Pub. 6 2018 Issue 2

www.uba.org 10 E veryone thinks their own manage- ment team is great. After all, they are a part of it, so it’s very hard to be objective. But if a bank’s management are working toward the pinnacle of a “1” CAMELS rating and never receive it, they must look deep into their souls and realize that maybe they aren’t so great after all. In addition to quantifying a bank’s exist- ing and potential credit risk, examiners also look into the ability of bank man- agement to identify, measure, monitor, and control that credit risk. How well examiners believe a bank is performing in those areas has a material impact on each bank’s CAMELS rating—made up of capital adequacy (C), quality of assets (A), quality of management (M), earn- ings (E), liquidity (L), and sensitivity to market risks (S). It’s inevitable that some banks will hear negative feedback from examiners. But if those banks counter that feedback by demonstrating effective, responsive man- agement, they can score better CAMELS ratings than banks experiencing similar issues but failing to demonstrate proac- tive management. This article offers suggestions for how management can make a material dif- ference in CAMELS evaluations, simply by asking the right questions and then discussing them openly and honestly. Currently, regulators and bankers alike are noting rapid asset growth, rising cybersecurity risk, funding of loans with brokered deposits, concentrations of all types, pressure on the return on assets, and capital needs in all areas of each bank. Regulators and management want us to remember that, as noted by the FDIC, during the Great Recession “the majority of community banks failed as a result of aggressive growth, asset concen- trations, poor underwriting, and defi- cient credit administration coupled with declining real estate values.” 1 With that in mind, any bank with an eye toward improving its CAMELS number should be asking the following questions. How would others rate your underwrit- ing and credit administration? Is your bank’s pattern of recognition and implementation merely a response to regulatory criticism or does it anticipate changes in the economy? Does your bank follow its written risk appetite statement? Is your board aware of the pattern of loan policy, loan documen- The CAMELS Rating - How to Get Over the Hump By Roger Shumway Executive Vice President, Chief Credit Officer, Bank of Utah You Can Make A Material Difference In A Regulatory Examination