CRE Concentration Analysis

alt_moon CRE Concentration Analysis

The Regulators (Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices | Managing Commercial Real Estate Concentrations | FDIC.gov) have requested institutions with large concentrations of CRE loans assess this risk in an additional way. CRE Concentration Assessments are meant to identify different CRE concentrations: if they have shifted periodically or changed risk level. The CRE loans should first be segmented into portfolios with common risk characteristics, as agreed upon by the institution and ARCSys. These portfolios will be analyzed for risk, as well as compared to each other to assess the similarities in risk they share.

The Commercial Real Estate (CRE) Concentration Analysis assesses the similarity between different CRE loan types with respect to net charge-offs and prepayments. This analysis can determine whether certain loan types should be broken out from the parent portfolio. ARCSys can perform this analysis on loan types within a portfolio, or between portfolios already created in CECL, creating a deeper understanding of the CRE portfolio.

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Our CRE Concentration Analysis Includes:

ARCsys will analyze the CRE portfolio as a whole, finding loan types with similar risk characteristics and grouping them together into a portfolio. We can also group certain loan types together or create certain groups based on your institution’s needs. Additionally, ARCSys can perform segmentation on more than one code if requested. Once these segments have been identified to contain similar risks, the following information is provided for each segment:

  • Current balance of loans in the segment
  • Number of historical loans in the segment
  • Number of loans in the segment over the past 12 months
  • Net charge-off percentage in the segment
  • Net charge-off percentage in the segment over the past 12 months
  • Prepayment percentage in the segment
  • Prepayment percentage in the segment over the past 12 months

ARCSys will also provide your institution with a Correlation Analysis (using Pearson’s, Spearman’s, and Kendall’s correlation metrics) to determine how similar each of the portfolios’ risk characteristics are to one another. The main risk characteristics utilized in the analysis are net charge-offs and prepayments; however, other characteristics can additionally be utilized upon request. Correlations will be provided in both a heatmap and a pairplot visual. ARCSys will also provide recommendations regarding the risk within each of the segments, as well as which segments can be grouped together given their similar risk characteristics.