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Samantha: Hello, this is Samantha Shares.

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This episode covers the O C C's
current thoughts on Credit Risk

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This podcast is educational
and is not legal advice.

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We are sponsored by Credit Union
Exam Solutions Incorporated, whose

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team has over two hundred and forty
years of National Credit Union

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Administration (N C U A) experience.

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We assist our clients with N C
U A so they save time and money.

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Credit Risk: COMMERCIAL CREDIT THEMES

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Commercial credit risk remains
moderate and shows signs of

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stabilizing as risks are better
identified, monitored, and controlled.

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Elevated but declining interest rates
could continue to affect borrowers

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with loans that originated before 2022,
especially those with variable rates,

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or borrowers seeking refinancing.

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Credit risk drivers indicate
pockets of risk specific to a

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lender's region and lending market.

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The current operating environment remains
challenging, especially for companies with

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higher leverage and marginal repayment
capacity, smaller and lower-rated firms

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with near-term debt maturities, firms
with a higher level of floating debt, and

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firms with limited financial flexibility.

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It is important that banks continue
to use sound credit risk management

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practices such as stress testing at
both the portfolio and facility levels,

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timely and accurate risk ratings, and
effective concentration risk management.

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The C R E office sector continues
to experience stress, and there may

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be additional valuation declines and
bank losses as a volume of office and

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multifamily loans—many with interest-only
terms—are set to mature or reprice

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over the next two to three years.

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C R E borrowers seeking to refinance
may need to re-margin through cash

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equity injections or by providing
additional collateral because of higher

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debt costs and lower property values.

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Generally, banks are appropriately
identifying problem office C R E loans,

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and the O C C expects banks to continue to
have credit risk management systems that

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produce accurate, timely risk ratings.

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Classified loan levels may increase
but are expected to remain manageable.

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Risks in multifamily C R
E lending remain elevated,

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particularly in the luxury segment.

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Nationwide, pressures from higher
interest rates and increased

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expenses are slowing the growth
in net operating income (N O I).

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Oversupply in some southern, southeastern,
and western metro areas and changes in

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rent regulations in some markets have
resulted in further narrowing of N O I.

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The hotel and industrial sectors
continue to show signs of softening.

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While banks with C R E concentrations
continue to present heightened risk,

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C R E loan growth has slowed overall.

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Staffing continues to be
challenging in the loan workout

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and credit risk review functions.

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During the most recent benign
credit period, retirements and

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other attrition decreased the
number of experienced professionals.

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It remains important for banks to ensure
that experienced staffing is adequate.

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The allowance for credit losses
(A C L) should continue to reflect

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a forward-looking assessment
of loan portfolio risks.

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This includes considerations for
potential loss drivers from a bank's

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current business, economic, and
overall operating environments.

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The A C L should include appropriate
adjustments, such as qualitative factors,

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recalibration, or model redevelopment, to
address potential modeling imprecision.

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RETAIL CREDIT THEMES

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Retail credit performance
remains satisfactory, and overall

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retail credit risk is stable.

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In recent years, consumers benefitted
from strong employment and wage growth,

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but those factors are beginning to slow.

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However, the labor market's rebalancing
of supply and demand does not currently

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indicate systemic consumer stress.

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Consumer segments that are most
susceptible to elevated prices are highly

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leveraged, lower income borrowers, but
do not present systemic credit risk.

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Delinquency and loss rates on
residential real estate-secured

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loans held by banks remain
historically low but are increasing.

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Delinquencies in other retail asset
classes, namely credit cards and auto

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loans, reflect an increasing trend.

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However, banks' retail credit loan
performance is consistent with many

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industry forecasts reflecting delinquency
and seasonal loss patterns normalizing

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from atypical historically low levels.

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Portfolio growth was generally
flat for the first half of 2024.

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Headline nominal growth in credit card
outstandings continues, largely because

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of several years of high inflation.

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Credit risk drivers continue to
include higher interest rates on newly

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originated loans with potentially
higher loan-to-value ratios,

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upward adjustments on variable rate
loans, and borrower segments with

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more limited repayment capacity.

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Banks reported tighter lending standards
across most categories of residential

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real estate lending, and with credit
card, auto, and other consumer loans

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in response to economic uncertainty.

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As risk profiles change, increased
portfolio monitoring may be

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warranted with appropriate risk
allocation within the A C L.

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Sound governance, transparency,
and documentation of assumptions

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and judgments, including those for
scenario selection and weighting,

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are critical to an appropriate A C L.

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Homeowners face mortgage
payment increases.

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Home price appreciation is contributing
to increased real estate taxes, and

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insurance costs are increasing because
of appreciating home values, rising

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construction costs, and insurability
issues related to climate-related events.

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Affordability pressures in some
geographies are more material

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and may adversely affect
borrowers' ability to repay debts.

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The increase in housing obligations may
warrant enhanced risk identification,

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monitoring, and reporting.

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Despite increasing costs, the median
monthly payment increase in taxes and

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insurance is not anticipated to have
a systemic impact on retail credit.

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Collateral administration
policies should outline standards,

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responsibilities, processes, and
internal controls so banks maintain

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appropriate collateral protection.

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Such policies and procedures should
facilitate timely identification,

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remediation, and reporting of
expired insurance policies and

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inadequate insurance coverage.

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If your Credit union could use assistance
with your exam, reach out to Mark Treichel

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on LinkedIn, or at mark Treichel dot com.

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This is Samantha Shares and
we Thank you for listening.