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FOS Blog

05 May

More Rate Increases Imminent, Don’t forget Concentration Management of The Commercial Lending (CRE) Portfolio

More Rate Increases Imminent, Don’t forget Concentration Management of The Commercial Lending (CRE) Portfolio

Interest rate margins (loan yields) are a key component for banks in terms of profitability, especially for community banks.  Commercial lending has traditionally been an area for community banks to capitalize on a slightly better yield during the almost ten years of historically low rates which squeezed the yields on lending portfolios very tightly.   The good news to most bankers, especially community bankers, is the current interest rate outlook with more increases to the Fed rate.  The rate increases should start to increase those loan yields that have been suffering, and current political policy looks to deregulate areas in the financial world.  The outlook for the banking industry is looking up, however, that does not mean to rule out risk management.

Commercial Real Estate (CRE) loans are a traditional core business for many community banks.  Credit risk is still a top concern to bankers , and although the future is looking brighter ‘letting the wolves run amok’ in the CRE realm to capture better fees and yields still needs to be a top concern for banks (especially senior management and the board of directors). CRE loans are historically one of the most cyclical in terms of delinquency and default rates, and the challenges often stretch a bank’s risk-management capabilities. Banks need to ensure that close attention is placed in underwriting, ensuring that rates are not being stretched, that terms and structure are adequate, and that a loan is not completed only to achieve growth goals without solid risk management practices in place.

A vital part of the underwriting and risk management process is concentration management of the bank’s CRE portfolio.  Concentration management requires careful monitoring and management.   Some key areas to aid in the concentration management process would be:

  • Remember the size/complexity of institution needs to be considered.
  • Proper Risk Rating of CRE Loans
  • Proper definitions of CRE Loan Segmentations
  • Reports on loans by property types
  • Do not overlook guidance lines (uncommitted)
  • Geographic dispersion of CRE Loans
  • Underwriting standards relating to CRE Lending
  • Supervisory criteria to CRE concentrations as:
    • Total loans reported on the Report of Condition for construction , land development, and other land represent 100 percent or more of the institution’s total capital
    • OR
    • Total CRE Loans represent 300 percent or more of the institution’s total capital, and the outstand balance of the institution’s CRE loan portfolio has increased by 50 percent or more during the prior 36 months.

For additional information, email Adam at