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Key Risks and Exam Prep
June 3, 2021
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Today’s webinar will cover the following areas . . .
1. The Landscape
2. How to prepare for your next examination
3. FDIC 2021 Risk Review
4. OCC Spring 2021 Semiannual Risk Perspective
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Traditional risk metrics continue to be muted by government actions and other programs protecting
troubled borrowers
OCC semiannual Risk Perspective
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The system-wide offering of proprietary relief and mandated programs coupled with unprecedented
stimulus efforts may be deferring potential losses within the financial services industry
OCC semiannual Risk Perspective
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Polling Question #1
Do you believe that the government stimulus packages and foreclosure moratoriums have deferred potential losses in portfolios?
A. Yes
B. No
C. I don’t know
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Polling Question #2
Have you introduced new lending products into your portfolio in the past 12 months?
A. Yes
B. No
C. I don’t know
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Polling Question #3
Have you expanded your lending market area in the past 12 months?
A. Yes
B. No
C. I don’t know
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Bankers need to be prepared for a changing regulatory environment . . .
Changes priorities at the banking
agencies
Return of Onsite Examinations
The New Administration
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1. Review last Examination and be 100% certain that all items are full addressed:
a. Formal or Informal Orders
b. MRBA, MRIA, MRA
c. Entire ROE
2. Ensure you have strong credit admin practices . . . Do not simply rely on lagging indicators
a. New products?
b. Expanded territory?
c. New staff?
d. New policies?
e. Effective credit risk reviews?
3. Maintain an appropriate ALLL/ACL . . . Q-factors are critical
a. Independent review of the methodology
4. Document an effective Risk Management Program
a. Identify, measure, monitor, control
b. Financial metrics and risk thresholds
c. Peer groups (or comparable groups)
5. Verify an effective Corporate Governance Program
a. Board and Committee minutes
b. Appropriate policies
c. Succession Planning
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Top 10 rules for exam preparation . . .
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6. Ensure that all internal items have been fully addressed by the Board’s Audit Committee
a. Audit Plan
b. Exceptions and remedies
c. Documentation
7. Perform Stress Tests
a. Loan Portfolio
b. Interest Rate Risk scenarios
c. Liquidity position
8. Establish an internal communication strategy to avoid surprises
a. Daily updates
b. At least two bankers in room
9. Focus on key compliance issues
a. BSA
b. Fair Lending
10. Perform (or engage FinPro to perform) a thorough pre-exam assessment
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Top 10 rules for exam preparation (continued) . . .
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Polling Question #4
Have you had a negative provision to your ALLL in the past 9 months?
A. Yes
B. No
C. I don’t know
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The FDIC is focused in two key areas . . .
Credit Risks
Market Risks
Key Risks to Banks
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Let’s take a deeper dive into some of the Credit Risk categories . . .
Credit Risk
Commercial Real Estate
Consumer
Housing
Leveraged Lending & Corp Debt
Small Business
Nonbank Financial
Institutions
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Agriculture and Energy are also key areas.
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Market Risk has two key components . . .
Interest Rate Risk and Net Interest Margin
Liquidity and
Deposits
Market Risk
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Let’s take a deeper dive into the Commercial Real Estate risk profile . . .
Credit Risk
Commercial Real Estate
Consumer
Housing
Leveraged Lending & Corp Debt
Small Business
Nonbank Financial
Institutions
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Agriculture and Energy are also key areas.
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CRE loans held by FDIC insured banks reached a record high at year end 2020 . . .
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Clearly the Luxury Hotel industry has been hardest hit . . .
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Some markets have an excess supply of multifamily units . . .
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The pandemic negatively impacted almost all CRE values in early 2020 . . .
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CRE loans at FDIC insured institutions reached a record high at year end 2020 . . .
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$1.9T
$2.6T
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FDIC insured banks held $487.6 billion of CMBS at year end 2020. Approximately 39% of FDIC insured banks hold CMBS, although such holdings generally do not represent a large percentage of capital . . .
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Let’s take a deeper dive into the Consumer risk profile . . .
Credit Risk
Commercial Real Estate
Consumer
Housing
Leveraged Lending & Corp Debt
Small Business
Nonbank Financial
Institutions
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Agriculture and Energy are also key areas.
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No doubt the CARES Act impacted U.S. personal income growth . . .
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Overall consumer debt was down 5% for a year earlier while consumer loan performance was stable in 2020 . . .
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Did the stimulus programs help defer
deterioration in these portfolios?
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Let’s take a deeper dive into the Housing risk profile . . .
Credit Risk
Commercial Real Estate
Consumer
Housing
Leveraged Lending & Corp Debt
Small Business
Nonbank Financial
Institutions
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Agriculture and Energy are also key areas.
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The residential real estate market is heading toward a problem in some parts of the country . . .
Low Inventory
Low Interest Rates
Hot demand
Bubble waiting to happen
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“Ability to Repay” vs “Willingness to Repay”
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The delinquency rate of 3.4% is up 71 bps from a year earlier and the sixth consecutive quarterly increase . . .
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Let’s take a deeper dive into Leveraged Lending risk profile . . .
