During RMA’s November 28th Regulatory and Legislative audioconference, Bernie Mason, RMA’s Regulatory Relations Liaison, led a question and answer discussion with FDIC Regional Director Thomas Dujenski and FDIC Program Manager Mindy West. The discussion focused on questions raised by community bank representatives during RMA’s recent Community Bank Council meeting in Atlanta, regarding examiners’ current positions and expectations on such areas as ALLL, TDRs, appraisal-related issues, CRE and other asset-concentration concerns, and community bank stress testing.
A major concern about ALLL is the discrepancy over reserve level among examinations. How many years should banks include in their net loss history? Mr. Dujenski stated that the FDIC does not mandate a definitive time period. Instead, the FDIC expects banks to properly document their approach and he emphasized that examiners are looking for reasonableness and consistency in that approach. During periods of economic stability, banks typically use a three- or five-year look-back. However, if a bank experiences a negative cycle, a look-back focusing specifically on the recent loss period would be more appropriate.
Regarding TDRs, when should modified performing loans be considered TDRs? Mr. Dujenski replied with the following criteria:
- When the debtor is experiencing financial difficulty.
- When the guarantor has granted some kind of concession.
He added that restructured loans with modified terms and non-accrual status need not be considered a TDR in the calendar year when the restructuring took place.
3) Appraisal-related issues
Many community banks are confused as to why examiners require new appraisals even when the loans are amortizing and performing. In conjunction with that, when does an old appraisal need to be updated? Mr. Dujenski stated that if a loan is amortizing and performing, but the real estate collateralizing the loan has declined in value, the loan does not require write-down on the bank’s books. He said the focus for such loans should be on the reasonable continuation of adequate cash flow to service the debt. Mr. Dujenski also said there is no need to obtain an updated appraisal for property securing a performing loan, unless there has been a change in real estate market conditions or a change in the property itself.
4) CRE and other asset-concentration concerns
The FDIC does not have strict restrictions on CRE thresholds, but expects banks to engage in good underwriting and meaningful reporting that clearly identifies risks to the board. Mr. Dujenski also stated that the FDIC expects banks to include effective limits on concentrations in their policies. The FDIC emphasizes robust risk management practices rather than definitive threshold limits. However, any concentration needs to be examined closely by the bank whether it’s CRE or not.
5) Community bank stress testing
Mr. Dujenski indicated that there is no specific stress testing model that community banks need to follow. Rather, a community bank’s stress testing program should be a part of its overall risk management strategy and tailored to its size, complexity, and concentration level. The FDIC expects every bank to conduct some form of stress testing. However, Ms. West indicated that the stress testing can be as simple as testing a bank’s debt service coverage or its largest exposures. Examiners will work with banks, exercising good judgment, and meeting the overall goal to keep it simple.
Please join us for the next offering in the Regulatory and Legislative Audioconference Series on January 23, 2012 at 2pm ET.