CEIS REVIEW QUARTERLY REPORT Q1-2015

ON MY MIND – CEIS PRESIDENT, JOE HILL

Commercial Lending Clients seem to have fully recovered from the recent financial downturn

"Having been through several economic banking cycles myself, I must stress that credit quality should remain fully intact despite growing competition“

Upcoming Risk Management Questions for CEI Does our current lending policy accurately reflect our current portfolio as well as areas the bank intends to grow in? Do we have the in house expertise to handle an increased and

potentially diversified loan production pipeline? Does the current board have capable members who fully realize the

liability that they have on the line?

IN THE SPOTLIGHT – ELIZABETH “LIZ” WILLIAMS

Managing Director Stress testing ALLL validations (allowance for loan and lease losses) General consulting engagements

Extensive expertise in the Banking Industry with past experience at: Chase Manhattan Bank, FleetBoston, BankBoston Bank of America

Full bio available: http://www.ceisreview.com/biographies/CEIS-Management

CREDIT RISK RATING SYSTEM – A DYNAMIC MANAGEMENT TOOL

What is a Credit Rating System? A tool for banks to measure the quality of their financial transactions Allows banks to confidently understand the level of risk they hold in their portfolios Loan transactions are the main source of credit risk, but banks should also be wary

of derivative, foreign exchange and cash management service risks Why a CRS is mandatory?

The system ensures that banks investment strategies comply with its overall policy It’s a source of documentation and measurement of the risk on which a bank is taking Facilitates the calculation of loan loss reserves

COMMON TRAITS OF A CREDIT RISK RATING SYSTEM

9-grade scale Top 2 grades are reserved for cash collateralized transactions Grades 3-5 house the bulk of the bank’s portfolio

Generally divided into low, medium, and high risk transactions Grades 6-9 incorporate the 4 criticized categories defined by regulators

Special Mention, Substandard, Doubtful, and Loss Watch List Regime

Enhancement of the monitoring of transactions Loan ratings can depend on the level in which they are collateralized Distinction between the ratings of borrower risk and transaction risk

USES OF A CREDIT RISK RATING SYSTEM

Used to rate individual transactions so risk can be consolidated into one risk profile of the banks portfolio

This system offers a constant measurement of risk so that the variable factors can potentially be isolated

Calculate Reserves Aid in the pricing of transactions Determine loan conditions

PROCEDURE OF ASSIGNING RISK AND LOAN REVIEW

Procedure During the process of deciding when to lend Credit ratings must be frequently reassessed Document the changes in the risk levels

Loan Review Ratings must be assigned consistently Ensure that risk ratings are appropriately assigned

PIT FALLS OF CREDIT RISK RATING SYSTEMS

Portfolio managers prefer to lean on the higher range of the credit rankings, while credit assessors rely on the lower rankings

Grading inaccuracies The Grade levels in the portfolio are not effectively diversified

and a bank can hold 70-80% of its loans in one grade. This diminishes the usefulness of the Credit Risk Rating system

CONCLUSION Regulators chief concerns surround credit risk An effective Credit Risk Rating System is necessary for a bank

to stay afloat and out of trouble with authorities if their credit is endangered by economic shocks

A Strong credit system benefits every one Improves credit Improves portfolio management Improves safety, and soundness Improves profitability