Over the past two years, a critical trend has emerged in the banking industry: regulators are no longer tolerating lax loan review practices, regardless of a bank’s size or stature. This isn’t just a recommendation; it’s a mandate. Even small banks with seemingly modest loan portfolios are now facing action requirements – whether a Memorandum of Understanding and Agreement (MRA), a Matter Requiring Immediate Attention (MRIA), or a Matter Requiring Board Attention (MRBA) – to secure external loan reviews.
Furthermore, regulators are enforcing a level of scrutiny not seen in years, particularly in the areas of credit analysis and annual reviews. My observations: banks that ignore or avoid the mandate instead of proactively addressing it are paying a heavy price.
A Costly Lesson in Reactive Compliance
Consider a recent case that hits the nail on the head: A bank was suddenly required to undergo external loan reviews and brought in my company for two reviews per year. Management was understandably anxious about these new regulatory demands. Our initial evaluation revealed a range of issues within their systems and processes, ultimately resulting in an unsatisfactory outcome.
Instead of panicking, the bank partnered with us to tackle their problems head-on. Over 270 days of collaborative effort, the bank diligently worked to obtain current information, establish robust credit analysis, and conduct thorough annual reviews. This focused effort dramatically reduced their classified loans from a staggering 99% to a manageable 30%. The remaining 30%, however, had passed the point of no return. We then implemented a project management plan to initiate their liquidation. So 30 + 30 is 60, what about the other 40? This paragraph is confusing.
Non-Compliance Equals Millions Lost
The consequences of this bank’s procrastination were severe. They incurred over $1 million in charge-offs, and their legal expenses, excluding losses, amounted to approximately $25,000 per month, or $300,000 per year, for two years. The “30% rule” proved tragically true in this instance: 30% of their classified loans resulted in losses equivalent to 30% of the principal balance.
Could this have been prevented? Absolutely. If this bank had conducted regular loan reviews over the past four years, most of these issues would have been identified much sooner, allowing for a proactive rather than a reactive approach. In my estimation, a proactive strategy could have saved the bank approximately $750,000 in losses and at least $300,000 in legal fees. Whoa. Could that be you?
Regulators’ Demands and Your Bank’s Future
The lesson of non-compliance is stark. Regulators are demanding a standard of excellence not witnessed since the 2008 financial crisis. They are often short-staffed, particularly in terms of seasoned experience, and do not have the resources to waste time analyzing cash flow when proper memos are missing. The result? Regulatory examinations are leading to accelerated downgrades for banks without proper loan reviews, a trend we are observing across institutions of all sizes.
In the case above, had the bank proactively partnered with McSwain Consulting, I am confident we could have saved them over 30 times what a two-loan review per year package would have cost. This is the undeniable cost of non-compliance.
Don’t Wait for an Expensive Lesson
I’ve spoken with strategic partners who assist banks after an enforcement action, and the costs are exponentially higher. While some risks are unavoidable, we consistently see banks continuing to lend to their largest customers without adequate analysis and servicing. As these loans grow, their failure leads to exponential pain and financial devastation.
It’s time to take a critical look at your portfolio. Even if you feel comfortable with its current state, it doesn’t guarantee your bank is operating at the expected level of today’s rigorous standards. If you want to avoid an expensive, painful lesson that could cost your institution thousands, or even millions, of dollars, reach out to McSwain Consulting today to save you the stress and high cost of procrastination tomorrow. Let’s discuss how we can help you proactively secure your bank’s financial health.