Western Banker - November/December 2016 - 8

Back to the Future to Manage Portfolio Performance Credit Administration Measures (CAM) CAMs reflect process; i.e., they draw on data as credit rolls through the pipeline or as it performs on the books: * Documentation exceptions * Credit policy exceptions * Past-due annual reviews * Stale risk ratings * Excessive extensions Loan Documentation exceptions (LDE) occur because a document is missing, incomplete or erroneous. LDEs typically happen as a consequence of haste in closing, but special asset officers complain that problem loans are especially troublesome because they usually come laden with LDEs that often add months to the workout process. As preventive maintenance, the bank should establish the list of documents necessary to book a legally enforceable loan and the appropriate higher echelon authorities to permit any defectively documented loan to be booked or funded. LDEs continue for the life of the loan or until a credit action, such as renewal or restructure, allows the bank to re-document the transaction. continued Credit policy exceptions (CPE) measure how well the lending activity is following the bank's credit strategy. Large numbers of credit policies may be an opportunity for remedial training or a review of the policy itself. For example, a surge in guarantee exceptions may be a reflection of increased competition with other banks willing to forego guarantees or a result of new lenders unaware of the bank's policy requiring guarantees. In either case, the incidence of a policy exception is cause for some action. Figure 2 illustrates some common exceptions. Some CPEs are cited for the transaction or obligation, others for the borrower or obligor. This distinction minimizes doublecounting. For example, a borrower with three loans may have poor quality financial statements, but this exception should not be counted three times against each transaction. One of the three loans may have too high a loan-to-value ratio, but that would be counted only once on the obligation with the excessive LTV, not on all three loans or against the obligor. Figure 2. Credit Policy ExcepƟons ObligaƟon Obligor 01 guarantor 02 loan term 03 amorƟzaƟon 04 undesirable collateral 05 max LTV 06 exceeds FIDICIA LTV 07 appraisal 08 environmental risk 09 speculaƟve purpose 10 unsecured LOC 11 LOC clean-up 12 pre-leasing/pre-sales 13 leasing/occupancy rate 14 release prices 15 max LTC 16 min equity 17 borrower 18 DSC 19 financial statement quality 20 TCE 21 higher risk/undesirable industry 22 Ɵme in business 23 LFT ____________________________ Glossary: DSC = debt service coverage LFT = leveraged financial transacƟon LTV = loan to value LOC = line of credit LTC = loan to cost Max = maximum Min = minimum TCE = total credit exposure 8 www.wib.org Western Banker Past-due annual reviews (AR) may be caused by busy lenders, overworked credit analysts, unreasonable review processes, credit information delays, etc. One solution to consider is adjusting the degree of the review by the size and risk inherent in the relationship; require a "full review" for borrowers with larger credit exposures and poor risk ratings, and permit a "limited review" for smaller, better rated obligors. A more cautious approach is appropriate for tardy financials from borrowers simply because these delays typically portend deteriorating financial prospects. Regardless, portfolio management should periodically remind relationship managers that the AR offers an opportunity to renew contact and sustain the relationship with the borrower. It is well documented that an existing borrowing relationship is much cheaper than opening a new relationship. Stale risk ratings (RR) are another red light that management must monitor closely because their presence signals that no one is monitoring the health of the borrower. One positive outcome of the ongoing Basel Accords, the Dodd-Frank regulatory guidance and the Financial Accounting Standard Board's new Current Expected Credit Loss (CECL) accounting standard is the attention they have directed to the currency of risk ratings. A bank is expected to review and revise as needed a borrower's RR at least annually, but more frequently if a significant event has occurred that may impact the borrower's ability to repay. The event could be financial, such as an unprofitable quarter or a merger, or non-financial, such as a fire or the death of an owner. Most RR systems rely heavily on financial information, so any delay in the receipt of current financials also delays the update of the borrower's RR. Migration of RRs is a common portfolio management tool for changes in RR from period to period, but if the RRs are stale, it is of little value. http://www.wib.org

Table of Contents for the Digital Edition of Western Banker - November/December 2016

