Asset Quality Ratings

Asset Quality
The asset quality rating reflects the quantity of existing and potential credit risk associated with the loan and investment portfolios, other real estate owned, and other assets, as well as off-balance sheet transactions. The ability of management to identify, measure, monitor, and control credit risk is also reflected here. The evaluation of asset quality should consider the adequacy of the allowance for loan and lease losses and weigh the exposure to counter-party, issuer, or borrower default under actual or implied contractual agreements. All other risks that may affect the value or marketability of an institution’s assets, including, but not limited to, operating, market, reputation, strategic, or compliance risks, should also be considered. The asset quality of a financial institution is rated based upon, but not limited to, an assessment of the following evaluation factors:
 The adequacy of underwriting standards, soundness of credit administration practices, and appropriateness of risk identification practices;  The level, distribution, severity, and trend of problem, classified, nonaccrual, restructured, delinquent, and nonperforming assets for both on- and off-balance sheet transactions;  The adequacy of the allowance for loan and lease losses and other asset valuation reserves;  The credit risk arising from or reduced by off-balance sheet transactions, such as unfunded commitments, credit derivatives, commercial and standby letters of credit, and lines of credit;  The diversification and quality of the loan and investment portfolios;  The extent of securities underwriting activities and exposure to counter-parties in trading activities;  The existence of asset concentrations;  The adequacy of loan and investment policies, procedures, and practices;  The ability of management to properly administer its assets, including the timely identification and collection of problem assets;  The adequacy of internal controls and management information systems; and  The volume and nature of credit-documentation exceptions. Ratings A rating of 1 indicates strong asset quality and credit administration practices. Identified weaknesses are minor in nature and risk exposure is modest in relation to capital protection and management’s abilities. Asset quality in such institutions is of minimal supervisory concern. A rating of 2 indicates satisfactory asset quality and credit administration practices. The level and severity of classifications and other weaknesses warrant a limited level of supervisory attention. Risk exposure is commensurate with capital protection and management’s abilities. A rating of 3 is assigned when asset quality or credit administration practices are less than satisfactory. Trends may be stable or indicate deterioration in asset quality or an increase in risk exposure. The level and severity of classified assets, other weaknesses, and risks require an elevated level of supervisory concern. There is generally a need to improve credit administration and risk management practices. A rating of 4 is assigned to financial institutions with deficient asset quality or credit administration practices. The levels of risk and problem assets are significant, inadequately controlled, and subject the financial institution to potential losses that, if left unchecked, may threaten its viability. A rating of 5 represents critically deficient asset quality or credit administration practices that present an imminent threat to the institution’s viability.