CMS Case Study

C loyd Bank and Trust Risk Assessment Summary 2020-2021

Audit Area:

Commercial Loans

Definition (score range)

Risk Factor

Score

High (21-30)

Moderate (11-20)

Low (0-10)

Rationale

Although a substantial level of compliance is required in the area of commercial lending, the Bank employs experienced Lending Officers with knowledge of compliance requirements. Recent changes in regulations over commercial lending have not been as numerous as changes in regulations over consumer and residential lending; therefore, the inherent risk of compliance is somewhat lower as compared to these areas.

Regulatory requirements are limited to low-profile regulations and law issues that warrant action but have significantly lower levels of risk.

Significant regulatory requirements are evident; however, regulatory expectations are clear, seasoned, and considered routine. Violations if any will be technical in nature.

Potential violations of high profile regulations with potential fines, legal liability or costly corrective action are possible.

Compliance

18

Management and the Bank's Lending Officers possess adequate levels of experience and judgment in their decision-making process with regard to commercial lending. The Bank employs experienced Commercial Lenders who handle most of the commercial lending transactions.

Impact on accurate timely financial reporting is minimal. Likelihood of material financial reporting effect is negligible.

Material financial effect is possible; however, activity is routine and noncomplex and errors would be readily evident in normal operations.

Material financial misstatement is possible due to incorrect handling of infrequent, complex transactions or estimates. Critical management decisions may be based on these financial areas. Complex manual or automated systems are new, critical to management

Nature of Transactions

19

Personnel involved with the lending function have been appropriately trained on the Bank's processes, procedures, and systems. As mentioned above, the Bank employs experienced Commercial Lenders who handle most of the commercial lending transactions. Lending limits are set based on job title and experience; lending limits are reviewed at least annually. The Bank does not have a pricing or risk matrix for commercial loan products which could increase risk. The Bank has a Credit Department that performs a annual credit analysis on loans greater than $750,000. The credit analysis is to mitigate the risk of loss. However, lenders have the authority over the final loan decision depending on authority limits. This risk is monitored by both Loan Operations performing a quality assurance review on all closed loans and a third party loan review.

Noncomplex systems and operations are seasoned, with well established back up routines.

Seasoned and complex manual or automated systems are important to management decision making or product delivery; however, collaborating or alternative back-up systems exist.

Nature of Operations

decision making, or important to product delivery.

21

Controls are nonexistent or known to be weak.

There is no basis for control assessment, or they are thought to be weak. Minor changes since last audit are anticipated this year.

Controls are strong or adequate.

Internal controls are in place and function adequately on an overall basis.

Internal Controls

12

Changes to systems, processes, or procedures

No changes since last audit are planned this year.

The Bank increased CRE lending by eighty percent in 2020 by participating in the SBA's PPP program. Thirty five percent of the loans granted have been forgiven as of late January 2021. In 2021, the Bank does not expect significant changes to their commercial loan portfolio other than the continued forgiveness of PPP loans.

Major changes since last audit are anticipated this year or not recently reviewed. Management lacks experience or places low priority on internal controls.

12

Management has average experience.

Management is experienced and has high priority on controls.

Members of management have achieved their positions within the Bank because of their level of knowledge, demonstrated skills, and experience within the banking industry. A strong emphasis will be placed on maintaining a sound control environment with loan growth.

Management

10

92

Risk Score

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