I have to develop my own loan grading system for alll and loan review for a small community bank. What criteria should be included in my grading system?

I am including: credit history, collateral value and liquidity, and debt servicing ability.

Thanks for your help.

Why develop your own? You can use the same grades that your regulator uses.

If you want to pm me with your e-mail address, I have a sample loan grade worksheet that I can send you.

I will be happy to send you a copy of our worksheets and grading system, even a copy of our loan review policy. We just finished a FDIC safety and soundness exam yesterday and the regulators said that our program is one of the best they have seen and wished that other community banks had a program like ours. Needless to say, I about fell out of my chair and I was glad that several of our directors heard them say it. Yipeee!!

In the grading system, for commercial loans we use the 5 C's of credit plus documentation. The key is the system is how you weight the different C's. We have tweaked ours over the past 5 years since I put it in place and feel very confident that the loan grading worksheet assign proper grades to loans. Loan officers and loan review use the same worksheets to build consistency. For consumer loans we only use Capacity, Collateral, and Character (credit score).

Just keep in mind that the worksheets are only a tool and sometimes you may have to change the grade up or down depending on the situation. For example, I can have year-end financial statements that show plenty of coverage but since the end of the year, I know that the company has lost a major contract and now are having problems making their payments on time.

I don't know how you report the finding to the management, the board, or audit committee, but that report is also a key component of the program. It will show the regulators that you know and the board knows what the risk level is in the loan portfolio.

If you are interested please e-mail me at ghartz@peoples-bank.com