Minimizing Loss in the Credit Portfolio

COVID-19 and the changing economy have created uncertainty. While bankers have weathered many of the initial concerns, all are now wondering what the fallout will be and asking, “What’s next?” Preparation and looking ahead are the keys to minimizing potential loss and creating a successful future.

One area that bankers should be digging into now is credit asset quality. Delinquencies and charge-offs have begun to trend higher, which are early warning signs of negative impacts from the pandemic. In addition, businesses in hard-hit industries are utilizing their lines of credit more and depleting their deposit balances.

Credit restructuring and re-pricing are becoming a sharper focus at renewal time, as FIs seek to minimize impact on their margins. With increased risk should come increased pricing.

“Interest rates are at the lowest in this flat yield environment, so now banks are considering establishing ‘floor rates,’” said Ty Glenham, Senior Lending Consultant of Profit Resources, Inc. “Financial Institutions must discard the paradigm of how they’ve always priced loans in the past and respond to the current risk environment by getting more creative to improve yields.”

In addition, credit policy exceptions are a strong indicator for future issues. If loan extensions have been approved outside of standard loan policy requirements, those exceptions should now be reassessed when evaluating the credit portfolio.

Actions to Improve Asset Quality:

• Scrub the portfolio to address any policy exceptions.
• Focus on larger borrowers first, who represent the greatest risk.
• Visit borrowers at their place of business to get a true picture of their situation.
• Beef up the annual review and external loan review processes.
• More closely monitor any loan covenants.
• Activate a Special Asset Committee to monitor any deteriorating credits.
• Task Loan QC/Audit and Loan Operations with ensuring loan maintenance and codes are current and correct any loan documentation issues. This will help the FI protect their liens if a loan goes into default.  

“Benjamin Franklin said, ‘By failing to prepare, you are preparing to fail,’” Glenham said. “Now is the time to prepare for what’s next. Healthy community banks help their communities. By taking these actions to strengthen credit portfolios, community banks can better accomplish their mission and purpose in the community.” 

Profit Resources specializes in identifying profitability improvement areas for financial institutions through revenue growth, cost control, streamlining processes, and effective use of technology. Contact us to learn more about our personalized approach to propel growth and improve profitability.