Portfolio Due Diligence & Impairment Analysis

CRM routinely performs loan portfolio due diligence examinations in support of a variety of transactions, including:

• Mergers and Acquisitions by and between banks.
• Detailed internal assessments by banks in support of capital raising activities.
• Detailed external assessments for private equity groups prior to capital investments in banks.
• Troubled banks seeking to reach a loss sharing arrangement with federal regulators.

In several cases, CRM's reputation for thoroughness and objectivity has resulted in being engaged to evaluate both sides of a two bank transaction.

Methodology – Overall Process; Impaired Loan Analysis

The critical portion of loan portfolio due diligence is identifying potential capital needs by quantifying the adequacy of Allowance for Loan and Lease Losses (ALLL). Particular emphasis is placed on the accurate identification of loans meeting the regulatory definition of impaired, and providing realistic estimates of the corresponding required Individual Loan Loss Reserves according to FAS-114.

Any Loan Loss Reserve adequacy recommendations are generated using CRM's proprietary ALLL Model – an estimating tool based on the most recent comprehensive federal regulatory guidance( Policy Statement on the Allowance for Loan and Lease Losses; Question & Answers on Accounting for Loan and Lease Losses) issued in December 2006 – and the experience of CRM staff. Given a reasonably broad and appropriately focused due diligence sample, CRM can extrapolate an overall FAS-5 Formula Loan Loss Reserve estimate to complement the specific Individual Loan Loss Reserve estimates for any credit that is either:

• Already designated as an Impaired Loan by the bank being evaluated, or
• Identified as an Impaired Loan by CRM after review of the majority of Watch List Loans and a reasonable sample of other suspect categories.

Methodology – Other Components

CRM's Loan Loss Reserve sufficiency evaluation is the core of loan portfolio due diligence, but it is far from the only evaluation made by CRM. Other areas for which observations and recommendations are provided include:

• Degree of overall regulatory concerns; adherence to specific Consumer Compliance requirements.
• Appropriateness of lending philosophy; thoroughness of underwriting and approval processes.
• Quality of Loan Documentation; organization of collateral files (paper or imaged files).
• General risk levels and concentrations; evaluation of bank risk management systems and reporting.
• Accuracy and timeliness of OREO valuations.

Let CRM assist you in your next need for a loan portfolio due diligence and impairment assessment. Contact us to find out more.

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