Pub. 10 2021 Issue 3

Pub. 10 2021 Issue 3 31 Here are some things to consider to help prevent some unnecessary surprises: 1. Pandemic-Related Loan Modi cations – While there is still some uncertainty, pandemic-related loan modi cations should now be the exception and not the rule. Make sure you are closely evaluating any continuing modi cations and not just delaying the recognition of a bad loan. Analyze the business’s fundamentals, and be realistic about the business’s prospects for recovery. 2. Be Realistic About Appraisals – In your evaluations of appraisals, make sure you are considering whether the appraisal was pre-COVID-19 or more recent, as well as what the pandemic’s short- and long-term effects are on the property’s operating income. Have conversations with your appraisers to discuss local vacancy trends, cap rate trends, and other aspects that might be affecting real estate markets. Appraisers not only have local market knowledge but also can help you understand national trends that might affect your borrowers. 3. Analyze Concentrations – A concentration in any industry will act like one very large loan. Make sure to realistically stress test the concentration relative to bank capital for both potential movement to classi ed risk grades and potential loss given default. 4. Identify Problem Loans Quickly – As we continue to recover from the pandemic, the most important thing you can do is identify problem loans quickly. Borrowers have received assistance from Paycheck Protection Program loans, Economic Injury Disaster Loans, the U.S. Small Business Administration making loan payments, bank deferrals and modi cations, economic stimulus checks, and other vehicles. Be realistic about a borrower’s prospects without all the assistance. Do not wait for loans to be past due, as delinquencies are a lagging indicator of credit quality. You need leading indicators (such as current 2021 results compared to projections) because early problem identi cation o en leads to improved results. As we continue to evolve from the pandemic that has gripped us the past 15 months, it is more important than ever to maintain diligence over your loan portfolio—the biggest asset on your balance sheet—and not become lax due to the positive reports in the press. e bene t may be improved loan performance resulting in lower loan losses. This article is for general information purposes only and is not to be considered as legal advice. This information was written by qualified, experienced BKD professionals, but applying this information to your particular situation requires careful consideration of your specific facts and circumstances. Consult your BKD advisor or legal counsel before acting on any matter covered in this update. Mark Weitekamp is a member of BKD’s National Loan Review Service division. He has spent the last 25 years working with large super regional banks as well as small commercial banks with credit underwriting, portfolio management, cash flow analysis and loan documentation