Turn the STRESS in Stress Testing into an Empowering Experience

What you’ll learn in the video:

  • Focus on Turning Stress into Empowerment
  • Why is it important to evaluate your Bank’s readiness now?
  • Where should we focus our attention and priorities to get ready?
  • Common challenges and solutions
  • How CECL provides a logical “Baseline” for Stress Testing
  • How to ensure the Bank’s unique credit culture is accurately reflected in a life-of-loan reserve?
  • How can a Community Bank afford to implement the same practices as larger Banks?
  • How can I leverage an investment in a strong Risk Management foundation to benefit related processes within our Bank?

Watch the webinar video:

Download the PDF Gateway Asset Management – Turn the STRESS in Stress Testing into an Empowering Experience

Buying or Selling a Portfolio

A simple task is often the most difficult to do well

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Every day we hear bank CEOs discuss their interest in augmenting sluggish asset growth with portfolio acquisitions or de-risking their balance sheets by selling NPL’s. Given this, we feel inclined to help banks avoid unnecessary risk and common mistakes by providing our expertise and the following insights:

  • Hire an investment banker with access to a larger network of buyers and sellers to manage the progression of the transaction.
  • Retain legal counsel with experience in completing purchase and sale agreements. Whether you are buying or selling a loan, the negotiation of the representations and warranties will be a critical component of the transaction.
  • Engage a company experienced in due diligence. This will aid in preparing or reviewing initial bids, provide in-depth analysis and efficiently scrub the individual loans in the pool.
  • Ensure all your servicing questions are answered— especially if you use a third-party servicer. You will want to have the master servicing agreement fully negotiated prior to boarding any loans. You may consider an independent firm to maintain portfolio and servicer surveillance ensuring your portfolio performs to expectations.

Mastering the Sell: Demanding High Execution

If you are selling assets, a couple factors that will ultimately determine whether the sale is successful are pricing and execution. Because you don’t want to be surprised by low bids or excessive kick-outs by the buyer, it is important to understand what your selling. By understanding the buyer’s needs, capital and funding structure, it will allow you to accurately establish the price expectations for the portfolio for sale. In addition to getting the best price, you want to achieve at least 90-100 percent execution. This means you want to sell 90-100 percent of the assets you are marketing after the buyer has completed their due diligence. The key to guaranteeing high execution levels is to do your own diligence and screen every loan going into the pool as if you were buying, not selling. By screening every loan, you will catch missing critical information, correct data inconsistencies, ensure servicing statuses are up to date and accurate, etc. The end result of this process is a bid tape, where you are legitimately expecting the buyer to take it all.

Dominating the Buy: The Devil is in the Details

Phase I: Preparing the Initial Bid
The first phase should identify potential outliers for additional review or custom pricing. (This will include data collection, proxy building, data supplements, BPO (Broker Price Opinion) valuation analysis, and modeling of all loans with loan level analysis and output.) Each loan should be modeled for probability of default (frequency) and loss given default (severity) as part of the purchase price/value exercise. Three distinct collateral values are developed to help validate the BPO value.

With this information, you can determine “best value” based on the analysis and desired risk threshold of the buyer to be used for the indicative bid. Outliers can be priced separately from pools, removed from the bid, etc. The aforementioned analysis should be run, and rerun, with different economic stress levels on the valuations and/or different risk tolerance levels.

Phase II: Acquisition and the Final Bid
The objectives include:

  • 100 percent penetration of target portfolio
  • A hybrid combined bid data tape is created incor-porating:
  • – Phase I modeling output and analysis
    – Validated seller loan information
    – Corrected seller loan information
    – Added pertinent risk variables captured during file review
    – Reviewer comments
    – Overlay buyer/client internal comments when applicable
    – Enhanced analysis elements including custom calculations, comparisons and highlighted loans with higher risk and uncertainty

  • Specific portfolio attribute analysis to provide support and comfort regarding loss forecast, loan/portfolio value and final bid
  • Potential final bid scenarios, summary stratifications and report tables.

It is our job to help your community bank manage risk and be more profitable. Should you have questions, we are happy to provide you with a complimentary consultation.

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Portfolio Stress Test

Turn your required Portfolio Stress Test into an empowering experience

How many times have you heard the saying “the best defense is a good offense?” That saying couldn’t be more true when it comes to providing comfort regarding the composition and risk embedded within bank portfolios.

doug-tayor-commentToo often loan porfolios are judged based on the credit culture and practices of others, when they should be based on the specific attributes and characteristics of the customers that combined make up your portfolio. Many times, better than average historical performance is not enough.

A portfolio is simply the consolidation of customers, and these customers are a product of their complex layers of credit attributes. These customer characteristics
are usually referred to as layers of RISK. Within this classification, the term risk is intended to include weight for good or positive attributes equally with negative attributes.

The layering of these risks at the customer level allows you to:
• Support the strength of your portfolio
• Isolate, track and create appropriate strategies for high risk segments
• Increase profitable customer retention while having the tools to effectively provide comfort to regulators and other stakeholders that bank management understands the inherent risk and is doing the right things to manage it

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Stress Testing produces diverse outcomes based on the nature and combination of these layers of risk. Stressing a portfolio amplifies negative performance characteristics while barely affecting loans that exhibit primarily positive ones.

Whether your bank has a portfolio of low-risk customers or isolated pockets of adversely high-risk, when you are able to prove that risk has been accurately identified and your strategies and practices appropriately address the inherent risk,
you feel empowered and can confidently go on the offense.

