Reviewing the Commercial Loan Portfolio

Published April 14, 2020

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The current COVID-19 environment has taken a toll on the commercial landscape, and the prevailing market forces seem to be positioned for a continuing credit downturn.

This article is not about addressing TDRs and making short term modifications.  If you are interested in that topic, see for additional information.

This article is focused on monitoring credit in the commercial portfolio.

Don’t wait for missed payments

“They’ve always paid as agreed.” We’ve heard that one a lot.  Every borrower has paid as agreed – until they don’t.  Late payments should not be the warning sign.  It is AN indicator, but does not have to be the ONLY indicator.

Methodical approach

We advocate an unemotional methodical approach to credit administration.  During a crisis, it is no different.  By sticking to the method, you can drive this process during the current environment with the most bang for your buck.

All hands on deck

This process will likely take all of your lending team. The sales force and the back-office need to function as a team in this process.  Each bank will be different is how assignments are doled out, but you probably have the necessary skills within your organization.  Job titles may be less important than skill sets.

NAICS codes

North American Industry Classification System (NAICS) codes will help you here, if you have them loaded in your system.  If you cannot run a report by NAICS codes from your system, skip to the next item.  If you can run reports, think critically about which industries are being hammered the most in the current environment.  For example, if you have a large amount of loans in the hospitality industry, hotels are being hit hard.  Hotels, in general are code 721110.  Hotel Construction is 236220.

Top-down approach

Staying methodical, let’s break down the focus to the loan relationships to review, and the order to work in.

Watch list

These were already exhibiting some elevated credit risk.  The current market is likely adding stress to the situation.  Review these loans to see what dominos are falling next.  As you review these loans, consider if they need to be downgraded.

Criticized loans

No – substandard is not the lowest risk rating.  You should find doubtful and loss as ratings below that.  The good news about these loans is that you are already aware of them.  You probably even have workout plans being submitted periodically.  Refresh the workout plans.  Really – get new information for as many as possible.   Review any specific reserves in the allowance and update as necessary.  And – consider if these loans should be downgraded further or potentially charged off.

Pass graded loans

Now, let’s take a methodical approach within the Pass graded loans in our portfolio.

Concentration risk

You know your bank, and the industries that have concentrations.  Review your concentrations list for industries.  Remember all those conversations you have had over the years about industry concentration risk?  Well, sadly, here we are.  Some industries are obviously getting hit harder than others.  Grocery stores seem to be faring well.  Restaurants are having problems.  The rest of the portfolio is probably somewhere in between. Determine the industries you will review in order of largest to smallest.  Use a combination of these concentration reports and the aforementioned NAICS reports to assist in identifying the loans in these categories.

Largest loan relationships first

Captain Obvious here, I know.  But sometimes in the middle of a crisis, we forget things.  In each step of the process, grab the largest loans.  If you have a top 10, or top 20, or top (you fill in the number) report, this will be helpful.

Comprehensive analysis

For each of the loan relationships being reviewed, a comprehensive analysis should be performed.  It should include as many of the following as possible:

  • Review updated financial information
  • Meet with borrower (virtually, in this instance)
  • Visit the property and assess condition if possible
    • With pictures
  • Update financial projections
  • Review documentation
    • Mortgage
    • Insurance
    • Lien position
  • Covenants review
    • Is the client in compliance
    • Timely reporting

Track your progress

At the outset of the project, build a list of the credits to be reviewed, in what order, BY WHOM and BY WHEN.  Assign not only the task, but the desired deadline.  Determine the frequency of progress reports.  The project manager should maintain a list and monitor progress weekly, or more often.  Reporting to the Senior or Board Loan Committee will crucial to the success of the project.

Update risk ratings

As you learn information about clients and what they are going through, follow your current process for risk ratings.  Have a column on the progress report for confirmed or updated risk ratings for loans.

Continue to assess

This process will take a while.  But we will be in this for a while too.  So, if you think you have made it through the list, you get to go around again.  Maintain focus on the Watch Lists, Concentration List and the Largest Borrowers.

Update qualitative factors

As we move through the process, consider your qualitative factors in your Allowance computation.  You’re not allowed to forecast (unless you adopted CECL), but you have some current information on the state of the economy, and you know certain industries are not essential, and therefore not open.  We expect that you will increase qualitative factors accordingly.

Allowance guidance from regulators

The FDIC issued Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019 (Referred to as COVID-19) – As of March 27, 2020.  In that FAQ set, they addressed the Allowance generally as follows – for Banks who have not adopted CECL.

Consistent with generally accepted accounting principles (GAAP), the amounts included in the ALLL in first quarter regulatory reports for estimated credit losses incurred as a result of the effects of COVID-19 should include those amounts that represent probable losses that can be reasonably estimated. As financial institutions are able to obtain additional information about their loans to borrowers affected by COVID-19, estimates of the effect of COVID-19 on loan losses could change over time and revised estimates of loan losses would be reflected in financial institution’s subsequent regulatory reports.

Talk to your auditor and your examiner

You don’t want your client ghosting you.  Don’t do the same for the auditors and examiners.  Have engaging conversations with them to make sure you are on the same page with what you are doing.


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Nothing in this document should be construed as providing tax advice.  Please consult with your own professional tax advisor.  In addition, this document represents the information that we have up to the date the presentation was made and cannot be relied upon for additional updates beyond that date.

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