1. “Double, double toil and trouble;
Fire burn, and caldron bubble…”
Will ‘Eye of newt, and toe of frog, wool of bat, and tongue of dog,’
be enough to protect today’s bankers from the scrutiny of
regulators beyond even what William Shakespeare could envision?
By David G. Cogswell
CAMELSolutions, LLC
Macbeth never had to face scrutiny like proactive and defensive uses to which we
today’s beleaguered community banker, must put these assessments.
but had he toiled under an ever watchful
eye like we do today, I am not certain he
would have found a way to persist without An evaluation of your risk assessment
the aid of the three witches! process. Does your credit policy require
your line lenders and credit underwriters
to accurately assess the risk of a credit
Perusals of Regulatory cease and desist before approval? Because the lending
orders issued over the previous 12 months officer knows the customer better than
shows a wide variety of issues confronting anyone else inside or outside of the bank,
the industry. But none carry so much the initial risk assessment must be
weight as the effectiveness of the bank’s performed by the line lender in
risk assessment program and their ability consultation with the credit underwriter.
to apply those risk assessments to their By using their knowledge and using an
ALLL methodology. objective, simple tool to evaluate the
inherent risk in the credit, the bank will
be able to assign a consistent risk
Many banks use outside loan review assessment at origination, while satisfying
companies to perform risk assessments of the Board that loans meeting their credit
credits on a periodic basis. While this policy criteria are being booked.
does a good job of identifying the inherent
credit and administration risk, in many
cases this assessment is too late; the loan An evaluation of your loan review process.
has already been made! How do we Does your loan review team, whether in-
institute an effective initial risk house or outsourced, provide you with the
assessment without adding expensive staff tools needed to measure risk on an
and investing in new software packages? ongoing basis? Your loan review team is
in place to validate what your line lenders
and credit underwriters have already
Once the risk assessment is complete, done. The results of their reviews,
what do we do with them? Many banks reported periodically to the Board, should
simply file them in the credit file, report be used to assist management in
the result to the Board, and expect the preparing their analysis of loan and lease
examiners to be satisfied with our process. losses and ensure your bank is adequately
In fact, there are many important protected against future credit losses.

2. Much like an internal audit function, the community bank for establishing an
loan review team should act in a adequate allowance for loan and lease
proactive, consultative manner, ensuring losses. Will yours stand up to increased
that policy standards are being applied scrutiny? ALLL methodology requires
correctly by the line lenders and credit three different sets of analysis: allocation
underwriters and are being communicated analysis for performing loans, allocation
effectively through the ALLL process. analysis for special identified
concentrations, and specific allocations for
criticized and classified assets. Each type
An evaluation of your portfolio of analysis is different and must be
management. How do your credit supported by data ideally from your own
managers make use of the information portfolio.
provided to line lenders and credit
underwriters each year? Your portfolio
analysis must take into consideration the CAMELSolutions can help you evaluate
current market conditions, portfolio your credit administration processes to
concentrations, and changes in the ensure that the bank is well positioned for
performance of the underlying businesses its next exam. Our solutions can let your
and collateral supporting the loans. Most Board rest easy that the risks inherent in
core processing systems provide ample the loan portfolio have been identified and
user fields to track this information properly reserved.
allowing management to see changes in
the portfolio that may not be uncovered Let us show you that proper loan
simply through delinquency analysis. administration isn’t magic…
This type of analysis allows the bank to
take a proactive approach, identifying
weakening credits and devising exit Dave Cogswell is the credit principal at
strategies that may allow the bank to get CAMELSolutions, LLC – a banking
out whole. consultancy that helps clients improve their
CAMELS rating and increase shareholder
value. Call him at (561) 213-8146 or email him
An evaluation of your ALLL methodology. at dave.cogswell@camelsolutions.com.
Many of the current enforcement actions
criticize the methodology used by