National bank regulators have a message for banks making a lot of agriculture loans: Plan for the bad times during the good times.
That was one of the key messages officials from the Office of the Comptroller of the Currency’s Western District office had for nationally chartered banks and thrifts in Kansas, 16 other states, western Missouri and Guam, which make up the district.
“By preparing now, the banks will be better positioned to help their customers in times of stress,” Kay Kowitt, OCC Western District deputy comptroller, said in a conference call Thursday with reporters.
The OCC said the conference call was to update reporters on community banking conditions in the district.
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Kowitt said there are a number of positive trends for banks and thrifts in the district, including improving commercial real estate loan portfolios, a healthier housing market and fewer problem banks.
She said more than three-quarters of the banks and thrifts it supervises in the district have a composite rating of 1 or 2. A composite rating considers a bank’s capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. A rating of 1 is the highest and means that there is little supervisory concern, while a 5 rating means there is great supervisory concern.
She said the district’s agriculture banks are performing well. That’s why her office is encouraging those banks to plan now for when the ag economy turns down.
That planning includes stress-testing their ag loans individually and as a portfolio. Kurt Raney, assistant deputy comptroller for the district, said the OCC encourages banks to test a loan or portfolio using a variety of scenarios, including the effects of falling commodity prices and higher input costs such as fuel and fertilizer, against the ag borrower’s income and expense statements.
Kowitt and Raney also said that their office is closely watching what they call strategic risk for the district’s banks. They said that banks are facing a number of challenges, including persistently low interest rates, increasing competition and increasing regulatory compliance. The low interest rates continue to put pressure on banks’ profit margins, and some of them are seeking to do business in new areas, such as equipment leasing and mortgage lending, to offset the effect of tighter margins. They said they are telling examiners to pay special attention to banks that have or are planning to expand their services or product lines.