CURRENT NET INTEREST MARGINS
The fed has rolled rates to near zero again. This tightens the bank’s bottom line again. When visiting with bankers in the last months interest rate spreads are almost always the number one concern. Loan monitoring vs interest spread? Watching expenses as the spread thins is the initial reaction. Cutting proper monitoring and valuation could cost the bank much more in the future.
SHORTCUTS ARE COSTING BANKS MILLIONS
Countless banks are postponing or neglecting improvement of controls in the lending back office to reduce or prevent a future loan loss. Looking at the current average spread of 3.00% it would take over thirty three years to earn back the dollars charged off. Just $100,000 charged off would offset earnings of over 3.3 million dollars this year.
HARD LUCK STORIES
Looking at several publications that recall various stories about how a loan went sour there is a pattern that is usually preventable. It reads like a rehash of the OCC Failed Bank Study. Missing or inadequate documents, collateral values not supporting the debt . . .
BABY STEPS TO IMPROVING THE BACK OFFICE
First all credit and collateral documents need to be properly reviewed and filed. Simple things like saving a few dollars on a lien or UCC search can cost millions. Proper procedure would be to search before and after filing. There are dozens of other examples of lax versus strict controls that can save earnings and in extreme conditions banks.
NUMBER TWO ON THE OCC’S HITLIST
As the second most popular reason for losses and failures, Loan to Value positions need to be monitored daily. I often hear bankers complain that valuing collateral is too complicated and time consuming. Of course, after a regulator instructs the bank to write down a loan due to inadequate collateral, the value of identifying the problem early-on when L/V crosses a predetermined threshold become all too clear. Yes it increases expenses up front but often a single loan loss could have covered thousands of back office hours applied to effective transparency and accountability measures.
Updating and monitoring individual collateral values in LQAS takes seconds. Stock or commodity prices can be updated portfolio wide in seconds. A loan to value report is then available to list all loans underwater in real time in seconds.
IMPROVING ASSET QUALITY
Minimizing loss and surviving the next shock can be greatly influenced regulator’s confidence in management. If the exam team keeps discovering issues of which management was not aware, confidence erodes as the exam progresses. One exam I conducted had a surprise every few minutes. In the time span of eighteen months that bank went from one of the best run banks in our district to the brink of closure. This happened during a level economic period – there was no recession to blame – simply having the bank almost try to do everything wrong all at once did the trick.
The opposite is also true. We have clients that can and have informed the exam team of every aspect of the loan portfolio. They discussed document status, collateral valuation and even all contents of the examiner’s line sheets. The bank has this data in minutes after the examiners forward the review list.
CAMELS IMPROVEMENT
Two had improved their CAMELS ratings by 2 in eighteen months. As an examiner I saw this happen as a drop by 2 or more in that time period, but never this kind of improvement.
BANKRATE IMPROVEMENT
Over seventy percent of our clients scored four or better at bankrate.com during the height of the great recession. They simply allowed the system to work and transferred data from various systems and began to maintain it in LQAS. This gave these banks full advantage of having all required data in the same place. This enables critical reporting to management. The board has timely detailed information and has proven to provide all needed data to the regulators in minutes instead of weeks or months.
Loan monitoring vs interest spread? The case for proper back office controls far offset upfront reduction in expenses in this area.
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