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Survival Tactics for Regulators’ Scrutiny

By: Bill Poquette

Dealing with examiners and regulatory orders were topics drawing considerable interest at the Missouri Bankers Association’s Executive Management Conference in St. Louis last month. “Staying close” to examiners and the examination was recommended by Don Hutson, national industry manager for BKD LLP.

“Go see them three times a day while the examiners are there,” he said. Hutson also advised thinking strategically and getting away from being reactionary. “You manage the process,” he added, “but don’t be confrontational.”

Among tips for being ready for the examiners were these: sound loan administration and policies are important; earnings are critical; weak links in management will not be tolerated; liquidity needs to be monitored, managed and planned; and capital is king. The Bank Secrecy Act and information technology have taken a back seat but are still a focus, Hutson noted. Stress testing will rise in importance, he believes, and the number 1, 2 and 3 regulatory issues are asset quality, asset quality and asset quality.

Regulatory orders are being shelled out with alarming frequency and they also must be dealt with effectively. Some ways to do that were listed for the MBA members by Lee Keith, president of Premier Bank in St. Charles. Keith, who has responded to regulatory orders in several banks in his career, said denial is the first stage in every case he’s been involved with. Everybody needs to realize that, at the end of the day, the bank has to survive over everything else — including customers and employees.

“Surround yourself with board and staff who understand what needs to be done,” he said. “Things have to be done you wouldn’t usually do to get capital ratios up to 7, 8 or 9 percent.” It is difficult if not impossible to raise new capital, he warned. “Try to get on your toes” in the face of a regulatory order, he advised, “instead of constantly being on your heels.” Providing regulators with timely information is key, he suggested. “Don’t lie to them.”

Keith divides stressed borrowers into two categories. The first group will work with the bank to try to get out of trouble. The other kind call their lawyers and fight the proceedings. He has also found that in dealing with builders specifically, working with the borrower to help him sell his houses can result in lower losses than if the bank forecloses and becomes the seller.

Keith also advised bankers to be honest with themselves about what is a classified asset. “When there are issues out there don’t hide them. They (the examiners) will find them.”

Seven red flags warn of trouble, Keith said: excessive loan officer incentive compensation; loan officers not checking collateral; capitalization of interest; loan officers being defensive about procedures; credits that make absolutely no sense; financial and technical exceptions; and overdrafts.

And remember, he said, “Change happens rapidly. Say you financed a Chrysler dealer’s new building five years ago. What is it worth today?”

Click here to view photos from the conference.

Chief Economist Paul L. Kasriel of Chicago-based Northern Trust closed out the MBA program with a forecast he began by stating that recovery has begun from the longest and deepest recession of the post World War II era. His optimism was fueled by the fact that recovery is underway not just because any one sector is “soaring” but a number of sectors have either stopped descending or are descending at a much slower rate.

Although on the day of his speech (Dec. 4) unemployment was reported to have dropped slightly to 10 percent, he believes it will continue to rise through the first half of 2010, perhaps peaking at more than 10.5 percent. The earliest the Fed will begin taking the massive liquidity it has created out of the market will be around midyear 2010 and then “only tentatively,” he believes.

During the conference MBA President and CEO Max Cook announced the launch of MBA Compliance Services and the hiring of Chuck Lewis, formerly of RSM McGladrey and UMB Bank in Kansas City, as vice president of compliance services, effective Jan. 1. In addition to workshops, schools, webinars and a compliance hotline, offerings will include in-bank training with Lewis or Denny Deischer, MBA vice president of educational services.

Nearly 400 bankers, vendors and guests were registered for the conference Dec. 1–4 at the Ritz Carlton Hotel in St. Louis. Next year’s sessions will be Dec. 8–10 at the InterContinental Hotel in Kansas City.

Bill Poquette is editor-in-chief of BankNews.

Copyright © January 2010 BankNews Publications


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