Safety and soundness examinations are some of the most important events in the life of a bank, thrift or credit union. Financial institutions spend months preparing for the exams, trying to anticipate examination concentrations and avert problems.
Sageworks, a financial information company that provides risk management solutions to financial institutions, sought insight into this process from institutions that have recently undergone examinations. The Sageworks Bank & Credit Union Examination Survey aimed to provide banks and credit unions greater clarity into current examiner expectations, especially surrounding specific areas such as credit administration, the allowance for loan and lease losses (ALLL) and asset quality.
According to respondents, federal bank and credit union examiners have focused largely on asset quality during recent examinations. While other areas also received attention, three quarters of respondents named asset quality as an area of focus by examiners from the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the National Credit Union Administration (NCUA). The survey found that some of the asset-quality issues receiving criticism from examiners included:
• Risk rating systems
• Higher rates of delinquent and non-performing loans
• Loan reviews that weren’t completed annually or were inconsistent
• Quality issues related to the financial institution’s growing pains, the overall economy or continued real estate devaluation.
Open-ended answers from respondents showed that financial institutions received criticism for a variety of issues. Among those named most frequently in these responses were real estate valuations and concentrations, loan administration (especially documentation exception issues), as well as the calculation and methodology of the ALLL.
Criticisms related to documentation were about having adequate documentation in loan files, collecting financial documents in a timely manner and documenting decisions on risk ratings. Documentation of the ALLL methodology also drew attention. “Document everything!” said one bank with $2 billion to $10 billion in assets examined by the OCC. “Every assumption you make, every calculation process, every reason for why you do it the way you do.”
Two additional themes among respondents:
• That stress testing is being evaluated and recommended strongly in some exams and not in others, even when examined by the same regulatory agency, and
• That there is frustration by financial institutions about changing requirements and standards of evaluation from exam to exam.
Other financial institutions reported a smooth examination process. One financial institution with between $500 million and $1 billion in assets that was examined by the OCC said, “Our most recent exam was one of the cleanest we have ever had.” Another financial institution with between $75 million and $500 million in assets that was examined by the FDIC, reported “no serious criticisms.” Even so, the respondent noted, examiners “still worked through loans with a fine-toothed comb.”
To view the full survey results, please visit Sageworks Bank & Credit Union Examination Survey.
About the survey: Representatives from 165 financial institutions participated in the online survey, conducted between May 17 and June 13, 2013. Poll respondents, who were not randomly selected, included Sageworks financial institution clients as well as members of the “ALLL Forum for Bankers” LinkedIn Group and recipients of Sageworks newsletters. They included chief financial and chief credit officers, credit analysts, compliance and risk management staff, and bank and branch presidents.
By Mary Ellen Biery, research specialist @Sageworks