What are examiners’ most frequent concerns?

Jan 22, 2015

Blog URL:

http://www.sageworks.com/blog/post/2014/07/31/What-are-examiners-most-frequent-concerns.aspx

In the most recent issue of Supervisory Insights, the FDIC included an article highlighting evolving risks in banking.  The findings from this report are derived from of a culmination of FDIC exams, in which repeated Matters Requiring Board Attention (MRBAs) have surfaced. These MRBAs are deemed as issues uncovered by examiners upon which board members should immediately act, or at minimum take into immediate consideration. They are given to banks with a “1” or “2” under the Uniform Financial Institutions Rating System, as those ranked “3” or worse are typically under some form of an enforcement action, requiring more formal reporting requirements than an MRBA.

As such, these MRBAs can serve as an invaluable resource for financial institutions preparing for an exam, as they elucidate the most common (FDIC) examiner concerns, and allow board members to perform a quick audit to ensure that their processes are up to expectations.

To recap the most recent findings, from 2010 to 2013, MRBAs have cited both Loans and Board/Management with the highest frequency, in 69% and 45% of examination reports, respectively (one examination report may merit multiple MRBAs):

• Loan-related (cited in 69% of FDIC reports of examination):

• Credit administration was cited in 75% of all loan-related MRBAs. This included the need to improve appraisal review, loan review, and the loan grading system.

• 41% mentioned an elevated volume of problem assets.  The reports emphasized a need to reduce the volume of criticized assets, nonperforming loans, nonaccruals, and past dues.

• Nearly one-third of MRBAs involved the need to correctdeficiencies in the ALLL methodology, including the need to set aside additional provisions in order to reflect what examiners deemed a more appropriate reserve.

 

• Board/Management (cited in 45% of FDIC reports of examination):

• 49% of board/management-related MRBAs mentioned “policies,” or the need for management to revise and comply with board-approved policies.

• 27% focused on audit.  These spanned from development of an audit plan reflective of the institution’s risk profile to the need for management oversight of the audit process.

• Other mentions included strategic plan (~15%), succession plan (~12%), board oversight (~10%), staffing training (~9%), risk management (~8%), and insider activities (~4%).

 

One other finding worth mentioning is that the overall number of examinations containing MRBAs has decreased in the past four years, suggesting that the financial condition, as well as the process by which banks operate have improved in recent years.

If a financial institution receives an MRBA, management must respond with documentation detailing how they will address said issue. Thanks to the FDIC’s Supervisory Insights, which discloses overall trends in MRBAs and information on how to better comply with processes in question, institutions can be proactive in their exam preparation, and foresee “hot button” issues that are the most common sources of examiner concern.

As noted above, the ALLL is a frequently mentioned MRBA. For more insight into ways to meet examiner expectations, download our whitepaper: Documenting the ALLL: What Examiners Expect.

Supervisory Insights is a journal published by the Division of Risk Management Supervision of the Federal Deposit Insurance Corporation. Its primary aim is to instill best practices and ‘promote sound principles for bank supervision.’