Time to Revisit CRE Loan Portfolio Management

As many community banks continue loosening underwriting standards for commercial real estate (CRE) and regulators heavily scrutinize CRE portfolios, it’s a good time for financial institutions to review their CRE loan portfolio management.

So says Robert Ashbaugh, Executive Risk Management Consultant at Abrigo, formerly Sageworks, Banker’s Toolbox, and MST. After all, billions of dollars on the balance sheets of community banks are at stake, considering banks are still looking to grow CRE portfolios and there isn’t any assurance that the 10-year U.S. economic recovery will continue, Ashbaugh told bankers recently during the American Bankers Association Conference for Community Bankers.

Ashbaugh and Roger Shumway, Executive Vice President and Chief Operating Officer of Bank of Utah in Ogden, Utah – an Abrigo customer – were the headliners of a new CRE educational track during the ABA Conference for Community Bankers, the premier event developed for – and by – community bank CEOs. Ashbaugh and Shumway will provide a repeat of the speech Feb. 26 at 2 p.m. ET during the Abrigo webinar, “CRE Lending Market Simplified: Key Insights for 2019.”

Regulators are asking about stress testing practices related to CRE portfolios, the strength of risk rating practices, underwriting guidelines, bank policies and procedures related to CRE lending, and institutions’ reporting on CRE concentration, Ashbaugh said. This focus will continue, he predicted, even though banks in recent quarters have shaved CRE growth rates as they contend with rising delinquencies and stiffer competition from non-bank lenders.

“You want to make sure you’re managing the risk, that you’re always evaluating the portfolio and making sure you know where the risk is,” Ashbaugh said. “And once you’ve identified it, you want to make sure you’ve mitigated that risk. Banks have to ask, ‘Am I adding additional covenants for debt service recovery, for getting additional financials, have I priced and risk rated it appropriately?’ ”

In addition to providing information on best practices for CRE portfolio management and stress testing CRE, Ashbaugh and Shumway’s session at the conference also included an update on the upcoming shift to the current expected credit loss model, or CECL.

Attendees were advised that the two biggest issues to consider as it relates to CRE and CECL might be the segmentation of loans and the average life/remaining life of loans in the portfolio. Data quality and utilizing accurate risk ratings and risk-based pricing are also important considerations that were discussed during the session.

More than 1,100 banking and financial services professionals were slated to attend the four-day national conference in San Diego.

Register for the Abrigo webinar, “CRE Lending Market Simplified: Key Insights for 2019,” to learn more about CRE loan portfolio management.