Regulatory Write-ups Point to Emerging Risks in Community Banking

Don’t be surprised if your bank receives a write-up about supervisory concerns after your next exam, whether it’s a Matter Requiring Board Attention (MRBA) from the FDIC, or a Matter Requiring Attention (MRA) from the OCC.

The FDIC reveals in the summer issue of Supervisory Insights that 36 percent of banks rated 1 or 2 received an MRBA in 2015. The OCC reports that it had more than 4,000 outstanding MRAs in 2015, but it won’t say what percentage of banks that entails.

Though the numbers are down – the FDIC says 55 percent of satisfactory-rated banks received MRBAs in 2011 and the OCC had more than 9,000 outstanding MRAs in 2012 – issues such as commercial real estate concentration management may lead to an uptick in the coming years.

The FDIC article, “‘Matters Requiring Board Attention’ Underscore Evolving Risks in Banking,”  says the write-ups act as an early warning system so potential problems can be fixed before it is too late.  The article notes that MRBA trends “can provide a picture of risks that may be developing within the industry.”  An OCC spokesman noted that MRAs are a normal outcome of the examination process.

While write-ups may be directed at senior management, regulators expect the board of directors to be in charge of the process to correct deficiencies.

Management-related issues and loans most frequently lead to MRBAs, the FDIC noted, with deficiencies related to audits, policies and procedures and then strategic planning the most common triggers.  But while MRBAs in the loan category have decreased, issues related to concentration risk management are increasing.

“Since community banks typically serve a relatively small market area and generally specialize in a limited number of loan types, concentration risks are a part of doing business,” the FDIC article notes. “Consequently, the way these banks manage their concentration risk is important. In 2014, approximately 12 percent of loan-related MRBAs addressed concerns with the risk management practices governing concentrated loan exposures; in 2015, credit concentration-related MRBAs rose to 22 percent.”

Regulators issued a warning late last year that they would pay particular attention to CRE concentration risk management in 2016. Banks are reporting that they already have received MRAs and MRBAs as a result of their concentrations.

The FDIC noted that banks with MRBAs that also had high concentration levels of CRE, ADC or agriculture also tended to have an increased in warnings about liquidity risk. That’s consistent with Call Report data that showed the proportion of liquid assets to total assets held by smaller banks has been declining.  Loan-related MRBAs also involved ALLL issues and problem assets.

The OCC reported that the top MRA categories for small banks were credit, enterprise governance and bank IT (also an issue with the FDIC).

Regulators expect board of directors to respond and correct the weaknesses that examiners have identified. The FDIC noted that in about 70 percent of the MRBAs in 2014 and 2015, banks addressed the problems in their first response to the agency. The OCC updated its MRA guidance in 2014, noting that banks must submit a board-approved action plan within 30 days of receiving an MRA if they don’t provide a plan during the actual exam.