Getting the most out of portfolio reporting

Getting the most out of portfolio reporting

John Barrickman

Improved reporting can help bankers monitor and manage their portfolios more effectively. Steps to getting the most out of portfolio reporting include knowledge of 1) weaknesses with traditional portfolio reporting; 2) required types of portfolio reports and their content; 3) reporting frequency; and 4) keys to formatting and presenting portfolio reports. These four areas are discussed in this article.

Shareholders, regulators, and industry analysts are increasingly demanding clear, comprehensive, and timely reporting to accurately gauge risks at individual financial institutions. Internally, bank managers and directors need to be educated on how to interpret risk, management reports for new lines of businesses and identify potential issues. While banks tend to generate a great deal of loan portfolio data, they often stumble at organizing, analyzing, and presenting portfolio information–that is, findings, implications, explanations, and recommendations to provide insight and guide decision making.

Importantly, the implications of these shortcomings extend beyond credit quality. Proper perspective and understanding are required to ensure banks are compensated fairly for the risks they take. Furthermore, banks that monitor and understand portfolio risk well are better informed to create competitive advantage, respond to market opportunities, and enhance profitability.

Weaknesses with Traditional Portfolio Reporting

At least four fundamental weaknesses limit the effectiveness of traditional portfolio reporting: a focus on outcomes, a failure to adapt, point-in-time visibility, and using numbers without analysis.

1. A focus on outcomes, not causes. While they are important, summaries of portfolio credit quality that identify delinquencies, nonperforming and nonaccrual loans, criticized/classified assets, and losses reflect the results of lending decisions made three, four, or even five years ago. Current credit-quality measures shed little, if any, light on what to expect in the future and are even weaker quality predictors for banks that have embarked on changes in strategic direction, experienced a change in management or ownership, or entered new markets or lines of business.

2. Failure to adapt. Banks often develop good tracking and reporting systems but fail to augment these capabilities as their lending businesses evolve. This oversight is particularly troublesome as the more advanced forms of lending require unique and often more complex monitoring. For example, banks engaged in leasing should track residuals. Syndicated lenders need to understand the size of their exposure relative to the overall deal and that of other lenders. Residential construction lenders should assess concentrations by property price point and subdivision as well as by market and borrower (i.e., builder). Banks that apply the same reporting processes and structure to all lines of business cannot possibly recognize all relevant risks in their portfolios.

3. Point-in-time visibility. Traditional portfolio reports often provide present-day measures only, with no comparable benchmarks. This limited focus lacks perspective and can lead to “surprises” in portfolio performance. Banks instead should report historical trends and variances with their model portfolios to highlight shifts in credit quality and portfolio composition and any potential changes in the source or magnitude of assumed risk.

4. Numbers without analysis. Banks often report a lot of data but very little information. Most traditional portfolio reports do not include interpretation of results and recommendations for action. Readers of the reports–including executive management and the board of directors–frequently do not have the training to understand raw output in isolation. The failure to provide recommendations can result in a delay or lack of focus in addressing problems and issues.

These weaknesses can mislead management and the board about the risks in the portfolio and the potential for volatility in portfolio credit quality and earnings. Banks should structure their monitoring and reporting practices and capabilities to help them anticipate these issues, determine the potential impact to portfolio credit performance, and provide guidance for problem avoidance and resolution.

Types of Reports

Banks should produce at least five fundamental types of portfolio reports to manage the performance of most lending businesses effectively:

1. Portfolio composition.

2. Portfolio risk.

3. Portfolio profitability.

4. Portfolio credit quality.

5. Loan officer assessments.

More complex lines of business, such as land development and construction and income property lending, present additional, unique risks and require a sixth set of specialized reports.

1. Portfolio composition.

First and foremost, for assessing portfolio composition, banks should report stratifications of the total portfolio by both relationship size and loan size (see Table 1). In addition, banks should produce similar stratification reports for each major line of business. These reports quantify the number of loans/relationships and total balances outstanding within each size stratum. This information is critical to ensuring efficient credit analysis and portfolio monitoring. Banks should consider smaller credits–those below the level at which management would consider a 100% loss material (the bank’s “threshold for pain”)–as candidates for streamlined underwriting and exception-only monitoring.

