| The Three Deadly Sins
of Portfolio Management |
· Poor distribution of asset quality ratings (AQRs)
· An emphasis on higher-risk types of lending
· Allowing concentrations in an individual borrower(s), industries, property types, etc. to build in the portfolio
Because a bank's exposure in these areas is a better predictor of future portfolio performance than past history, management should carefully track the bank's vulnerability to the "sins." Specifically, portfolio monitoring and reporting should focus on the desired distribution of AQRs over time, the desired mix of business lines (and each line's level of risk), and limits on over-exposure to concentrations as noted above. |
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www.whitlockco.com
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To our valued clients and friends,
Until about three years ago, most banks were enjoying low levels of past-due accounts, criticized/classified loans and losses in their small business portfolios. Then came the recession and financial crisis. While it's easy for banks to point to the financial turmoil as the cause of their problems, it's clear that many made some key mistakes, making a bad situation worse.
Our lead article looks at some common mistaken assumptions made by banks prior to the recession, and how you can avoid some of these mistakes going forward.
A primary cause of concern among many banks today is the high rate of default on government agency guaranteed small business loans. The second article below outlines some due diligence steps you can take that will help ensure that guaranties are paid when these loans go bad.
When a company is sold for more than net book value, this results in an accounting concept known as goodwill. If you are relying on reviewed or audited financial statements from borrowers, you should be aware of their obligation to test for goodwill impairment.
We hope that you find this issue of Financial Lending Notes to be beneficial to your company. If you would like more information on any of the topics mentioned here, we would be glad to discuss them with you in more detail.
Sincerely,
Tom Beisner, CPA, Partner |
| Managing and Mitigating Risk |
What a difference time makes. Three years ago, most banks were enjoying low levels of past-due accounts, criticized/classified loans and losses in their small business portfolios. Then came the recession and the financial crisis, which led to record losses and the subsequent failure of many banks.
It's easy for bank management to point to the financial turmoil as the cause of their problems, and it has certainly been a major factor in banks' struggles. When looked at objectively, however, it's clear that many banks made some key mistakes and poor assumptions that resulted in making a bad situation much worse. Read more... |
| Monitoring Government Guaranteed Loans |
A primary cause of concern among many banks today is the high rate of default on government agency guaranteed small business loans like Small Business Administration (SBA), Farm Services Administration (FSA) and Farmers Home Administration (FMHA) loans. In the good 'ol days, when these loans hit 90 days past due, the bank simply filed a claim, sent the government agency the credit file and the agency took it from there.
Now, the agencies expect lenders to work out the credits themselves before filing claims. And for claims filed, the agencies expect documented evidence of lender due diligence in every aspect of loan origination and monitoring before they will honor their guarantee. Read more... |
| Are Your Borrowers Testing for Goodwill Impairment? |
When a company is sold for more than net book value, this results in an accounting concept known as goodwill. If you are relying on reviewed or audited financial statements from borrowers, you should be aware of their obligation to test for goodwill impairment.
Once a year, these companies are required to screen for potential impairment, measure the amount of impairment (if any exists), and adjust the value of intangible assets (like goodwill) to reflect current economic realities. Read more... |
| About Us |
The Whitlock Company is a full-service accounting firm offering a range of audit, tax, technology, risk management and consulting services to the community banking industry.
The experiences our professionals have gained from these relationships allow us to offer you best practice ideas on business issues specific to community banks.
We appreciate your referrals. If you know of a company, organization or individual who may benefit from our services, please let us know.
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