Massachusetts banks have been adding risk officers to their executive leadership teams in part to keep on top of the complex and evolving credit risks the current economy has created. iStock illustration
As the industry faces the risk of loan delinquencies amid a high interest rate environment, inflationary pressures and more vacancies in office properties, Massachusetts’ community banks are promoting risk officers into their executive leadership teams to guard against credit risks.
North Adams-based MountainOne Bank recently promoted Richard Kelly from head of its commercial lending team in the Berkshires to senior commercial risk officer, overseeing issues from Boston to Pittsfield. Jennifer Nickerson of Webster Five was recently made that bank’s CRO. And Framingham-based MutualOne Bank announced Kimberly Sambuchi as its new CRO Jan. 14.
“Formally bringing risk into our senior leadership further demonstrates the bank’s commitment to proactive risk management and strategic decision making,” Webster Five’s Nickerson stated. “With our talented teams at Webster Five, I look forward to navigating complexities and charting a course for sustainable growth.”
According to a recent Oliver Wyman survey, 74.1 percent of chief risk officers think the risk environment for commercial credit will continue to get worse this year than the past year.
But how does a chief risk officer protect a bank from credit risks? It all starts in the loan origination process, said Kathryn O’Malley, the chief credit officer of Rockland Trust.
The Risk Management Process
The Oliver Wyman survey said a big chunk of CROs’ time (16 percent) is devoted to managing credit risks. For O’Malley who oversees credit risk management and environmental risk mitigation at Rockland Trust, checking for credit risks is done in every step of the loan origination process, particularly in commercial loans.
“The role of a credit officer begins at the time of loan origination. From there, credit officers are responsible for reviewing all fundamental repayment risks associated with a loan including the experience of ownership/guarantors, cash flow, collateral and ability to perform under stressed situations,” O’Malley said.
She said CROs mitigate risks through establishing and maintaining policies and guidelines that will determine a level of risk that is acceptable to the bank and make sure that this is consistent for each and every loan the bank originates.
This process involves looking into proper loan structures, collateral valuations and documentation, O’Malley said.
CROs’ initial analysis and assessment of whether they would extend credit to a company or individual is done by looking at worst-case scenarios, MountainOne’s Kelly said, making sure that there are ways for the bank to get repaid if something goes wrong with a loan.
Options in case of default include sourcing from the cash flow from the operating commercial real estate entity, a guarantee from the owners of the property or some type of collateral.
After a loan is closed, O’Malley said that the credit team manages the portfolio by “reviewing updated financial and other information, monitoring payments, and evaluating the strength of the repayment source on an ongoing basis.”
This can be done through reviewing the borrower’s financial information such as monthly, quarterly, and annual financial statements, balance sheets, and operating statements of the property.
“Some loans may need more frequent monitoring than others,” Kelly said.
Measures During Credit Deterioration
If a loan is at risk of default, both O’Malley and Kelly said banks usually provide leeway for borrowers who suffered unexpected disasters or one-time losses, making loan payments difficult. In this scenario, CROs and lending teams will arrange workouts with the borrower, usually in the form of an extension of the loan term or rescheduling payments.
The Rockland Trust chief said that in a growth economic cycle, all institutions have strong credit metrics or performance as a whole and can pay their obligations. But in weakened economies like today, she said, banks’ credit quality is expected to also show some weakness as customers are strained, impacting businesses. During these times, CROs are required to have “increased focus on credit metrics.”
During the recent earnings presentations of regional banks with Massachusetts presences, Eastern Bank, Rockland Trust, M&T Bank, NBT Bank and Berkshire Bank all reported elevated levels of commercial loans at risk or in non-payment status, whether ‘criticized’ – showing weakness in repayment ability – ‘non-accrual’ – when a borrower has missed payments for 90 days – or ‘non-performing,’ when payments have been missed between 90 and 180 days.
Nika Cataldo
Some of the banks reporting increased volumes of troubled loans are trying workout options with borrowers while others like Berkshire and Eastern have resorted to selling off the properties tied to the loans.
When asked about CROs’ potential concerns about the rising rate of criticized, non-accrual and non-performing commercial loans at present, O’Malley said: “Credit officers monitor the trends within various industries and property types to attempt to stay ahead of any deterioration. This involves active communication with the relationship managers and customers to anticipate potential needs. At Rockland Trust, if a loan falls into the criticized or non-performing status, we have a dedicated team available to work specifically with those customers to evaluate strategies for repayment, regardless of whether it is a commercial & industrial or a commercial real estate asset.”
For his part, Kelly said that commercial real estate office loans in particular still have high credit risk for banks as value of properties continue to go down amid high office vacancy rates in metro areas from Boston and San Francisco.
