Pub. 6 2018 Issue 2

Issue 2. 2018 11 tation, and post-closing documentation exceptions? Is your board aware of trends in loan covenant violations, waivers, and forbearances? Do most of the changes in your loan grade come from loan officers, loan re- view, or credit administration? What has been your bank’s trend of examination recommended downgrades over the last five exams? If your bank has an unseasoned loan portfolio (that is, one less than three years old), management’s expertise and experience are key and risk selection is critical. It will take two to three years to fully season the portfolio. If your bank’s loan portfolio is growing faster than the market is expanding, are your results aligned with your strategy? Are you resisting competitive pressures? Are you over-risking or underpricing? Does the bank have any new, modified, or expanded products and services? If so, have the strategic, reputation, credit, operational, compliance, and liquidity risks been quantified? Was proper due diligence performed and were approvals obtained? Were effective change-man- age¬ment processes to manage and con- trol new or modified operational risks fol- lowed? How robust are the performance and monitoring? Were new third-party relationships entered into? What are the level and trends of prob- lem assets? What are the trends and the level of your bank’s due loans and its nonaccruals? What has been your bank’s experience in write-offs? What trends have been noted between your most recent examination and now? Is your allowance for loan and lease losses adequate? Examiners view ALLL as the first buffer against losses; thus, they will opine as to both its adequacy and the appropri- ateness of its methodology. Is the board involved in its approval? If you have an unseasoned loan portfolio, how do you demonstrate to the examiners that your ALLL is directionally consistent? If the ALLL/total loans and leases has been 1.49%, 1.52%, and 1.48% over the last three years, the overall methodology is probably acceptable. What are your asset concentrations? There are no hard limits and no safe harbors when it comes to loans subject to the 100% and 300% of total capital guid- ance. Management must have expertise in its market and have in place the proper elements before reaching one of these two thresholds. A bank would be wise to establish its own definition of a concentration in much the same way that it does a house lending limit versus the legal lending limit, thus establishing a warning path. The higher the concentration, the more robust the management and reporting required. Meanwhile, the board would be well advised to understand the gap analysis between regulations and the bank. Keep your board apprised as to the effect high-volatility acquisition, development, or construction exposure will have on risk-weighted capital. Does management or the board employ third-party reviews? To hold management accountable, does either the board or management employ third-party reviews? Is the scope of the re- views dictated by the board? Who reviews the findings? What is your management’s level of expertise? Please be cold fact honest in answering the following questions: • Do the examiners absolutely trust management and can management present itself as a student of regu- la-tions and refer easily to them? • Is management seasoned not only in their positions, but through econom- ic cycles? • How well does management exhibit knowledge of the markets the bank serves? • Is management combative with the examiners? • How many regulators meet with just one member of your management team when they have significant issues to discuss? • Does management disregard what the examiners bring to its attention? • How quickly and thoroughly does management respond to regulator findings? Are findings cleared easily by the examiners? Also remember that management is eval- uated on how well it can recognize asset quality (this will make or break the bank), enforce risk appetite, avoid over-risking and underpricing, manage concentra- tions, leverage independent reviews, and stay true to proven standards. A BANK WOULD BE WISE to estab- lish its own definition of a concentration in much the same way that it does a house lending limit versus the legal lending lim- it, thus establishing a warning path. ACI Coverage Ratio Adversely classified items (ACI) are comprised of classified loans and invest- ments, OREO, etc., divided by equity capital plus ALLL. As stated, the examiners’ options or ranges are broad and overlapping, giving them discretion—and, again, giving management the option to shine (or not). If your bank has an unseasoned loan portfolio (that is, one less than three years old), management’s expertise and experience are key and risk selection is critical. It will take two to three years to fully season the portfolio.  The CAMELS Rating — continued on page 12