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Loan Portfolio Due Diligence: Leveraging the Opportunity for Acquisitions 

Loan Review Series: Part 3 of 3 

By: Kevin Graff, President

When acquiring a financial institution or purchasing a loan portfolio, thorough due diligence is critical. This process equips leadership with the insight needed to make informed decisions, manage risk, and integrate assets confidently. At Integrity Loan Review, we specialize in commercial loan review due diligence, providing clear, actionable insights that support a seamless acquisition process. 

The acquisition of a financial institution has many moving pieces which all need to be choreographed and closely managed in a discreet way, to efficiently and effectively complete the transaction.  Company resources may be spread thin to meet the acquisition benchmarks in a timely and meaningful way.  Focus can be drawn away from existing customers as staff work toward completing due diligence activities. 

Loan portfolio due diligence is a key aspect of executing an acquisition, as the loan portfolio is typically the highest risk area.  We can help alleviate some of the pressure and time constraints on your team by providing the loan portfolio due diligence necessary to deliver the critical information management needs to assist in negotiating the terms of an acquisition.  We can help your team develop a risk-based approach to the loan portfolio due diligence process to make best use of the resources available for the potential acquisition. 

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Beyond the Basics:
Unlocking the Power of Targeted Loan Reviews
Loan Review Series: Part 2 of 3 

By: Kevin Graff, President

When it comes to managing a loan portfolio, most financial institutions are well acquainted with full-scale loan reviews. But sometimes, the smartest move is not to audit everything—it’s to focus on what matters most. A targeted loan review offers a precise and cost-effective approach that zeroes in on specific segments of a loan portfolio, allowing institutions to proactively manage both growth and risk. 

What Is a Targeted Loan Review? 

Unlike a full-scope loan review, which encompasses a large segment of the entire loan portfolio, a targeted review focuses on specific loans, specific segments of the loan portfolio, borrower types, industries, geographic areas, watch and worse rated credit relationships or other risk segments. These reviews can be prompted by a variety of factors—not all of them negative.

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How to Maximize the Benefit of an External Loan Review
Loan Review Series: Part 1 of 3

By: Kevin Graff, President

Third-party loan reviews can be an excellent way to manage a variety of risks a financial institution is exposed to.  These can include credit underwriting, credit administration, and reputational risks.  A loan review should provide insights into the effectiveness of the risk rating process, credit underwriting and credit administration function. 

Leveraging the overall loan review process will result in a more effective loan review.  Up-front time preparing for the review will maximize the return on investment in the loan review process.   Every loan review firm has their own approach to a loan review engagement. While the specific steps and processes may differ, they all require timely access to the credit file information and the appropriate personnel from the financial institution. 

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ACL Model Validation

Part III: Qualitative Adjustments

By: Peter Warmenhoven, Consultant

As previously mentioned in Part 2 of this ACL Model Validation series, financial institutions have recently transitioned to the new Current Expected Credit Loss, or “CECL” method of estimating the Allowance for Credit Losses (“ACL”). While much about the CECL method is unfamiliar, and while ACL calculation models vary, there are a few basic similarities with the previous incurred-loss method. First, historical loss information still provides the starting point and figures heavily into the “quantitative” calculation of an institution’s ACL.

Further, the CECL method still incorporates adjustments for qualitative and environmental factors into the ACL calculation, to adjust for how current or forecasted conditions differ from historical loss experience. The purpose of qualitative factors is to adjust for what is not in the historical loss analysis. An important difference with CECL is that management should apply a forward-looking thought process when evaluating these criteria.  Q-factor adjustments should address the differences in the current environment, and the current or expected conditions that indicate that future loss rates will be different than losses incurred in the past.

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ACL Model Validation
Part II: Loan Portfolio Segmentation
By: Peter Warmenhoven, Consultant

Financial institutions have transitioned to the Current Expected Credit Loss, or “CECL” method of estimating the Allowance for Credit Losses. Following regulatory expectations, many financial institutions are evaluating the effectiveness of their CECL process and looking for ways to improve the accuracy of their CECL result.  One of the most basic yet important elements of the CECL process to evaluate is portfolio segmentation; the way institutions divide their loan portfolios into pools of loans with similar risk characteristics.  Proper segmentation is the foundation of an accurate ACL estimate.  From each loan segment, loss histories and loan lifetimes must be determined, cohorts can be identified, and relative qualitative adjustments are applied.

FASB ASC Topic 326, the CECL Standard, requires expected losses to be evaluated on a collective, or pool, basis when financial assets share similar risk characteristics. However, neither FASB nor the regulatory agencies have prescribed a specific process for segmenting financial assets into pools for collective evaluation. Depending on portfolio size, composition, and complexity, a pool segmentation that’s appropriate for one institution may not be appropriate for another.  While there is no definitive approach for an institution to segment its portfolio, the CECL Standard does provide these key guidelines:

• Segmentations or pools should have similar risk characteristics
• Pools should be as granular as possible while maintaining statistical significance
• Risk differentiation and economic responsiveness are key considerations
• Both credit and non-credit related characteristics are relevant
• Management should exercise judgment when establishing appropriate segments or pools
• Management should evaluate financial asset segmentation on an ongoing basis

Many institutions, especially community based financial institutions, have segmented their portfolios to some extent according to the Call Report Codes for Schedule RC-C, Loans and Leases.  For Call Report purposes, each institution’s loan portfolio is already segmented into standardized pools according to loan  purpose, collateral type, or borrower. The call code represents a common starting place that virtually all institutions already track.  After first segmenting by call code, CECL pools can be refined by other criteria to break out significant sub-pools, or even by combining segments into larger pools according to shared risk characteristics.

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