank policies. In addition to checking the “big three” policies (Loan, Liquidity and Interest Rate Risk), they are reviewing (somewhat randomly) the following: Capital Plan / Policy, Dividend Policy, Transactions with Affiliates Policy, Management Continuity / Succession Policy and Expense Reimbursement Policy. If you don’t have one or more of these on your policy bookshelf, you should adopt one before the next “friendly visit”. We will gladly share samples of some of these policies, so don’t feel like you have to reinvent the wheel or buy a policy from a vendor.

We have made several subtle changes in recent months to our Liquidity and IRR policies to reflect examiner comments and revisions to our reports. If you haven’t updated these two policies in a while, please let us know and we will send you our current templates.

FDIC Insurance Assessment Invoices

The FDIC sent out second quarter assessment worksheets and invoices this week. This is the first invoice based on the lower rate schedule effective April 1. For those of you in Risk Category I (most CAMELS 1 and 2 institutions), your base annual assessment rate dropped from 12 basis points to 5 basis points (a 59% reduction). The assessment base shifted from Total Deposits (as of the Call Report date) to Average Total Assets less Average Tangible Equity.

The net result for most banks in Risk Category I is a 40-45% expense reduction. If you have not adjusted your daily or monthly accruals in a while, you may be overaccrued. If so, give me a call and let’s talk about a couple of options for making the adjustments.