The FDIC 2024 Risk Review noted that “risk ratings may see a deterioration as a result of the refinancing of commercial real estate (CRE) loans.”1 The rising trend in delinquencies and lower occupancy in certain sectors, coupled with softening collateral values, could weaken CRE loan portfolios, particularly from loans coming due during this period of higher interest rates.
Borrowers could face difficulties refinancing properties due to higher borrowing costs, which may affect repayment capacity and lower collateral values — two essential components considered by lenders.2 With an estimated $1.6 trillion in CRE loans maturing between 2024 and 2026, accurate risk ratings are instrumental in managing current portfolio risks while helping develop strategies for loan growth in asset classes preferred by your institution.
In fact, the Office of the Comptroller of the Currency (OCC) Semiannual Spring Risk Perspective from the National Risk Committee reported that “it is crucial that banks establish an appropriate risk culture that identifies potential risk, particularly before times of stress. The ability to proactively understand and respond to potential increased credit risk during times of stress remains a prudent resilience-planning component. Recognizing concentrations early and developing effective strategies for managing concentration risk enhance financial resilience.”3 The OCC indicated that commercial credit risk remains moderate although it shows signs of increasing.
Early detection and timely monitoring and analysis of credits is critical to accurately risk rating loans and borrowers. This includes collecting and reviewing required financial information in accordance with loan agreements and developing a plan of action based on anticipated events, updated forecasts and actual performance.
A best practice to consider is to align the intended source of repayment with the actual source of repayment and document any changes with timely file updates. If the intended source of repayment is no longer viable or does not meet bank policies, analyze and re‑grade accordingly. If you are “shifting” grade justifications, there is a clearly defined weakness. Recent conversations with loan review clients have indicated additional scrutiny from bank regulators on accurate risk rating and increasing downgrades from regulators.
In closing, identifying weaknesses and properly risk rating credits is a focus of regulatory exams and a proactive, transparent approach may be a key factor in a successful exam.
For more information, visit our website at www.forvismazars.com.
Brad
Brad joined Forvis Mazars as part of the ProBank Austin acquisition. Brad had previously joined ProBank Austin in 2011. Brad has an expansive history working in commercial banks and has expertise in business development, loan structure, credit analysis/underwriting, and workout and collection resolution. Through his hands-on banking experience, he has worked with a diverse client base of financial institutions ranging from small community banks and credit unions to multibank holding companies.
With a focus on credit risk, he works with clients to develop and implement credit teams, loan process and procedure improvements, and risk mitigation solutions. Brad works with clients on several credit-related projects, including loan review, stress testing, concentration analysis, ACL and other projects as needed.
Brad is a member of the Tennessee Bankers Association (TBA), TBA Credit Conference Committee, Kentucky Bankers Association and Risk Management Associates.
He is a graduate of Georgetown College, Kentucky, and the Graduate School of Banking at Louisiana State University, Baton Rouge.
You can contact Brad by calling (505) 321-2542 or emailing brad.snider@us.forvismazars.com.
Laura
As a professional on the Loan Review team at Forvis Mazars, Laura reviews loans to assess the creditworthiness of borrowers and assists in reviewing the effectiveness of credit administration practices. She manages loan review engagements and due diligence reviews. In addition, she oversees continuing education training for the loan review team and is an instructor for the firm’s Consultants Foundation Training.
Prior to joining Forvis Mazars, she worked in the credit department of a large midwestern bank in Wisconsin, Indianapolis and St. Louis for more than six years.
Laura is a 2006 graduate of Carroll University, Waukesha, Wisconsin, with a B.A. in business administration, majoring in finance and management. She is also a 2023 graduate of the Graduate School of Banking at the University of Wisconsin-Madison and received the Executive Leadership Certificate from the University of Wisconsin-Madison.
You can contact Laura by calling (317) 383-4000 or emailing laura.knight@us.forvismazars.com.
David
David has experience serving the banking industry since 1986. He manages loan review and loan consulting engagements for Forvis Mazars’ Loan Review service line in Dallas and Indianapolis, with a focus on sales and marketing in the broader Texas market. In addition to credit risk assessments, he provides consulting services for credit administration, cash flow analysis, loan underwriting, and collateral and loan documentation.
Before joining Forvis Mazars, he served as a commercial lender, credit manager, financial analyst and special assets manager. He has originated and managed sizable commercial and investment real estate loan portfolios for multiple financial institutions. His experience in commercial credit administration and special assets includes oversight of the credit adjudication process, underwriter and financial analyst training, and risk assessment and management of high-risk credits, including loan restructuring, collection and litigation.
David serves on the board of Vision Communities Inc., a nonprofit developer and manager of affordable multifamily properties.
He is a 1985 graduate of The University of Texas at Austin, with a B.A. in international business, and a graduate of National Commercial Lending School at The University of Oklahoma, Norman.
You can contact David by calling (317) 383-4110 or emailing david.bartus@us.forvismazars.com.
- “Analysis: 2024 Risk Review,” fdic.gov, May 22, 2024.
- “Analysis: 2024 Risk Review, Section 4 – Credit Risks,” fdic.gov, May 22, 2024.
- “Semiannual Risk Perspective, Spring 2024,” occ.treas.gov, June 18, 2024.
