Pub. 6 2018 Issue 2

www.uba.org 12 Examiners are watching for the follow- ing key red f lags: • Willingness to approve policy excep- tions or forgive loan covenants. • Elevated asset and funding concen- trations. • High levels of historical or planned growth. • Entering new lines of business. Based on the above, there truly is a range between CAMEL ratings of 2 in each category. Let’s review some exam- ples and see where a bank may be rated. Each bank is unique and the examiner in charge is granted leeway depending on the specifics of each case. Are brokered funds bad? Yes and no. What is the difference for your bank? How does your strategic plan address brokered funds? How does it relate to your asset tenure? Is a decrease in your efficiency ratio good? Yes and no. Is your loan growth outpacing your ability to properly man- age your assets? Is a 40% ACI ratio bad? Yes and no. An example may best illustrate this point: Bank A • ACI ratio = 40%. • Lending markets are deteriorating quickly. • Examiners have identified several downgrades. • Weaknesses have been identified in credit administration and underwrit- ing: Its likely rating is a 3. Bank B • ACI ratio = 40%. • Lending markets have stabilized. • Management has appropriately iden- tified all classifications. • Credit administration and underwrit- ing are satisfactory: Its likely rating is a 2. Unofficial examiner target ranges are a starting point for rating asset qual¬i- ty. Ranges are intentionally broad and overlapping, which gives the examiner discretion: • 0% to 15% (strong). • 10% to 40% (satisfactory). • 35% to 70% (less than satisfactory, or weak). • 60% to 100+% (deficient or critically deficient). Is having a business plan beneficial? Yes and no. How does it align with your strategic plan and actual operations? Is it short-term or long-term in nature? What does it emphasize? Are incentives properly aligned? Always remember the three themes that drive examiners: 1) core earnings, 2) ALLL sufficiency, and 3) adequacy of capital. Overall, does your bank’s stra¬te- gic plan tie to its risk appetite state¬ment, tactical plan, loan policies and proce- dures, credit underwriting, credit risk management, policy exceptions, waivers, and expertise? All must be in alignment. If any are not, the bank is open to criti- cism. A Case Study Consider the following key factors for ABC Bank: • Policy exceptions are increasing. • During the examination there were no downgrades. • Underwriting in CRE is loosening to meet growth targets. • CRE concentrations are increasing, to 471% of total capital. • The loan portfolio is unseasoned. • Loan growth is significant, averaging 17% over the last three years. • The level of problem assets is moder- ate: a 23% ACI ratio versus 18% last year. • Credit administration is satisfactory. • ALLL level and methodology are acceptable. Let’s understand the difference between the CAMELS asset quality ratings. A rating of “1” indicates that asset quality and credit administration practices are strong. Identified weaknesses are minor in nature and risk exposure is modest in relation to capital protection and man- agement’s abilities. Asset quality in such institutions is of minimal super¬visory concern. A rating of “2” indicates that asset qual- ity and credit administration practices are satisfactory. The level and severity of classifications and other weaknesses warrant a limited level of supervisory attention. Risk exposure is commensu- rate with capital protection and manage- ment’s abilities. A rating of “3” is assigned when asset quality or credit administration prac- tices are less than satisfactory. Trends may be static or indicate deterioration in asset quality or an increase in risk exposure. The level and severity of clas- sified assets, other weaknesses, and risk require an elevated level of supervisory concern. There is generally a need to improve credit administration and risk management practices. So, what should the asset quality rating be: 1, 2, or 3? Why? Here is what the examiner could say:  The CAMELS Rating — continued from page 11