Other portfolio composition reports should, at a minimum, mirror the parameters of the bank’s model portfolio and detail concentrations by line of business as well as by industry, property type, and agriculture type (see Table 2). Additionally, banks should monitor borrower and aggregate borrower concentrations and report these findings with borrower asset quality ratings and NAICS codes (see Table 3). Furthermore, to help forecast potentially dangerous concentration risks, banks also should report composition by collateral code and, within the consumer and mortgage portfolios, by employer–especially if one industry or a small group of employers dominates the bank’s market.

Banks that engage in construction lending also should report portfolio outstandings by:

* Builder/developer and related entities.

* Property price point.

* Market, submarket, and often subdivision.

* Speculation vs. contract development.

In addition, banks specializing in income property lending need to track and report portfolio composition by market, property type, and property grade. Importantly, income property borrowers often establish separate management companies for each individual property; as a result, borrower concentration rollups for this business should be expanded to include all related guarantor and borrower entities.

2. Portfolio risk. The second group of reports should focus on the credit risk in the portfolio. The key measure of credit risk is the distribution of asset quality ratings for the portfolio and by line of business (see Table 4). To be effective, the asset quality-rating framework should have sufficient granularity to differentiate adequately among performing borrowers and allow migration analysis among the pass categories. Specifically, banks with portfolios of $100 million or more should define at least five pass categories plus the regulatory classifications. The bank should assign risk ratings to individual borrowers and borrower transactions to reflect potential for default and loss given default. The bank also should assess and assign risk grades to industries, property classifications, and types of agriculture (refer back to Table 2). This practice will enable the bank to track and report the distribution of the portfolio by risk grade and assess concentration in high-risk portfolio segments (e.g., industries). The bank’s reporting also should focus on covariance, such as loans to high-risk borrowers in high-risk industries, property types, or agricultural businesses.

3. Portfolio profitability. While portfolio profitability is an important performance objective in its own right, understanding profitability is also critical for risk management. Banks should measure portfolio profitability by asset quality rating to ensure they are sufficiently compensated for the risks they assume (see Table 5). Profitability analysis also helps managers determine model portfolio allocations.

Portfolio profitability is simply the aggregation of the profitability of all component relationships. Relationship profitability is best measured by the risk-adjusted return on allocated capital (RAROC). In addition to AQR profitability reporting, and as with composition reporting, banks should tally RAROC summaries by the parameters defined in their model portfolios (line of business, industry/property/agriculture type, and largest borrowers). In addition, to assess productivity and determine what parts of the bank drive overall contribution, banks should report portfolio profitability by officer and branch/division.

4. Portfolio credit quality. While the future perspective gained by looking at concentrations is enlightening, banks can ill afford to abandon traditional credit quality monitoring and reporting. Banking institutions should publish credit quality reports at the composite portfolio level as well as by line of business. Reports should include transaction counts, balances outstandings, and total associated relationship exposure for:

* Delinquencies.

* Criticized/classified assets.

* Nonperforming loans.

* Nonaccrual loans.

* Losses.

Banks also need to track and report policy exceptions and variances from procedures, as significant exception activity suggests the bank may have undertaken an unacceptable level of risk. It may also suggest a need for process corrections or possible modifications to the loan policy (see Table 6). Report details should include transaction/relationship counts and balances. Additionally, reports should differentiate and age types of exceptions or variances; i.e., policy, underwriting, or documentation/collateral. Reports should subtotal by line of business, branch/division, and officer. To enable remedial action, banks should be sure to record when exceptions have been resolved.

5. Loan officer assessments. As indicated above, banks should monitor individual lender portfolio risk and profitability to manage officer performance and, ideally, drive incentive plan compensation. This level of detail, of course, requires banks to be able to assign relationships to individual officers. Because of the complexity of many customer organizations–multiple names, TINs, and addresses–and their multiproduct relationships, the assignment exercise typically is manual and done by the officers themselves. Importantly, relationship assignments should be maintained regularly to ensure accurate reporting. Loan officer report detail should include total measures of portfolio size (number of relationships and balances outstanding) plus each officer’s weighted-average portfolio AQR and RAROC.

6. Specialized reports. Real estate development and income property management business lending require additional specialized reports to assess portfolio risk adequately. The necessary portfolio composition reports associated with these businesses are described above. In addition, banks also should monitor the items shown in Table 7.

