ABA Banking Journal - January 2008 - (Page 44) COVER STORY COVER STORY: HARD HAT continued from page 26 in construction loans,” says Pearson, and there was much discussion between examiners and management. Some of the team members were relatively new, and an anticipated exam time of a few weeks wound up running several times as long. Clearly, Pearson was a bit chagrined by the results. “We don’t usually charge off loans,” he explains. “We haven’t done so since the Depression.” But after some discussion, the examiners asked management to charge off one credit. “I can’t wait to get the money back,” says Pearson, “so I can write them a letter afterward.” Not all exams under the guidance progressed like Butler’s visit from FDIC. S.C.’s Mike Crapps says his bank’s recent OCC exam turned out pretty clean, in spite of heavy CRE lending levels. “Our experience with OCC was that if they could see the documentation that we give to our board about the concentrations, and how we disclose what we’re doing to the board, and the quality of the loans, and that the board is accepting of the risks, then we were OK,” says Crapps. At the end of the third quarter, his bank’s noncurrent commercial real estate loans to total loans stood at 0.05%, and there weren’t any noncurrent construction loans. Peter Clement’s Virginia bank, much more diversified, didn’t cross the guidelines’ tripwires, and has an abundance of capital—its Tier 1 risk-based capital ratio, for instance, stood at more than 17% at the end of the third quarter. That’s almost triple the ratio to be well-capitalized. “That gives us a little bit of a cushion,” says Clements. “We’re still working on the reporting, though. It was not a slam dunk. We’re looking at outside vendors to help us do a better job. Now we have something we cobble together, manually.” Some bankers in the roundtable have not yet had an exam since regulators finalized the guidance, though they spoke about additional reports they’ve prepared for boards and management, to better comply. When guidelines become “rules” A concern among the bankers is the institutionalization of the guidance. Even though his latest exam was not a big dealhelpful, in fact-Utah’s Matt Packard worries that “four or five examinations down the road, the examiners will begin using the guidance more as a regulation, and will tell you that you have to do certain things.” In part this arises because the agencies’ field staffs will increasingly be green examiners who take training as gospel. George Bradford of Texas, who had an OCC exam coming up, agreed Packard’s current markets. Meanwhile, SEC has long held that the loan and lease loss allowance shouldn’t be maintained such that it distorts financial results. “The examiners, of course, feel that the more you have in reserves, that’s wonderful,” says West Virginia’s Charles Maddy, whose one-bank holding company, is an SEC registrant. “But we went through that thing with the SEC telling us we had too much—actually, they don’t say you have too much, they say ‘We don’t see justification for this, please provide additional information.’ And the regulators Bankers fret about the bank regulators’ commercial real estate guidance. One worries that: “Four or five exams down the road, the examiners will begin using the guidance more as a regulation, and will tell you that you have to do certain things” concern was warranted. He worries that such developments could result in a early 1990’s atmosphere. “You were guilty until proven innocent,” says Bradford. “They would disagree about the value of a property, and tell you that you needed either to write it down or get the borrower to pay down $5 million in the next 30 days. And developers don’t have that kind of money.” Loan loss reserve controversy continues Bankers noted that the longstanding disconnect between regulators, bankers, and the Securities and Exchange Commission on loan loss reserves continues. Some bankers pointed to conflicting public guidance from regulators regarding appropriate levels to maintain in the on the other side are saying, ‘You’re growing so fast, you’re going to have more losses…’.” Minnesota banker Charles Cavanagh got caught between auditors and regulators. “We had a letter from our accountants asking for us to get an added form letter to them from our examiners,” says Cavanagh. “We use the specific method for chargeoffs. They were asking our examiners to opine that our methodology in terms of the loan loss reserve and chargeoffs was OK, and that we were charging off our loans in a reasonable manner.” Matt Packard stresses that bankers need to pay more attention to projections and anticipated risk. “Past history has nothing to do with it,” he insists. BJ 44 JANUARY 2008/ABA BANKING JOURNAL www.ababj.com/subscribe.html http://www.ababj.com/subscribe.html
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