A Message from the President & CEO
Back to the Future to Manage Portfolio Performance
The WIB App Store
Managing Your Bank’s Reputation by Taking an “Inside-Out” Approach to Communicating News
Interest Rate Risk and ALM: Most Institutions Are Doing it Wrong
Everything Old is New Again — Updating FCRA Compliance in a CFPB World
Professional Development
Secrets to Employee Engagement for Bank Managers
March of the Millennials: Cultivating Relationships Within the Digital Generation
Welcome New Members
Index of Advertisers
Western Banker - November/December 2016 - cover1
Western Banker - November/December 2016 - cover2
Western Banker - November/December 2016 - 3
Western Banker - November/December 2016 - 4
Western Banker - November/December 2016 - A Message from the President & CEO
Western Banker - November/December 2016 - Back to the Future to Manage Portfolio Performance
Western Banker - November/December 2016 - 7
Western Banker - November/December 2016 - 8
Western Banker - November/December 2016 - 9
Western Banker - November/December 2016 - The WIB App Store
Western Banker - November/December 2016 - 11
Western Banker - November/December 2016 - 12
Western Banker - November/December 2016 - Managing Your Bank’s Reputation by Taking an “Inside-Out” Approach to Communicating News
Western Banker - November/December 2016 - 14
Western Banker - November/December 2016 - Interest Rate Risk and ALM: Most Institutions Are Doing it Wrong
Western Banker - November/December 2016 - 16
Western Banker - November/December 2016 - 17
Western Banker - November/December 2016 - Everything Old is New Again — Updating FCRA Compliance in a CFPB World
Western Banker - November/December 2016 - 19
Western Banker - November/December 2016 - 20
Western Banker - November/December 2016 - Professional Development
Western Banker - November/December 2016 - Secrets to Employee Engagement for Bank Managers
Western Banker - November/December 2016 - 23
Western Banker - November/December 2016 - March of the Millennials: Cultivating Relationships Within the Digital Generation
Western Banker - November/December 2016 - 25
Western Banker - November/December 2016 - Index of Advertisers
Western Banker - November/December 2016 - cover3
Western Banker - November/December 2016 - cover4
http://www.nxtbook.com/naylor/WIBS/WIBS0117
http://www.nxtbook.com/naylor/WIBS/WIBS0616
http://www.nxtbook.com/naylor/WIBS/WIBS0516
http://www.nxtbook.com/naylor/WIBS/WIBA0016
http://www.nxtbook.com/naylor/WIBS/WIBS0316
http://www.nxtbook.com/naylor/WIBS/WIBS0216
http://www.nxtbook.com/naylor/WIBS/WIBS0116
http://www.nxtbook.com/naylor/WIBS/WIBS0615
http://www.nxtbook.com/naylor/WIBS/WIBS0515
http://www.nxtbook.com/naylor/WIBS/WIBS0415
http://www.nxtbook.com/naylor/WIBS/WIBS0315
http://www.nxtbook.com/naylor/WIBS/WIBS0215
http://www.nxtbook.com/naylor/WIBS/WIBS0115
http://www.nxtbook.com/naylor/WIBS/WIBS0614
http://www.nxtbook.com/naylor/WIBS/WIBS0514
http://www.nxtbook.com/naylor/WIBS/WIBS0414
http://www.nxtbook.com/naylor/WIBS/WIBS0314
http://www.nxtbook.com/naylor/WIBS/WIBS0214
http://www.nxtbook.com/naylor/WIBS/WIBS0114
http://www.nxtbook.com/naylor/WIBS/WIBS0613
http://www.nxtbook.com/naylor/WIBS/WIBS0513
http://www.nxtbook.com/naylor/WIBS/WIBS0413
http://www.nxtbook.com/naylor/WIBS/WIBS0313
http://www.nxtbook.com/nxtbooks/naylor/WIBS0213
http://www.nxtbook.com/nxtbooks/naylor/WIBS0113
http://www.nxtbook.com/nxtbooks/naylor/WIBS0612
http://www.nxtbook.com/nxtbooks/naylor/WIBS0512
http://www.nxtbook.com/nxtbooks/naylor/WIBS0412
http://www.nxtbook.com/nxtbooks/naylor/WIBS0312
http://www.nxtbook.com/nxtbooks/naylor/WIBS0212
http://www.nxtbook.com/nxtbooks/naylor/WIBS0112
http://www.nxtbook.com/nxtbooks/naylor/WIBS0611
http://www.nxtbook.com/nxtbooks/naylor/WIBS0511
http://www.nxtbook.com/nxtbooks/naylor/WIBS0411
http://www.nxtbook.com/nxtbooks/naylor/WIBS0311
http://www.nxtbook.com/nxtbooks/naylor/WIBS0211
http://www.nxtbook.com/nxtbooks/naylor/WIBS0111
http://www.nxtbook.com/nxtbooks/naylor/WIBS2011MediaKit
http://www.nxtbook.com/nxtbooks/naylor/WIBS0610
http://www.nxtbook.com/nxtbooks/naylor/WIBS0510
http://www.nxtbook.com/nxtbooks/naylor/WIBS0410
http://www.nxtbook.com/nxtbooks/naylor/WIBS0310
http://www.nxtbook.com/nxtbooks/naylor/WIBS0210
http://www.nxtbook.com/nxtbooks/naylor/WIBS0110
http://www.nxtbook.com/nxtbooks/naylor/WIBS0609
http://www.nxtbook.com/nxtbooks/naylor/WIBS0509
http://www.nxtbook.com/nxtbooks/naylor/WIBS0409
http://www.nxtbook.com/nxtbooks/naylor/WIBS0309
http://www.nxtbook.com/nxtbooks/naylor/WIBS0209
http://www.nxtbook.com/nxtbooks/naylor/WIBS0109
http://www.nxtbook.com/nxtbooks/naylor/WIBS0608
http://www.nxtbook.com/nxtbooks/naylor/WIBS0508
http://www.nxtbook.com/nxtbooks/naylor/WIBS0408
http://www.nxtbook.com/nxtbooks/naylor/WIBS0308
http://www.nxtbook.com/nxtbooks/naylor/WIBS0208
http://www.nxtbook.com/nxtbooks/naylor/WIBS0108
http://www.nxtbookMEDIA.com