Pub. 9 2020 Issue 2

The CommunityBanker 14 Identifying Potential Problem Loans W e all knew an economic contrac- tion was around the corner. It had to be, right? The U.S. was in uncharted territory as it relates to consecutive months of economic expansion, but I don’t think anybody anticipated an over- night, screeching halt, to the U.S. economy like we have experi- enced due to the COVID-19 crisis. Being in the early stages of this crisis, financial institutions still have the opportunity to respond proactively to help borrowers through this period of time. One of the best ways to identify potential problem loans is through loan portfolio stress testing. No matter how big or small your financial institution, loan portfolio stress testing is no easy task. Here are a few points to consider when performing a loan portfolio stress test to identify potential problem loans. 1. Industry Analysis There is no doubt that the COVID-19 crisis has impacted all industries in some form or fashion, but we know there are some industries that have been hit harder than others. The following is a list of industries we know have already been significantly impacted by the COVID-19 crisis: • Travel and hospitality — airlines and hotels • Tourism and entertainment • Manufacturing • Oil and gas • Restaurants • Commercial real estate • Retail • Dental practices What other sectors can we anticipate will be impacted by COVID-19? • Nonprofits • Churches • Office space after the crisis passes Management will need to deter- mine the scope and coverage of the stress test. There are many different ways to slice and dice portfolios — even loan portfolio segments. Within the industries listed above, the finan - cial institution may have several types of concentrations and segments that need to be analyzed. Focus on the areas of greatest risk first and if time permits or additional resources become avail- able, add other lower-risk areas to the scope. The primary purpose behind a loan portfolio stress test is to identify potential problem loans and the overall impact to the financial institution if these loans become problem loans; therefore, the more data we can include in the stress test, the better and more useful the stress test results will be. F E A T U R E By Jason Price, CPA Credit Risk Senior Manager, Elliott Davis