Good news first: 2024 appears to have been a good year for the community banking sector, but it depends on how it was benchmarked. As usual, banks had different results depending on their priorities. Many insights, emotions, and experiences were learned in 2024.
Here are five common threads learned from my clients’ bank examinations. In my observations, the level of expectations has risen.
Why did you make that decision? This is particularly true in credit analysis, committee minutes, board minutes, CECL/ACL calculations, why your ACL levels are adequate, and classified memos to upgrade or downgrade. Minutes and memos are no longer just memos. The regulators expect not just to read the decision; they want to know why. The regulators want to be able to read your thought process and the analysis that backed your
thought process.
Any request to change the loan terms may be construed as a restructured trouble debt. This is one of the things that made me pause the most. Suppose you find yourself in this situation in the future: it is believed that we need to refer to the first bullet point above and utilize data, be honest with ourselves, and explain why temporary adjustments to the original loan structure are not considered restructured debt. Several cases throughout the year showed where regulators included extensions of maturity on property for sale in this category. I found this to be a bit on the extreme side, but hey, the regulators hold the keys to the rules in which we operate, and they have a job to do, as well.
The level of expectations from regulators has exponentially increased in 2024. My observations are backed by the number of calls I received from bankers and the questions asked. I also received more calls this year, which surprised me with the regulatory expectations. Bank size didn’t matter. I received just as many calls from smaller banks that are not my clients, in addition to my clients, as I did with my larger bank clients. Also, no more judgement calls/jump ball to the bank. Any decision must be totally documented with the financial analysis of why it’s in the best interest of the bank. As the old saying goes, do I want to do this, do I need to do this, or do I have to do this is now paramount. The level of scrutiny was at least consistent, but what was learned is the regulator expectation has elevated tremendously.
Minutes, credit analysis, or any other written document must have a robust narrative with defensible facts: Another common theme in 2024. I can’t count how many times this was shared with me throughout this year. I believe this refers to the previous bullet points. There needs to be enough thought process demonstrated along with the data that backs up the decision. Not everything needs a dissertation; it just needs to be factual and illustrate the thought process. This is the way I had to get my hands around this. Have you ever received an email or document you want your input on? You read it and ask yourself, what the hell is the meaning of this? As a suggestion, as you are proofreading your work, ask yourself, could I hand this off to someone who doesn’t work, or is not familiar with this area, and can they understand what I am attempting to communicate? At one time was recommended that we think our audience is the committee, board, or other internal body, but this no longer holds true. Our audience is an auditor, bank examiner, and anyone who may touch this document, including a court of law.
Speed bumps are now required—Limits are Limits: We know that a policy or procedure is the minimum requirement. Inside most banks’ policies, there is an expectation of data benchmarks or ranges within which the bank will operate. This is not a new expectation, but it is now enforced more stringently. I get the benchmark ranges, but the regulators want speed bumps set up in several cases. For example, if the range is 10-20, a speed bump at 17 is expected. At 17, the regulators want more dialogue around what you will do to change course or what you will do not to increase the activity that will cause it to go to 20. I have seen this in many different bank areas, including but not limited to liquidity, dependency ratios, concentrations, past dues, ACL requirements, and classification requirements. They do not want to see the bank increase the range without massive explanations, justification, and data supporting the tactic to increase. It should be ironclad that if you increase ranges, the bank will be exposed to additional risk.
I share these five observations with you not out of fear but to help those who have not had this experience avoid going there. Based on my conversations and observations, this current exam environment is not last year’s. These observations have caused my company to huddle and re-evaluate how we must elevate our game to stay true to the environment. I hope this helps you avoid pain and gives you a better 2025 than 2024. Cheers to the new year, friends. Thank you for following and reading.