Pub. 6 2018 Issue 2

Issue 2. 2018 13 Asset quality is satisfactory. “The level of adversely classified assets is modest, but signif- icant loan growth and increasing CRE concen-trations have increased the credit risk profile. As of December 31, 19xx, the adversely classified items coverage ratio is 22.47%, compared to 18.53% at the prior examination. Classified items primarily consist of $5.238 million in loans in addition to $526,000 in OREO. Past due and nonaccrual loans are manageable at 1.20% of total loans. Despite reasonable credit quality metrics, a large portion of the loan portfolio is unseasoned, with annual loan growth aver- aging approximately 18% over the past three years. Although management has slightly relaxed credit underwriting standards for CRE and construction credits as a strategy to meet loan growth targets, examiners did not downgrade any loans during the review. The board should be aware of potential migration risk resulting from permissive standards and an increased level of policy ex- ceptions. The methodology and level of the ALLL are appropri- ate at 1.47% of total loans. Credit administration practices are generally satisfactory.” Concentration risk is rising. “Concentration risk is elevated and increasing, but management has generally appropriate risk management practices in place. As of December 31, 19xx, non-owner-occupied CRE loans represent 471% of total capital (TC), compared to 352% at the prior examination. The concentration increases to 589% of TC when owner-occupied CRE loans are included. Con¬struction and land loans represent 78% of TC, or 137% when including unfunded commitments. Management appropriately performs portfolio stress testing and reports concentrations to the board quarterly. However, quarterly reports can be improved by including detailed portfolio metrics such as LTV, DSCR, geo- graphic location, and policy exceptions.” Do you agree with that analysis? Conclusion To summarize, management must do the following: 1. Recognize asset quality will make or break the bank. 2. Enforce the bank’s risk appetite. 3. Avoid over-risking and underpricing. 4. Manage concentrations. 5. Leverage independent reviews. 6. Stay true to proven standards. Recognize that everything affects capital. Understand the importance of board oversight. Be aware that capital planning must reflect the bank’s risk profile. And heed the lessons from the financial crisis. n ¹From testimony by Jon T. Rymer, inspector general of the FDIC, before the Sub- committee on Financial Institutions and Consumer Credit, U.S. House Committee on Financial Services, March 20, 2013. Roger Shumway is executive vice president and chief credit officer at the Bank of Utah. He can be reached at rshumway@BankofUtah.com . WORDS. DANI GORDEN Advert ising Sales 855.747.4003 dani@thenewsl inkgroup.com