By now, it's pretty much accepted that some sort of an economic downturn is coming over the next 24 months. Unfortunately, there are plenty of signs.
Below are several steps you can take to prepare. We will address each in more detail over the upcoming months.
- Ensure you know how much risk is in the loan portfolio and where the risk resides by quantifying the risk. Then, set appropriate risk tolerance limits to ensure this risk does not increase in 2019 and 2020.
- Pay particular attention to loans in your highest pass risk rating (Pass/Watch). These loans are typically comprised of loans where financial statements are outdated, loans approved based on projections, or loans where the primary source of repayment is weak and the loans are dependent on owners/guarantors (secondary source of repayment). Make these loans a priority for annual reviews and mitigate risk where possible.
- Identify which income producing commercial real estate (IPCRE) properties, which you have taken as collateral, are not generating sufficient Net Operating Income (NOI) to service their debt. Take additional collateral in cases where the NOI does not, or increase your loan loss reserve for these loans.
- Review all construction loans to determine possible impact on the projects if NOI will not stabilize before mid-2020. New construction loans should be closely scrutinized given forecasted economic environment.
- Stress test the Debt Service Coverage Ratio (DSCR) for loans where the interest rate is set to readjust over the next two years. In addition, stress test the Loan to Value (LTV) for IPCRE loans by increasing the Cap Rate.
- Consider selling Special Mention and Substandard credits in the secondary market if they comprise more than 25% of your capital, especially if your Workout Department is low on staffing. Get more credit individuals trained in workout procedures.
Stay proactive and start addressing these items now. If you would like to discuss these steps further, don't hesitate to
contact us.
