Sometimes, when things develop unexpectedly, we spring into action and seize the day. My longstanding Thanksgiving tradition collapsed with the pandemic warnings this year, and I scrambled to put together an alternate plan — dinner for two. Maybe your local school went to virtual learning and you’ve had to balance remote work with childcare. Did a job loss within your family require a revamp of the budget? We’ve all had some type of disruption in our normal routines, many that have caused us to make changes and embark on new paths.
Financial institutions have also been required to embark on new paths. They have had to reinvent their facilities to accommodate safety protocols. They are dealing with technology issues raised by employees working from home and customers banking online. They are responding to changes to their regulatory environment, some long in the works, such as CECL, and others newer on the horizon. Does this sound familiar? All of the change and uncertainty affects the lending staff within the financial industry.
They have raced to assist their clients with SBA Paycheck Protection Program (PPP) loans that are now on the books. They are responding to requests for assistance with forgiveness of those SBA PPP loans. They are working with customers in industries hard hit by the pandemic, offering payment deferrals or debt restructure. Amidst all of the pressure, one can lose sight of the big picture. You know we are officially in a recession, right?
Loan portfolio management is the umbrella under which a financial institution protects itself from the risks associated with lending. From credit culture and portfolio objectives to loan policy and the allowance for loan and lease losses, a financial institution’s lending practices require management. In times of upheaval, all aspects of loan operations are under duress, increasing the need for reliance on a sound and thorough loan portfolio management program. COVID-19 is just the latest thing to test your current program.
If you are not already familiar, the Comptroller of the Currency issued its Comptroller’s Handbook, “Loan Portfolio Management,” in 1998, so it has been the standard for more than 20 years. The opening paragraphs remind us that lending is the principal activity for most commercial banks — and arguably for most financial institutions. Effective management of the loan portfolio and credit function is considered fundamental to the safety and soundness of a lending institution. While prudent approval and careful monitoring are critical to good loan portfolio management, more is expected. It is not enough to rely on trailing indicators such as delinquency, nonaccrual and risk rating trends, practices that do not allow sufficient lead time for corrective action, particularly if there is a more widespread increase in risk.
Advisory Letter 97-3, issued by the OCC in 1997, identified nine elements that should be part of a loan portfolio management process. These nine elements don’t minimize the need for sound underwriting, comprehensive financial analysis, adequate appraisal techniques, loan documentation practices and sound internal controls. They are the “something more” that is expected:
- Assessment of credit culture
- Portfolio objectives and risk tolerance limits
- Management information systems
- Portfolio segmentation and risk diversification objectives
- Analysis of loans originated by other lenders
- Aggregate policy and underwriting exception systems
- Stress testing portfolios
- Independent and effective control functions
- Analysis of portfolio risk/reward trade-offs
Where is your financial institution on the road to implementing the nine elements? Are there areas that may need research, improvement or testing? Has it been too long since you’ve updated key objectives and tolerance limits? With resources already stretched, an overview of your loan portfolio management practices is daunting but necessary.
Let us help! Wipfli’s resources are deep. We have specialists who have worked in your shoes and who are current in their understanding of your regulatory environment. In addition to our standard loan review procedures, we can offer consulting on your loan policy, portfolio stress testing and more. Is there an area of your portfolio management program that could use a fresh set of eyes? Give Wipfli a call and connect with someone who speaks your language.