Risk Management Manual of Examination Policies - FDIC

REPORT OF EXAMINATION INSTRUCTIONS Section 16.1
PURPOSE
ITEMS SUBJECT TO ADVERSE CLASSIFICATION
The purpose of this schedule is to provide a detail of adversely classified items, and to communicate the rationale for
adverse classifications via write-up, when necessary.
GENERAL
The page heading includes the interagency definitions of Substandard, Doubtful, and Loss.
All types of assets are subject to adverse classification.
ASSET CLASSIFICATION WRITE-UPS
Asset classification write-ups are prepared to support the examiner’s conclusions and recommendations to the Board
of Directors, senior management, and regulatory authorities (including support for enforcement actions). Generally,
classification write-ups are not necessary when the Asset Quality component is rated 1 or 2. However, when it is
rated 3 or worse, a sufficient number of write-ups should be prepared to clearly support the ratings assigned, to
demonstrate the bank’s inferior asset quality, management’s deficient credit underwriting or credit administration
practices, or to support the examiner’s recommendations for improvement in these areas.
Write-ups may be “tiered” as deemed appropriate. For example, “full scope” write-ups, addressing all seven
elements discussed below, may be accorded for loans over a certain size or to support a specific conclusion(s) or
recommendation(s) in the Report; less comprehensive write-ups may be accorded the next tier; “bullet” write-ups for
the following tier; and name and amount for the remaining items. Homogenous loans may be grouped together and
a total extended, if appropriate. The examiner-in-charge has discretion as to the level of detail necessary to support
conclusions and satisfactorily convey examination findings.
Notwithstanding the Asset Quality rating, write-ups of selected assets should be seriously considered when any of
the following circumstances are present:
• Significant weaknesses are noted in credit underwriting or credit administration policies or practices, or adverse
trends are evident in these elements
• Significant Loss classifications are involved
• Management disagrees with the classification(s)
• The examiner believes the Board of Directors or executive management may not be adequately informed of
certain significant weaknesses in credit policies, practices, or conditions
• The adversely classified asset(s) involves institution insider(s)
• The bank’s internal credit risk identification system is deficient
REPORT PRESENTATION
General
In all cases, adverse classification dollar totals will be set forth in the table at the top of the EDR page. If no
classification write-ups are prepared, the examiner may omit preparation of the Items Subject to Adverse
Classification page. In that case, appropriate lists of classifications should be left with bank management, and a
copy of this listing, signed by an executive officer, should be retained in the examination workpapers. Alternatively,
Report of Examination Instructions (12-04) 16.1-28 DSC Risk Management Manual of Examination Policies
Federal Deposit Insurance Corporation