Credit Risk
Commercial Real Estate
Consumer
Housing
Leveraged Lending & Corp Debt
Small Business
Nonbank Financial
Institutions
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Agriculture and Energy are also key areas.
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Both high-yield and investment grade bond issuance ended 2020 about 60% above 2019 levels . . .
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Improved defaults rates are somewhat mitigated by light or missing covenants . . .
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• The low interest rate
environment helped
improve cash flow
ratios
• The share of
leveraged loans
lacking lender-
protecting covenants
remained at an all-
time high
• More than 86% of
newly issued
institutional leveraged
loans lack appropriate
covenants
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Let’s take a deeper dive into the Small Business risk profile . . .
Credit Risk
Commercial Real Estate
Consumer
Housing
Leveraged Lending & Corp Debt
Small Business
Nonbank Financial
Institutions
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Agriculture and Energy are also key areas.
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What impact did the stimulus have on bankruptcies . . .
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Small businesses tend to file Chapter 7 (liquidation) rather than Chapter 11 (reorganization)
Small businesses benefited from the various stimulus programs
Chapter 11 filings increased 33% in 2020
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The industry experienced negative loan growth rates excluding the PPP . . .
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The PPP effect on C&I performance cannot be ignored . . .
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Let’s take a deeper dive into the nonbank risk profile . . .
Credit Risk
Commercial Real Estate
Consumer
Housing
Leveraged Lending & Corp Debt
Small Business
Nonbank Financial
Institutions
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Agriculture and Energy are also key areas.
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Community banks are not heavily involved in this lending area . . .
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From an overall industry perspective, though, this lending segment shows the greatest growth . . .
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Market Risk has two key components . . .
Interest Rate Risk and Net Interest Margin
Liquidity and
Deposits
Market Risk
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Market Risk has two key components . . .
Interest Rate Risk and Net Interest Margin
Liquidity and
Deposits
Market Risk
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The vast majority of banks that reported the highest levels of NIM compression – ranking in the 80th
percentile for all banks – had less than $1 billion in total assets . . .
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Community banks hold more time deposits (17.5% of TA) compared to noncommunity banks (5.6% of TA) . . .
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Market Risk has two key components . . .
Interest Rate Risk and Net Interest Margin
Liquidity and
Deposits
Market Risk
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Stimulus programs, Stay-At-Home Orders, reduced consumer spending contributed to this unique liquidity situation . . .
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Not surprisingly, Operational / Credit / Compliance are top three (3) areas of concern . . .
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The OCC ultimately categorizes Key Risks into these four buckets . . .
Key Risks
Operational
Credit
Libor Cessation
Compliance and BSA
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Operational Risk has three key pillars . . .
Cybersecurity
• Phishing
• Ransomware Attacks
• Supply Chain
New Products & Services
• Real Time Payments
• Mobile & digital technologies
• Open API
3rd Party Risk Management
• Due Diligence
• Service Provider Concentration
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Operational
Risks
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Credit Risk is segmented into Commercial, Retail, and Mortgage . . .
Commercial
• Risk remains elevated
• COVID-19 restrictions
• CRE, retail, restaurants, O&G, equip manufacturing, transportation, and commercial services
Retail
• Risk has moderated
• Borrower assistance programs
• Improving outlook for GDP and employment growth
Mortgage
• Risk has moderated
• Borrower assistance programs
• Foreclosure moratoriums could delay loss realization
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Credit Risks
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Banks must be aware of the 12/31/2021 “line in the sand” . . .
November 2020 Joint Statement
• Cease asap but NLT 12/31/2021
• Unsafe & Unsound
• Libor contract post 12/31/2021
• Failure to prepare for Libor disruption
Bulletin 2021-7
• Self assessment Tool
• Increased scrutiny for banks with significant exposure or less-developed transition processes
International Swaps and Derivatives Association
• Effective 1/25/2021
• Interbank Offered Rate Fallbacks Supplement
• Interbank Offered Rate Fallbacks Protocol
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Libor
Cessation
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Bankers may need to stock up on their supplies of Pepcid or Prilosec . . .
Bank Secrecy
Act
• AML Act of 2020
• FinCEN has specific COVID-19 updates
Consumer Compliance
• Monitor Customer Complaints
• CARES Act
• Disparate Impact
• Disparate Treatment
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Compliance
and BSA
Fair
Lending
• Mortgage Lending
• Disparate Impact
• Disparate Treatment
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1. Traditional risk metrics continue to be muted by government actions and other programs protecting troubled borrowers
2. The system-wide offering of proprietary relief and mandated programs coupled with unprecedented stimulus efforts may be deferring potential losses within the financial services industry
3. ALLL/ACL
− Reflect risk in portfolio
− With QFs considering
− Current environmental issues
− Potential modeling issues related to the pandemic
4. Proactive banks continue to monitor exposures or concentrations in distressed industries, markets, or consumer products highly affected by the pandemic. Banks should continue to assess the adequacy of credit administration, including workout programs, staffing and expertise, loan accommodation programs, and resources for back-office operations
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Remember these key items when planning for your next examination . . .
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You cannot afford a regulatory hiccup today. Let FinPro assist you with your pre-exam evaluation to
avoid a costly mis-step
Don Musso
908-234-9398
Scott Polakoff
Pat Rohan
Dave Mangian
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