Pub. 9 2019-2020 Issue 1

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S July • August 2019 11 and rising valuations, such a narrow focus could create an unsatisfactory or even disastrous result. In this relatively low interest rate environment, it may be difficult to do this and stay competitive, but bankers should keep trying. As part of any potential loan exit plan strategy, think about tightening your parameters before you need to do so. That way you won’t be caught off guard and forced to downgrade deals later as property values soften. As a reminder example, let’s take a 5-year loan. The originating 75% LTV has increased to 82%, due to a decrease in the property’s value. This can be due to vacancy increases, softer rents and cap rates. Once the loan is due and sitting at 82% it can be too late to take much action. However, by tightening loan parameters to 70%, in this exam - ple, the pile of such loans stays manage- able. The key as always is not to wait for the loan to come due to evaluate this. Also, stay on top of the borrowers’ submission of financial reports. Timely reporting (such as current rent rolls and up-to-date profit and loss statements) will allow you to spot any red flags. You may even want to do this on some loans as often as semiannually, perhaps. Reviewing your deals on a regular basis is just one of the elements that should be included in any potential exit plan. Doing so gives you the flexibility to decide whether to sell a loan and to have the ability to do so quickly. Staying on top of these loans is key. It is important to remind the team to keep their eyes and ears open to avoid issues when the credit cycle eventually turns. Some areas that can and should be considered are: • Occupancy trends at the subject property • Price per square foot trends at the subject property •Rents at the subject property vs. market rents • Leases coming to expiration and the effect they will have on NOI • Cap rate trends Much of this can be accomplished by running regular stress tests to manage the credit risk. To continue this conver- sation or for more information on stress testing, contact contact Matt Helsing. n Matt Helsing SVP Regional Manager - Northwest Phone: (415) 399-5826 mhelsing@pcbb.com www.pcbb.com Dedicated to serving the needs of community banks, PCBB’s com - prehensive and robust set of solutions includes: cash management, international services, lending solutions and risk management consulting services, including CECL.