Reduce liability for losses on commercial accounts by adhering to four requirements.
Be Proactive With Problem Loans
“Today’s safety and soundness examination is not your father’s exam,” David Kemp told attendees at the Federal Home Loan Bank of Topeka’s Annual Management Conference. Kemp is president of Bankers Management Inc., a consulting company in College Park, Ga. He said that credit that was a “pass” loan for the last several exams is now a substandard loan and the appraisal process that was OK is now an area of major concern.
Kemp said he finds community bankers tend to wait longer to take action on problem loans than bigger banks. He attributed that to community bankers actually knowing their customers and therefore feeling pressure not to downgrade the loan. However, problem loans must be identified with a thorough loan review program. Kemp said this program must be independent of loan functions; it should report to the audit committee of the board and should cover three areas: loan file review, credit administration and problem loan management. Kemp said too often loan file review is the only thing covered. He also suggested that the person who handles problem loans should not be the loan officer who made the loan. Problem loans should be segregated and handled by a senior loan officer because they take four times more work and constant communication.
It appears the need for a sound loan review program is more important than ever because, according to Kevin Moore, senior vice president at the Federal Reserve Bank of Kansas City, problem loans are increasing and the banking industry remains weak.
“Kansas, Nebraska and Oklahoma are the bright spots in terms of losses,” Moore said. While financial institutions in those states are experiencing losses, they are less than the national average. Thirty percent of banks nationally have suffered losses while in Kansas 18 percent of banks are experiencing losses; in Nebraska 12.9 percent are experiencing losses; and in Oklahoma 10.9 percent are experiencing losses. Moore also said Nebraska and Oklahoma are faring well in noncurrent loans. The total portion of noncurrent loans nationwide is 5.57 percent, but Nebraska’s noncurrent loans are only 1.79 percent and Oklahoma only has 2.50 percent of loans that are noncurrent. However, Moore said the fact that 26 percent of U.S. bank commercial real estate loans are in construction, land and development and 16 percent of those loans are noncurrent is worrisome.
Federal Home Loan Bank of Topeka President and CEO Andy Jetter said the bank’s goals for this year focus on the potential reform of Fannie Mae and Freddie Mac. Jetter said all government-sponsored enterprises will be affected by any new regulation on a GSE. The bank wants to make sure changes do not increase the Federal Home Loan Banks’ cost of funds but maintain the GSE status and preserve the FHLBanks’ regional structure. In addition, Jetter said any new regulation should allow the FHLBanks to maintain their primary role as a source of liquidity for banks and should not penalize financial institutions for using FHLBank advances.
Kari English is associate editor of BankNews.
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