Read Between the Lines January 2014

January 2014

Read Between the Lines

Each month Bank Insights reviews news from regulators to give perspective on regulatory challenges.

OCC to Target Strategic and Capital Planning Processes

As we’ve said before, the OCC and other regulators are zeroing in on the adequacy of strategic and capital planning processes at community banks. Look no further than the OCC’s semi-annual risk perspective, which lists this issue as the main one for community banks it supervises.  Other areas of concern for OCC examiners: IRR, loan underwriting, operational risk and compliance. The good news: OCC enforcement actions were down in 2013 from previous years.

Fed Takes Over Bank Projections

The Federal Reserve sent a letter to the 30 largest U.S. banks notifying them that they will independently project each bank’s balance sheet and risk-weighted assets under the supervisory stress scenario within the CCAR program, signaling its skepticism of the projected loan balances that the top 18 banks assumed in the prior CCAR stress tests.  

Note:  For most of the regional and community banks that have any levels of excess capital, loan growth is the centerpiece of their strategic plan, not dividends and buybacks.  With our bank clients, Invictus treats loan growth as the Fed treats dividends and buybacks in CCAR: by assuming that it is achieved irrespective of the economic conditions. This allows us to quantify the impact on the bank’s capital requirements.  This is not a practical exercise, but a hypothetical one.  

However, when regulators are reviewing the bank’s strategic plan, they can see that the bank can handle that growth without affecting its capital adequacy, even under severe stress.  This is especially important for aggressive growth banks that have loan growth rates of 15 to 20% plus per annum as part of their plan, says Invictus senior partner Adam Mustafa.

FDIC Releases Training Videos on TDRs, ALLL, Municipal Securities

As promised, the FDIC continued rolling out videos to help bank directors and officers understand regulatory issues and complicated changes. The agency released four videos in December, saying they address the most common questions the agency gets from bankers.

One on municipal securities addresses examiner expectations, investment policies, monitoring and purchase analysis.  An ALLL video provides an overview of regulatory policy statements and accounting standards. It also illustrates an effective loss migration analysis.  The troubled debt restructuring video shows how to identify a TDR, its accounting and regulatory treatment and the multiple note concept. The fourth video is about fair lending.

TruPS and Volcker:  Not a Problem

Federal regulators cleared the way for community banks to keep TruPS-backed CDOs as Tier 1 capital. Regulators announced on Jan. 14 an exemption to the part of the Volcker Rule that considered those CDOs as covered funds. The exemption came about after the American Bankers Association went to court. 

The Future of Community Banking

The FDIC has updated its community bank study and two words are key: consolidation and earnings.  The update notes that while community banks as a whole experienced their best year in 2012 since the crisis, those gains may be short-lived since future earnings growth is dependent on increases in net interest income.  There have been virtually no new charters since the crisis began, and the market continues to tighten, with voluntary closures and mergers.  Most of the community bank failures since the crisis have been tied to commercial real estate concentrations. 

Reviewing Appraisals and Evaluations

The Fed recently provided an overview of how examiners look at a community bank’s appraisal and evaluation program.  Examiners want the collateral valuation process to be independent from loan production and collection, though they concede this may not be possible at small banks.  Common mistakes that banks are making: using outdated appraisals or none at all, not using an appraiser certified or licensed by the state, and not meeting the appraisal regulation’s minimum standards.