Pub. 6 2016-2017 Issue 4

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S January • February 2017 15 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 after exams 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, ap - proximately 12 percent of loan-related MRBAs addressed concerns with the risk management practices governing concentrated loan exposures; in 2015, credit concentra- tion-related MRBAs rose to 22 percent.” Regulators issued a warning late last year that they would pay particular attention to CRE concentration risk man- agement in 2016. Banks are reporting that they already have receivedMRAs andMRBAs 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 cor- rect 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 anMRA if they don’t provide a plan during the actual exam. The Comptroller’s Bank Supervision handbook outlines how examiners should write MRAs. They must: √ √ Describe the issue, its root cause and contributing factors √ √ Lay out potential consequences of inaction √ √ Describe expectations for corrective measures √ √ Document management’s commitment to fixing the problem, including a timeline and names of who are responsible Expect OCC examiners to continue their focus on credit underwriting practices at community banks, particularly in portfolios with concentrations, according to the Comptroller’s Fiscal 2017 Bank Supervision Operating Plan. Regulators will evaluate whether banks are easing standards, “in structure and terms, increased risk layering, and potential fair lending implications. Reviews will focus on new products, areas of highest growth, or portfolios that represent concentrations, such as commercial and industrial, commercial real estate, and auto loans.” Other supervisory priorities include stress testing practices, strategic risk, including strategies focused on M&A, operational risks, interest rate risk, ALLL documentation and support, and cybersecurity. n 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. Expect OCC examiners to continue their focus on credit underwriting practices at community banks, particularly in portfolios with concentrations, according to the Comptroller’s Fiscal 2017 Bank Supervision Operating Plan. Regulators will evaluate whether banks are easing standards, “in structure and terms, increased risk layering, and potential fair lending implications. Lisa Getter is the partner in charge of communications at Invictus, a data-driven advisory firm that specializes in M&A, strategic and capital planning and stress testing.