For a free consultation please contact us.

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Help Your Bank Exceed Its Regulatory Requirements

Three-Step Approach to Bank Data That Can Help Your Bank Exceed Its Regulatory Requirements

New reporting requirements are coming to community banks. It’s only a question of when.
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Regulators are moving down the asset spectrum. They’re currently pre-occupied with banks of more than $50 billion in assets, but eventually some or all of the reporting requirements that have been applied to large banks are going to be applied to community banks.

For many of the banks that we speak to and work with, the looming requirements are, at best, an annoyance, and at worst, a significant disruptor to their operations and constant drain to the bottom line. Add in the potential for punitive fees for banks that fail to provide adequate reporting, and the new requirements start looking like a big spoonful of medicine with very little sugar.

However, with a little preparation your bank may be able to transform the reporting process from an onerous and costly task to one that may even be empowering. And it all starts and ends with one thing: the quality, breadth and accessibility of your bank’s data.

As you know, data is at the core of modern banking. Every time a customer applies for a loan or makes a deposit, new data is generated. Generally, though, this data is maintained for a limited time or is sequestered in isolated files or databases, since it’s generally assumed that ongoing customer activity and loan performance data will be sufficient for all anticipated analysis and regulator requests and that the extensive credit data gathered at origination or refreshing key elements will not become critical.

When we begin work with many of our clients, we start by looking at and consolidating as much available data as possible into a useable form. Capturing data, retaining as much data as possible and storing that data in an electronically accessible medium is the biggest thing that a bank can do to lay the foundation for a solid reporting structure that can exceed regulatory requirements.

Given the growing importance of data for banks, how should banks go about preparing for this new level of scrutiny?

We recommend that banks consider the three following steps for beginning their data management program. This isn’t all you’ll need, but it’s a good place to begin your thinking about how your bank can collect, organize, and maintain data for the long-term.

  1. Review data capturing processes
  2. Chances are, at one point you had or still do have important data that is not currently available to you for analysis or reporting.

    1. Seek guidance from regulators or industry experts to establish a data element capture priority plan.
    2. Complete a preferred data element inventory, identify;
      1. Important data currently captured requiring trust level certification, consolidation and organization
      2. Key elements available for capture and a capture process plan
      3. Opportunities to enhance data captured efficiently through current processes
      4. Data elements that would add analytical value as proxies (educated, fact based estimates) when it is unlikely data will be available or becomes too cost prohibitive to gather
    3. Think of enhanced data as a tool for empowerment, not as regulatory requirement. Go on the offense. Start by identifying things you wish you knew and build from there.
    4. Five primary areas where data is usually available but not captured for analysis;
      1. Residential 1-4 and other consumer loan Origination data detail
      2. Updated Credit scores and automated property valuations on Consumer customers
      3. Commercial Loan financial statement spreading information and property detail data at origination
      4. Incorporating analysis derived from updated information received from Commercial borrowers to satisfy loan covenants and during annual loan reviews
      5. Original and updated Collateral Values
  3. Consolidate data in a single, accessible location
  4. It is important to realize that you don’t need to embark on an expensive and complex project to vastly improve your analytical capabilities. Knowing what data is available, knowing the trust level of the source and being able to append/consolidate the data in one accessible location is the primary goal.

    1. Expensive data warehouses are great, but a simple Excel spreadsheet that consolidates multiple sources of data in a controlled, consistent and organized way can be a giant step.
    2. Always try to make sure your analysts have a solid understanding of the products or assets that you will be reporting on to make sure consolidated data passes the reasonableness test and errors or bad data issues can be identified and corrected prior to external consumption.
    3. Know and disclose the accuracy and trustworthiness of your data. Unlike customer facing or official customer record information that must be 100% accurate, analytical data can be very meaningful without being perfect.
    4. Too often banks abandon data consolidation projects and lose all of the analytical and reporting capabilities because they can’t certify 100% of the fields. The more trusted your data the better, however data can be trusted and useful without being 100% certified.
  5. Create a process for cleaning and updating data
  6. Building and maintaining a trusted comprehensive database is an ongoing process that requires constant diligence, focused effort and controls.

    1. Constantly challenge your data for reasonableness and inconsistencies. Simple filters combined with an educated look can easily identify areas where data needs to be cleaned up. When you find issues, quantify and correct them. This can be as simple as aligning internal product and loan type codes or making sure all adjustable loans have indexes and margins.
    2. Take advantage of current processes to confirm and validate data, whether through standard audits, file reviews or current trusted control processes.
    3. As you confirm that a data element is trusted, make sure your database reflects that it has been validated.
    4. Document how your data is sourced, processed and consolidated. Ensure that multiple people in your organization are familiar and knowledgeable about the process so you don’t run the risk of being hostage to an individual employee.
    5. Make data integrity and data integrity improvement a well communicated and a companywide priority.

While just collecting and maintaining data won’t satisfy reporting requirements, it can go a long way toward making the reporting process easier, and even rewarding and empowering for banks. A bank that has a lot of well-organized data that is easily accessible can produce analysis that showcases that bank’s efficacy in its decision-making and performance, which will go a long way toward convincing regulators that your bank is capable of responsible self-management.

Once you commit to a more comprehensive data collection and management program, you’ll be preparing your bank for even greater benefits in the future.

Mark Shepherd
Managing Principal, Gateway Asset Management