Reporting Frequency

Banks need to generate and review portfolio reports regularly to be able to recognize potential issues in a timely manner and make proactive portfolio management decisions. Portfolio profitability and credit quality reports should be run monthly, as they provide the most insight regarding current performance. Banks also should run specialized line-of-business reports on a monthly basis due to the variable nature of these businesses and the lead time required for banks to adjust to changes in market conditions. Portfolio risk and loan officer assessment reports should be administered quarterly, while portfolio composition reports can be run semiannually.

Format of Reports

The key to effective use of reports is being able to detect trends and manage the portfolio proactively to avoid adverse performance. Report packages should include at least five years of historical performance plus the current and prior reporting periods. Monthly and quarterly reports should contain annual comparisons with periodic breakdowns of the most recent rolling year. In addition, current portfolio measures should be compared to the model portfolio and to standards for portfolio performance.

Importantly, reports need to communicate information and not simply convey data. Thus, any variances should be analyzed carefully and explained fully in the reports. The reports also should contain specific recommendations to address issues identified in the analysis.

All recipients of reports should be trained to interpret the reports, understand the limitations of the information sources, and know the purpose of each report. Users should be questioned periodically to confirm that the information is used, to identify omissions, and to get feedback regarding reporting frequency and formats.


Good reporting is fundamental to assessing portfolio risk and guiding proactive portfolio management. However, while most banks engage in some form of reporting, many fail to provide adequate insight and direction. To be effective, portfolio reports should 1) be comprehensive to help anticipate potential issues; 2) provide timely, benchmarked measures of composition, credit quality, and profitability; and 3) be user-friendly by including analysis and recommendations rather than pure data.

Table 1

Bank XYZ

Portfolio Stratification of Accounts by Line of Business: 3-31-05

Face Amount Bank Commercial

# $ # $

$0 – $50M 86.5% 24.7% 52.0% 5.5%

$51 – $l00m 6.6% 10.9% 16.4% 6.2%

$101 – $250M 4.2% 15.0% 16.1% 13.6%

$251 – $500M 1.4% 10.7% 7.3% 13.5%

$501 – $1000M 0.7% 10.5% 4.4% 15.8%

$1001 – $5000M 0.5% 21.6% 3.5% 34.7%

$5001 M+ 0.1% 6.6% 0.3% 10.7%

Total 100.0% 100.0% 100.0% 100.0%

Face Amount Residential Consumer

# $ # $

$0 – $50M 58.4% 22.7% 97.2% 82.9%

$51 – $l00m 25.0% 28.8% 2.2% 9.9%

$101 – $250M 13.8% 32.4% 0.5% 4.9%

$251 – $500M 2.2% 11.4% 0.1% 0.3%

$501 – $1000M 0.5% 4.0% 0.0% 0.1%

$1001 – $5000M 0.1% 0.7% 0.0% 0.0%

$5001 M+ 0.0% 0.0% 0.0% 0.0%

Total 100.0% 100.0% 100.0% 100.0%

Table 1: Bank XYZ’s “threshold for pain”–determined through management

interviews–is $250,000. The bank has an opportunity to employ

differential (streamlined) analysis to credits in the commercial

portfolio below this threshold (i.e., 84.5% of accounts and 25.3% of

balances out-standing) without significantly increasing the potential

for volatility in portfolio credit quality and earnings.

Please Note: The tables in this article illustrate key concepts and are

excerpts from actual bank reports. In some cases, history and other

details have been omitted to ensure the main points are clear.

