Pub. 4 2015 Issue 1

13 S P R I N G | 2015 themselves– are compromising their own strategic and capital planning process. And that is an extremely dangerous compro- mise in these uncertain and volatile economic times.” Some market participants believe that loan review is the same as or a substitute for stress testing. Similar to traditional balance sheet or call report analysis, loan review is based on historical and current environments. Stress testing is the only forward-looking way to evaluate the performance of loans in different economic environments and determine their impact on capital adequacy. The Office of the Comptroller considers “some form of stress testing or sensitivity analysis of loan portfolios on at least an annual basis to be a key part of sound risk manage- ment for community banks.” The guidance noted that while many banks routinely conduct interest rate sensitivity analysis, they often don’t have “similar processes in place to quantify risk in loan portfo- lios, which often are the largest, riskiest, and highest earning assets.” While stress tests are not mandated for community banks, the Federal Deposit Insurance Corp. noted in the Summer 2012 issue of Supervisory Insights that stress testing can help banks evaluate lending risks. Examiners found that community banks that “proactively manage their lending function and attempt to plan for, measure and control their vulnerability to adverse events have been better able to make adjustments and improve performance over time.” While many banks have worked out much of their troubled pre-recession loans, those workouts have taken place during a highly artificial interest rate environment and jobless recovery. The recovery has created some dynamics that will have a profound effect on future earnings, capital adequacy and strategic planning. And that is why it is so important for community banks to use stress testing as a tool, now that the recession is over. “Banks gain the most benefit from stress-testing exercises when they are incorporated into the overall risk management and strategic planning processes,” the FDIC notes. Board of directors and senior management can use the results to analyze lending concentrations, capital adequacy, ALLL and the overall risk to the bank, the FDIC said, adding that ‘the strategic value of stress testing may be greatest during the expansionary phase of business cycles.” About the Authors: Adam Mustafa is a co-founder of Invictus Consulting Group and has been providing stress testing and capital adequacy advisory services to banks, regulators, bank investors, and bank D&O insurers since the beginning of the financial crisis. Lisa Getter, a former award-winning journalist, is a partner in communications at Invictus. She was the founding publisher of Bank Safety & Soundness Advisor. F E A T U R E Michelle Fowler, CPA, CIA, CISA, CRMA mfowler@fowlerandcompany.com Tel: 804-350-8654 11757 Dewberry Lane Chester, VA 23831 “…always highly competent, consistent and very approachable during the audit process.” Do you feel like you are paying for redundant services over & over again with Loan Review, Compliance, Internal Audit & External Audit? Do you feel like your internal controls impede progress with- out adding value? Is it difficult for you to find an accessible expert to turn to with questions? At Fowler & Company, we are internal control experts. We work exclusively with Community Banks with a specialized focus on Risk, Internal Controls, Compliance and Internal Audit. We work with Community Banks who struggle with aligning Internal Controls with their business objectives. Is this you? Call today to learn more. FOWLER & COMPANY Internal Audit and Control Consulting Services