Growth
Category: Corporate Governance
Members of Supervisory Council should also look at the effect of growth on the bank’s asset quality, earnings, capital, liquidity, and exposure to risk. Rapid growth may harm the bank as the bank may assume more risk than expected. Managing additional risk or a new risk profile can be costly and strain resources. In a growth environment, personnel with the requisite expertise must be handling new lines of business or assuming additional responsibility. The bank must also have control and information systems that are adequate to handle the bank ‘s increase in size and its greater exposure to risk.
Members of Supervisory Council can identify growth patterns by comparing historical and budgeted growth rates for assets, capital, loans, volatile liabilities, core deposits, and income and expenses. Comparing the bank’s growth rates with those of its peers may also indicate whether the bank is growing inordinately.
Growth Red Flags:
Growth that is not consistent with the bank’s budget or strategic plan.
Growth that is not accompanied by an increasing level and sophistication in risk management controls.
Introduction of new products or activities with little or no expertise or inadequate risk management controls.
Growth that is significantly greater than that of peer banks, even if projected in the bank’s budget or strategic plan.
Higher risk profile than forecast.
Declining capital levels or ratios.
Reliance on unstable or short-term funding sources.
Loan Portfolio Management
Supervisory Councils that effectively manage the loan portfolio understand and control the bank’s risk profile and its credit culture. To accomplish this, members of Supervisory Council have a thorough knowledge of the portfolio’s composition and its inherent risks. The members of Supervisory Council should also understand the portfolio’s industry and geographic concentrations, average risk ratings, and other lending characteristics. They also ensure that the bank has appropriate staffing and expertise for all of its lending activities and that management board is capable of effectively managing the assumed risks.
The members of Supervisory Council should identify adverse trends in the loan portfolio and judge the adequacy of the allowance for loan provisions by reviewing the loan reports. The board, or a credit committee of directors, should receive information on new and renewed loans, past-due and nonperforming loans, other real estate owned (OREO), problem loans and trends in risk ratings identified by management and examiners, charge-offs and recoveries, management’s analyses of the adequacy of the loan loss provisions, composition of the loan portfolio, concentrations of credit, credit and collateral exceptions, and customers with large total borrowings. Comparative and trend data may be best presented in graph form.