BID® Daily Newsletter
Dec 30, 2010

BID® Daily Newsletter

Dec 30, 2010

SPYING PART DEUX


Yesterday, in order to keep you informed, we covered key areas regulators have indicated they will review frequently when visiting banks. Our data comes from clandestine spying efforts (or perhaps just public information and speeches), so we share our nearly top secret information
again today. It is important to note that this information may or may not be all-inclusive (see disclaimer potentially hidden or not hidden in this document under a black light).
Concentrated Credit Risk: If a small group of loans make up the majority of the non-accrual loans, be prepared to provide more information about the borrower; type of collateral; amount of credit exposure; amount of allowance; any special circumstances around the loan (out of market, participation, etc.).
Interest Reserves: If you have a material amount of construction loans with interest reserves, expect more focus on how you recognize interest income on these loans; monitor projects to ensure appropriateness of continuing to capitalize interest; extensions, renewals or restructured terms (and reasons for any changes); underwriting process for the loans; specific differences in how you underwrite such loans and whether any loans with interest reserves are currently non-performing.
Non-TDR Loan Modifications: Banks should understand that material amounts of loans that have been modified, but not accounted for as TDRs, will draw inquiry as to triggers/factors used to identify these loans for modification. Key features of the modification program; a description of significant terms modified and length of the modification; success rates of such loans; quantification of the amounts of loans modified by type and strategy in each period presented are important to memo. In addition, bankers should expect to be asked to provide analysis supporting conclusions that the modifications are not TDRs; how loans are classified; whether they accrue interest; the impact of modifications on past due statistics; the extent the modification is short-term; whether such modifications result in more permanent or longer term modifications in the future and how the impairment analysis works for these loans.
Non-Impaired Loans: Expect questions around the allowance allocation in this area such as how these loans are grouped for purposes of deriving historic loss rates; periods used to determine loss rates; any changes made during the current period and why; any portion of the allowance for such loans not calculated based on applying loss rates to the outstanding balance (how calculated, what portion, etc.).
OREO: Regulators will look for banks to provide a breakout of OREO by category (lot loans, CRE, residential, etc.); roll forward of OREO (beginning balance, additions, adjustments, dispositions, ending balance); actual prices received upon sale versus amount recorded; income statement line item where gains or losses are recorded; and typical foreclosure decision making processes (significant concentrations, timelines, processes, etc.).
Liquidity Management: Regulators will be looking for more information on liquidity trends, demands, commitments or uncertainties that could result in liquidity increasing or decreasing in a material way; the types of risks faced by the bank and how those risks are being mitigated; a clear picture of the bank's ability to generate cash and meet existing known, or reasonably likely, future cash requirements; an evaluation of the amount and uncertainties of cash flows; whether there has been any material variability of historical cash flows; and the types of financing that are reasonably likely to be available in times of stress.
Don't worry though if you aren't doing all of these yet or if you are still concerned about what will be required in 2011 - to assist, we will keep our eyes open, listening bugs turned on and our satellite imagery sharply focused, in order to help keep you up to date as things change.
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