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Appeal of Shared National Credit (First Quarter 2022)


A participant bank appealed the substandard risk rating and nonaccrual designation assigned to a term credit during the first quarter Shared National Credit (SNC) examination.


The appeal asserted that a pass rating is more appropriate. The appeal contended that despite the impact of the COVID-19 pandemic, 2021 financial performance improved and would stabilize in 2022, providing an adequate primary source of repayment. The appeal also noted adequate liquidity and satisfactory collateral support evidenced in an updated appraisal that reflects a satisfactory loan-to-value.

Supervisory Standards

The interagency appeals panel conducted a comprehensive review of the information submitted by the bank and relied on the supervisory standards outlined below:

  • Comptroller’s Handbook, “Commercial Loans” (Narrative—March 1990, Procedures—March 1998)
  • Comptroller’s Handbook, Commercial Real Estate Lending” (Version 2.0, dated March 2022)
  • Comptroller’s Handbook, “Rating Credit Risk” (April 2001, updated June 2017 for nonaccrual status)
  • OCC Bulletin 2020-35, “Troubled Debt Restructurings: Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by COVID-19 (Revised)”
  • OCC Bulletin 2020-64, “Examinations: Interagency Examiner Guidance for Assessing Safety and Soundness While Considering the Effect of COVID-19 on Institutions”
  • OCC Bulletin 2020-72, “Credit Administration: Joint Statement on Additional Loan Accommodations Related to COVID-19”


An interagency appeals panel of three senior credit examiners concurred with the SNC review team’s originally assigned rating of substandard based on the borrower’s inadequate primary source of repayment, high refinance risk, and weak liquidity. The borrower operates in a stressed industry and faces significant tenant rollover risk as leases expire in 2022. During 2020, the borrower’s financial performance deteriorated significantly as the pandemic negatively impacted the retail industry. Additionally, the collateral value of the retail property was volatile and distressed during the pandemic. An updated internal evaluation resulted in a partial charge-off in 2020. Although borrower cash flow improved in 2021, quarterly recurring net operating income (adjusted for one-time items, non-recurring income, management fees, and current market terms) has not consistently generated a debt service coverage ratio above 1.0x. Additional time is needed to demonstrate sustainability of recently improved performance. These factors, coupled with higher market rates, heighten refinance risk as the credit approaches maturity. Accrued expenses, due to construction in progress, will require additional near-term liquidity, leaving minimal liquidity to support operations.

The appeals panel concluded that accrual status is warranted rather than the nonaccrual designation assigned by the SNC review team. This decision was based on recent improvement in operating performance and the recent appraisal that results in a satisfactory loan-to-value.