Concentration and Stress Testing Analytical Services

Ensight CRC Group can provide Concentrations and Stress Testing Analysis beginning with a “top-down” analysis of loan trial balance data fields to identify regulatory and “sensitive” loan portfolio concentrations and followed by “bottom-up” stress testing utilizing Ensight program financial and valuation information to provide a “forward-looking” credit quality and capital adequacy assessment.

Because a concentration of credit tends to perform like a single large exposure, the entire concentration pool of loans is potentially sensitive to the same economic and financial conditions and thereby can potentially pose a risk to earnings and capital. Long ago regulatory guidance addressed the more obvious concentration of Loans to One Borrower. More recently in 2006, regulatory guidance specifically identified Construction and A&D loans representing 100% of risk-based capital and CRE loans representing 300% of risk-based capital as a credit concentration. In 2011 the Comptroller's Handbook identified any category of loans with like characteristics representing 25% of risk-based capital as a concentration of credit, with the understanding that not all of these concentrations represent the same level of risk or required supervision. Regulatory guidance suggests that the bank should further identify concentrations for analysis of “sensitive” pools of loans even below the 25% of risk-based capital threshold.

Initially, a “top-down” approach for identifying concentrations can be accomplished by an analysis of Call Report data fields, such as product code, collateral code, NAICS code, etc. OCC supervisory guidance for Community Banks released in 2012 suggests that a simple stressed loss-rate analysis of concentrations identified by the Call Report data may be appropriate as a foundation for determining if additional analysis is required. For further analysis the Bank may stress test a representative small sample of loans to be reviewed to develop a stressed loss rate for the entire concentration or a segment of the concentration.

Because the bank does not maintain a database related to specific loan financial analysis, a robust “bottom-up” approach for stress testing is not feasible. However, the Ensight relational database over time will facilitate specific loan stress testing for in excess of 75% of the dollar exposure for any identified loan concentration.

Ensight CRC Group can provide a concentration and stress test analytical report on an annual basis to satisfy the integrity requirement for the bank's reporting on the supervision of loan concentrations.