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Trend analysis within your Watch List

Sageworks
February 13, 2015
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A standard component of monthly board meetings is an update on the performance and volume of the institution’s Watch List, the group of adversely classified loans under close supervision due to past nonperformance. Oftentimes, the Watch List includes loans rated as a (low) Pass, Special Mention, or Substandard, though in some situations the bank also includes loans nearing these thresholds as precautionary measure.

A trend analysis for the Watch List may be analyzed on a variety of fronts including

1. Outstanding Balance
2. Number of Loans
3. Number of Borrowers
4. Total Exposure

This group of problem loans holds special interest to the Board, in part because of its potential impact on the allowance for loan and lease losses (ALLL). Further decline in this part of the portfolio necessitates an increased impairment for these loans and therefore an additional allowance provision. Given the allowance is often overly scrutinized by examiners and because it directly impacts the bank’s earning potential, movements within the ALLL are an important board meeting agenda item.

 

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If the Watch List continues to degrade in credit quality, the board may also use the decline as an indication that the special asset management process needs further resources (too many loans to manage?) or amended policy (insufficient communication with the borrower before or after it’s been adversely classified) that can better attempt to cure the problem loans.

More granular reporting of the Watch List may provide insight into the cause of declining credit quality, therefore enabling the bank or credit union to identify and rectify the processes or policies that may be responsible. Possible segmentations or data cuts to use when analyzing the Watch List include but are not limited to

• Delinquency
• Loan Type
• Federal Call Code
• NAICS or Industry Classification of the Borrower(s)
• Originating Loan Officer
• Regulatory Risk Rating Classification
• Branch

These segmentations of the Watch List may reveal to the bank or credit union that adversely classified loans have in common characteristics that could be stymied. If a disproportionately high percentage of the loans fall into one NAICS code, for example, that may be an industry to avoid for new originations, price differently or invest in so the institution has adequately trained industry specialists to review those credits.

 
About the Author

Sageworks

Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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