ABA Banking Journal - August 2008 - (Page 16B) First, regarding any changes to procedures and policies, we have constantly worked to improve our loan review process over the past two years. We have accomplished the following: 1. All loans rated OAEM (other assets especially mentioned), Substandard, Loss, or Doubtful are reviewed on a quarterly basis. The process discusses information on the borrower company’s financial status, its progress, or lack thereof and a review of the bank’s plan to either upgrade the credit or work the credit out of the bank. 2. We started 12 months ago to review all of the company’s real estate loans (commercial, commercial construction, and residential real estate construction) quarterly. This review includes such information as the status of the borrower; the guarantor; the commitment; the balance outstanding; the value of the last appraisal; updated information on the appraisal (i.e. current trends in the market and their effect on value, in the case of residential real estate units sold, units under agreement of sale, units under construction, lots approved/unimproved, lots approved/improved and raw land); cash flow of the project and global cash flow of all projects of the borrowers and the individual guarantors; rent rolls of the commercial project and vacancy levels. Our present cut-off for this review are loans of $1 million or greater. 3. Review of all aggregate borrowings of $5.0 million or greater, which includes the following: the internal risk rating of the credits; the type of project; the collateral; the committed amount of the loan, the outstanding balance of the loans, guarantors, global cash flow; stress testing of up and down 100 basis points; comments by the lender on the relationship and its progress and tracking global cash flow as a percentage of debt service (greater than 1.20 times debt service; greater than 1.00 times but less than 1.20 times debt service and less than 1.00 times debt service) and any potential impairment of the credit that would result in a net charge off following the rules of FASB’s Statement of Financial Accounting Standards No. 114. 4. Development of maps of our trade area that contain concentrations of credit by counties for all levels of real estate. In addition, we know how many lots we have in each county and the type of lot each is (approved/improved; approved/unimproved; under construction; and raw land). In addition, these maps contain the amount of delinquency by county and type, the concentration of types of real estate loans by county and state, and percentage of each to capital. 5. It is our intention to expand our database to include key ratios for credits from our financial analysis and enhance our rating system to include levels of risk based upon financial data. Second, regarding the allowance for loan and lease losses, we presently have a nine-point rating system, ranging from 1 to 9. It is our intention to expand our ratings of credits in the areas of 3 to 7 to include a risk level (i.e., high risk, medium risk, and low risk) that will be based on such metrics, but not limited to key financial ratios, the value of the collateral, economic conditions (both nationally and locally) and current financial information about the future of economic climate and conditions. In addition, we have altered our ALLL calculations to include trends, historical information, and migration patterns. For trends in the real estate market for the five states that are our market, we presently subscribe to Hanley Woods for the Philadelphia MSA/Camden MSA; Hanley Woods for the Baltimore area; to a private research firm’s reports for residential activities in southeastern Pennsylvania; information supplied by our investment bankers; the government; and other sources. We have been in constant contact with our examiners. We consider our examiners to be a valued source of feedback on what we are doing. We have always taken the opportunity to discuss with them what our thoughts are and to share the information that we develop on a quarterly basis. Our company believes that we should be anticipating what is happening in the economy and making the appropriate decisions about our credit culture. Quoting Jamie Dimon from J.P. Morgan Chase in his message to his shareholders, “The United States and the world have, in fact, had various financial crises every five to seven years. Looking at these crises, some attributes were different, but some were the same.” It is the intention of our company to build a system that will enable us to have the right information to predict any future crisis that our industry will face and, therefore, avoid the negative impact on our shareholders. We believe that our examiners would expect us to create such a system and that is what we intend to accomplish during the next 12 months, while managing our way through the present crisis by using the vast information that is available to us to minimize the risk to our stockholders.
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