Happy New Year everyone!
As we begin 2017, here are some important items to keep in mind as you manage credit risk this year. These are lessons TGA has learned by performing loan review since 1984.
- Identify any variable rate loans that are to reprice in 2017 and 2018 and stress test their DSCR based on increasing the rates by 1% and 2%. Discuss results with Borrowers where cash flow is tight.
- Identify, monitor, and mitigate risk associated with collateral properties where the current Net Operating Income (NOI) does not support debt payments. Compare the NOI based on most recent financial statement/tax return to that used to establish the collateral value. Global DSCR may be acceptable, but these loans will eventually lead to credit problems if left unchecked.
- Review your Pass/Watch loans and see how you can mitigate any weaknesses in these credits. If most of your pass loans are skewed toward your highest pass rating, the probability is greater that you will experience credit challenges in an increasing rate environment or if the economy takes a downturn.
- Make sure you have set good credit risk tolerance limits. Best way to do this is to use the Weighted Average Risk Rating (WARR). Once you are confident that all your loans are risk rated accurately, you can use the WARR to control how much risk is in your portfolio, monitor which segments of your portfolio have the greatest risk, and determine how much more risk you can safely take on.
- Ensure investment in credit administration keeps up with your growing portfolio so it can be properly maintained.
If you would like to discuss the above topics in more detail, or if you need assistance in accomplishing any of these items due to your current workload, please contact us, we are happy to help.
Bo Singh, President