05 Mar How Stress Testing Is Helping A Troubled Bank Look To The Future
How Stress Testing Is Helping A Troubled Bank Look To The Future
A Client’s Perspective
When MBank CEO Jef Baker took over the troubled bank in 2011, there was a 95 percent chance that the Oregon-based bank would fail. But Baker isn’t your ordinary turnaround CEO – he is an accountant who had been the bank’s CFO, and he likes to beat the odds.
Flash forward three years, and Baker is describing the $173 million Portland bank as “the little engine that could.” Regulators just lifted the bank’s PCA directive, and the bank closed out 2013 with $2 million in earnings. Although still under a consent order, MBank is now diving into strategic planning for the future.
Baker heard Invictus Consulting Group chairman Kamal Mustafa speak at a conference and knew he had to hire the company to make sure the bank’s capital plan and projections were supportable. The strategic plans contained actions to improve the bank’s risk profile, but were they enough?
At its board of directors meeting in February, two Invictus executives presented the results to the six-member board and explained what they meant and the assumptions that were used. Invictus showed what would happen to the bank with the strategic actions, and what would happen without them.
“They did a nice job of educating us as a client in how this worked, in walking us through all the data,” Baker said. “They demystified the black box to help us better understand our risk profile, as well as helping us feel confident in talking about our stress testing with regulators.”
The board package included information about the bank’s loan portfolio and what kind of losses the bank could expect if the current economic environment were to significantly worsen. The Invictus model is able to dig into the loan portfolio to give a snapshot of asset quality by vintage and by concentrations, and pinpoint exposures that would lead to a potential loss of regulatory capital. In a comprehensive way the model also recognizes increasing overhead and reduced revenues, beyond just loan losses, in projecting results in a tougher economy.
“It was great to understanding our capital position better,” Baker says. “Looking at the portfolio mix and the vintage is critical in understanding our balance sheet. I think it gave our board a deeper understanding of our loan portfolio, and a better appreciation of the stress tests we were doing.”
Since the bank had never done a robust capital stress test before, the Invictus presentation was “brand new” to the board, Baker said. “I think they were very impressed. They recognized that this was a very high quality product and process. I think they felt comforted that we were 1) educating ourselves and understanding better our loan portfolio and potential impacts to capital and 2) being proactive in management, knowing that capital stress testing is not technically required. From a regulatory perspective, we believe it will be viewed as very positive.”
Baker said he loves the Invictus model because it provided him with a perspective on what happened to the bank’s portfolio historically, and it allowed him to take that loss experience and apply it going forward. “I think it’s great that this model can use our historical loss experience along with information from the banking industry to focus on the actual portfolio today.”
The bank submitted a capital plan to regulators about where it wanted to go, and the Invictus stress test indicated that the plan was acceptable. While the real benefit is a better understanding of a bank’s risk profile, Baker admits he hopes that regulators reward the bank in its M rating for using stress testing as a risk assessment tool, even though it’s not required for small banks. “If the regulators recognize our efforts, that will be the icing on the cake.”