PAS’s primary engagements are commercial credit reviews. Loans typically represent a Bank’s largest asset and greatest amount of risk on their balance sheet. Regulatory guidelines suggest that banks establish an independent credit review function to help manage risk. While this can be done internally, it is often found to be time-consuming and expensive. Additionally, internal staff may lack the broad perspective realized by third-party reviewers, who are exposed to numerous financial institutions. We offer a third-party solution with the goal of adding value to your organization.

As part of a commercial credit review, we will analyze your portfolio for risk grade accuracy, underwriting procedures, ongoing portfolio management, credit administration processes, and industry best practices. Reviews are structured to prepare you for success with regulatory exams. During each exam, PAS will review each credit for credit quality, loan approval, compliance with conditions of loan approval, and the ongoing management of each loan relationship by the account officer.

These reviews include all our standard commercial credit review practices, with the addition of a deep dive into the SBA origination, eligibility, procedure, documentation, and servicing. Our goal is to ensure that the SBA Standard Operating Procedures (SOP) are being adhered to and the bank’s government guaranty remains intact.

Asset-based lending is the business of loaning money in an agreement that is secured by collateral. Asset-based lending is often used by small to mid-sized businesses to cover short-term cash flow demands. Although liquid collateral is preferred, collateral may include inventory, accounts receivable, equipment, or other property owned by the borrower. Asset-based loans are often included in our commercial credit reviews.

Financial institutions that have sizable ABL portfolios may choose to have a focused asset-based credit review. Using Loan Review Consultants that specialize in this type of lending, PAS can provide a deep dive review that also includes a comprehensive review of a bank’s ABL lending policy and practices, borrowing base calculations, loan structuring, lender controls and monitoring, and ABL documentation.

The Allowance for Loan and Lease Loss (ALLL) is the reserve established by financial institutions to reflect the estimated credit losses within their portfolio of loans and leases. The ALLL reserve is established and maintained by charges against a bank’s operating income. Banks typically have their ALLL methodology reviewed by a third party at least every 12 months. An ALLL review includes a review of the Bank’s overall methodology, including ASC 450 loss factors, ASC 450 Q-Factors, and ASC 310.

With the implementation of CECL, beginning 1/1/23, the Allowance for Loan and Lease Loss is now referred to as the “Allowance for Credit Losses” (ACL). We are offering ACL methodology reviews that include an evaluation of the Bank’s ACL policies and procedures for compliance with regulatory and accounting methodologies, an evaluation of the Bank’s approach to establishing general reserves for unimpaired loans, a preview of the Bank’s historical loss experience, an evaluation of the Bank’s approach and supporting documentation for the establishment of specific reserves for impaired loans, and a peer analysis of asset quality and reserve components to compare bank practices with comparable institutions.

Our ACL reviews will be continuously refined as additional information becomes available.

A bank stress test is an analysis conducted under unfavorable economic scenarios which is designed to determine whether a bank has enough capital to withstand the impact of adverse developments. Stress tests focus on a few key risks – such as credit risk, market risk, and liquidity risk – to banks’ financial health in crisis situations. The complexity, method, and frequency of stress tests varies, based on the bank size and expertise. As suggested in regulatory guidance, financial institutions typically complete a portfolio stress test at least annually and obtain a third-party, independent review. Our portfolio stress test reviews encompass an assessment of the overall methodology, a review of the Bank’s process for gathering and analyzing the data, and a review of the methodology relative to the loan grading process and ACL analysis.

Commercial real estate (CRE) loans comprise a major portion of many banks’ loan portfolios. Demand for CRE lending, a traditional core business for many community banks, has been very strong in recent years, and a growing number of banks have CRE concentrations that are high by historical standards and rising. The 2006 interagency guidance focuses on the risks of high levels of concentration in CRE lending at banking institutions, and provides concentration guidelines for construction, land, and land development (CLD or “construction”) and non-owner occupied CRE loans (including CLD loans) The regulatory real estate guidance requires banks to monitor certain CRE totals to Risk Based Capital. In addition to monitoring the portfolio against the regulatory guidelines, banks are also encouraged to set internal concentration policy limits that may be less than, equal to, or greater than the guidelines. If the Bank’s CRE and CLD concentrations exceed the regulatory guidelines and loan growth has increased significantly, then enhanced due diligence on the CRE portfolio may be required.

Typically banks analyze portfolio concentrations on a quarterly basis and prepare a written report or table to summarize conclusions. A Portfolio Concentration Review from PAS includes a review of the Bank’s concentrations and monitoring procedures, including: CLD and CRE concentrations relative to internal target limits and regulatory guidelines, a review of enhanced due diligence the Bank has in place, and a review of other portfolio concentrations (i.e., geographic, borrower, product/ loan type, etc.).

While many banks use a single vendor to perform SOX testing, some opt to split the testing between different vendors, based on areas of expertise. PAS may be engaged to perform SOX testing in the areas of Credit Administration, Loan origination, Special Assets, and OREO. Our SOX testing procedures include validating a Bank’s internal controls using appropriate sample sizes, to identify areas of risk. Data from a PAS credit review may be used to validate testing for SOX which results in improved efficiency.

Upon request, PAS provides reviews for loan portfolios targeted for mergers and acquisitions. These reviews are given high priority in timing, with a team assembled for a quick completion. The need for confidentiality is understood and maintained. We can conduct the review or serve as an additional resource to support your internal review.

Our review will assess the sufficiency and reliability of the credit risk rating system, loan approval and monitoring, and adequacy of the loan loss reserve. Our report details the findings of the review, including a summary of observations and conclusions supported by a written summary of each loan reviewed. We realize the importance of validating the underlying credit quality of a portfolio and appropriateness of reserves. Understanding these components assists with suitable pricing as well as measuring the tolerance level for the acquisition.