The continued viability of a Bank depends on its ability to earn an appropriate return on its assets, which enables the institution to fund expansion, remain competitive, and replenish and/or increase capital.

In evaluating and rating earnings, it is not enough to review past and present performance alone.

Future performance is of equal or greater value, including performance under various economic conditions. Examiners evaluate “core” earnings: that is the long-run earnings ability of a Bank discounting temporary fluctuations in income and one-time items. A review for the reasonableness of the Bank’s budget and underlying assumptions is appropriate for this purpose. Examiners also consider the interrelationships with other risk areas such as credit and interest rate.

Key factors to consider when assessing the Bank’s earnings are:

  • Level, growth trends, and stability of earnings, particularly return on average assets;
  • Quality and composition of earnings;
  • Adequacy of valuation allowances and their effect on earnings;
  • Adequacy of budgeting systems, forecasting processes, and management information systems, in general;
  • Future earnings prospects under a variety of economic conditions;
  • Net interest margin;
  • Net non-operating income and losses and their effect on earnings;
  • Quality and composition of assets;
  • Net worth level;
  • Sufficiency of earnings for necessary capital formation; and
  • Material factors affecting the Bank’s income producing ability such as fixed assets and other real estate owned (“OREOs”).

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