Deposit Dilemma 2019 Third-Quarter Scorecard: Transaction Accounts Return, Community Banks Continue to Lag

Examiners Renew CRE Concentration Focus

CRE Exam Essentials™  Program Can Help Banks Get Ready

By Adam Mustafa, Invictus Group CEO

Bank regulators are getting serious about CRE concentrations again.  The Summer 2022 issue of the FDIC’s Supervisory Insights issues a harsh warning to banks with CRE concentrations about getting their risk management act together, pronto.

Even if the FDIC is not your primary regulator, you would be wise to read “Commercial Real Estate: An Update on Bank Lending Amid the Evolving Pandemic Backdrop.” Expect your OCC, Federal Reserve, or state examiner to have similar concerns. This is not the usual run-of-the-mill “CRE Concentration” push that the regulators seem to make every three to four years.  Supervisory Insights is published by the FDIC’s risk management supervision division, and it is based in part on what examiners are seeing on the ground in real-time.

That examiner perspective informs how future exams will be conducted. So when the FDIC writes that CRE lending risk management will be a “supervisory priority,” banks must pay attention. FDIC examiners noted that in the past year they have found issues with portfolio and loan-level data quantity and quality, insufficient metrics, improper segmentation of the CRE portfolio, inadequate stress tests built on insufficient and inconsistent assumptions, and a failure to properly assess post-pandemic market conditions. These issues will be the focus of exams going forward into 2023.

Invictus has created a CRE Exam Essentials™ program to help banks get in front of these expectations.  The CRE Exam Essentials™  program is designed to help community banks quickly implement the necessary risk management and capital planning infrastructure and capabilities needed before examiners come calling.  The CRE Exam Essentials™  program includes the following analyses:

  1. Loan-level data diagnostics – Invictus will analyze your bank’s loan-level (and collateral-level) data to identify strengths, gaps and possible errors, and then help prioritize how you should address these gaps. This will also include an assessment of how the quality and quantity of your bank’s data stacks up against other community banks.
  2. Loan-level CRE Transactional Sensitivity Test: Invictus will perform sensitivity tests on each CRE loan by testing assumptions for net operating income (NOI), debt service coverage ratios (DSCR), loan-to-values (LTV) and capitalization rates. Regulators expect these assumptions to be “accurate, reliable, and timely,” as the FDIC wrote. Invictus will run these tests under a multitude of scenarios.
  3. Loan-level CRE Stress Test: Invictus deploys the PD/LGD method, which is the superior method for CRE stress testing, and the most popular method utilized by publicly traded banks for CECL.[1]  Invictus specializes in this method and will run it under the Federal Reserve’s CCAR scenario, as well as a more moderate downturn.  This will also include a Reverse Stress Test in which we create a scenario intended to break your bank. A Severe Stagflation scenario is also available and highly recommended. Here we will break down your CRE portfolio by category, property type, geography, and vintage to identify which loans and loan segments are more vulnerable in a stressed environment.
  4. Capital Stress TestsThe Supervisory Insights article highlights the importance of understanding the impact that stress on your CRE portfolio will have on capital. Here we will feed your loan-level CRE stress test into a capital stress. However, in addition, we will also stress test the rest of the loan portfolio, adjust your interest income for increases in non-performing loans, stress your non-interest income streams, estimate the impact of rising expenses triggered by increases in problem loans, evaluate the impact of CECL implementation during the stress period, and more under each scenario including CCAR.  This will include complete pro forma P&Ls, balance sheets, and Basel III regulatory capital calculations by quarter for each scenario.  Capital stress tests will include both a “No-Growth” scenario and a stress test of your strategic plan, which may include loan growth targets and capital actions such as dividends and buybacks.  
  5. Updated Capital PlanYour capital plan must be refreshed to incorporate the results and findings from your CRE and capital stress tests. This includes customized internal capital thresholds supported by the stress test results, re-evaluation of your triggers and limits, and an updated contingency plan. The FDIC notes in Supervisory Insights that bank management often “did not consider how results would impact the bank’s capital and asset quality.” The FDIC emphasizes that “the final step in the stress testing process provides critical planning information to the bank’s board of directors.” In other words, checking-the-box is no longer an option.
  6. CRE Concentration Limits – One of the most overlooked areas of preparation for an upcoming regulatory exam are related to concentration limits. The FDIC notes that banks with high exposures will be subjected to “further supervisory analysis.” Your limits must be tested to ensure they are sufficient for both the bank and its examiner. Many banks also need to re-think how they segment their CRE portfolio to establish limits. It’s no longer recommended just to have a broad-based limit for CRE without having limits at the property type and/or geographic level. Determining and supporting limits must be done with data and analytics. Invictus has created a tool called InFocus™ that was specifically designed to calculate and validate concentration limits.
  7. Unlimited Consulting and Guidance – We have more than 15 years of experience assisting banks with high CRE concentrations throughout the U.S. with every regulator. We will advise you as necessary to fully implement these capabilities, as well as translate them into action items. We will help you involve your board of directors and prepare for regulatory exams.  We will also be in your corner throughout every step of the exam.

Banks that don’t have a proper CRE risk management framework in place will be subject to “supervisory feedback, or changes to a bank’s composite or component ratings,” the FDIC noted. Invictus can get your bank enrolled in the CRE Exam Essentials™ program immediately. Please contact Patti Casaleggio at to schedule a free consultation today. 

[1]  Brandy Buckler, partner, BKD, “Highlights from CECL Adoption,” Bank Director, May 21, 2021: “Approximately 60% of the banks with less than $50 billion in assets indicated they used the probability of default/loss given default model in some way.”