Table 2

Bank XYZ

Industry Concentrations > 3.0%

Commercial Portfolio Outstandings: 3-31-05

Current % Total

Industry Outstandings Commercial

($000) Portfolio

Lessors of nonresidential buildings (2) 461,292 11.8%

Lessors of residential buildings (3) 375,711 9.6%

Crop farming 209,750 5.4%

Hotel and motel 131,171 3.4%

Other RE rental and leasing 120,507 3.1%

Special trade contractors 117,333 3.0%

Durable goods 115,818 3.0%


Industry Industry % Criticized/

Rating Classified

Lessors of nonresidential buildings (2) 3 10.0%

Lessors of residential buildings (3) 2 7.5%

Crop farming 2 16.4%

Hotel and motel 3 55.4%

Other RE rental and leasing 2 2.1%

Special trade contractors 3 22.8%

Durable goods 2 18.7%

(1) 1 = Low Risk, 3 = High Risk

(2) Exceeds policy guideline as a % of capital: 46% vs. 35%

(3) Exceeds policy guideline as a % of capital: 56% vs. 25%

Table 3

Bank XYZ

Largest Borrowers/Outstandings

Distribution of Asset Quality Ratings: 3-31-05

20 Largest Borrowers

Balances % of 20 % of

Outstanding Largest Total

AQR ($000) Total Portfolio

1–Prime 6,675 3.33% 0.20%

2–Minimal 20,242 10.10% 0.61%

3–Moderate 45,610 22.76% 1.38%

4–Average 0 0.00% 0.00%

5–Acceptable 52,299 26.10% 1.58%

6–Marginally acceptable 10,324 5.15% 0.31%

7–Special mention 21,749 10.85% 0.66%

8–Substandard 43,496 21.71% 1.31%

9–Doubtful NA NA NA

Total 200,395 100.00% 6.05%

20 Largest Borrowers

% of Total

Portfolio % of Bank

AQR Tier I

AQR Stratum Capital

1–Prime 57.01% 0.98%

2–Minimal 10.14% 2.97%

3–Moderate 4.47% 6.68%

4–Average 0.00% 0.00%

5–Acceptable 4.88% 7.66%

6–Marginally acceptable 3.89% 1.51%

7–Special mention 10.65% 3.19%

8–Substandard 23.44% 21.71%

9–Doubtful NA NA

Total 6.05% 29.37%

Table 3: Many of these loans were originated when the borrowers were

risk-rated “acceptable” (AQR 5) and “marginally acceptable” (AQR 6).

The potential for default for a 6-rated borrower is 7 times higher

than the potential for default for a “average” (AQR 4) borrower.

The bank is emphasizing lending to higher-risk industries and has

ignored its own credit policy. This bank also has large exposures to

weak borrowers (see Table 3). This combination will result in

significant volatility in portfolio credit quality.

Table 4

Bank XYZ

Commercial Loans and Leases

Distribution of Asset Quality Ratings: 3-31-05

AQR (Current/Prior to 12-31-02 12-31-03


$000 % $000 %

1–Prime 160,132 4.49% 107,719 3.06%

2–Minimal 753,699 21.15% 566,618 16.09%

3–Moderate 920,203 25.83% 883,246 25.09%

4–Average 1,110,501 31.17% 1,307,580 37.14%


6–Marginally acceptable 317,168 8.90% 246,651 7.01%

7–Special mention or N/A

8–Substandard 298,605 8.38% 407,395 11.59%

9–Doubtful or N/A

No score 2,853 0.08% 797 0.02%

Total Outstandings 3,563,161 100.00% 3,520,546 100.00%

AQR (Current/Prior to 12-31-04 12-31-05


$000 % $000 %

1–Prime 12,320 0.37% 11,718 0.35%

2–Minimal 168,267 5.02% 199,632 6.03%

3–Moderate 1,120,029 33.39% 1,020,944 30.84%

4–Average 228,206 6.80% 257,517 7.78%

5–Acceptable 1,115,405 33.25% 1,070,677 32.34%

6–Marginally acceptable 191,563 5.71% 265,652 8.02%

7–Special mention or N/A 211,601 6.31% 204,280 6.19%

8–Substandard 215,944 6.44% 185,586 5.60%

9–Doubtful or N/A 90,149 2.69% 94,121 2.84%

No score 585 0.02% 202 0.01%

Total Outstandings 3,354,479 100.00% 3,310,829 100.00%

Table 4: The bank added granularity to its asset-quality-rating

framework in 2004. The additional detail reveals significantly more

portfolio risk than was first perceived. The bank also could expect

potential migration of large numbers of loans into the criticized

and classified categories.

Table 5

Bank XYZ

Commercial Loans and Leases

Risk-adjusted Spread and RAROC by AQR and Line of Business: 3-31-05

C & I Commercial RE

AQR–Risk Grade

Description Spread RAROC Spread RAROC

1–Prime 1.92% 20.81% 1.86% 21.56%

2–Minimal 1.52% 16.42% 2.69% 26.57%

3–Moderate 1.71% 19.11% 1.66% 20.15%

4–Average 1.81% 17.49% 1.89% 18.50%

5–Acceptable 2.38% 16.33% 2.40% 20.45%

6–Marginally acceptable 2.52% 15.57% 2.58% 21.20%

7–Special mention 2.52% 15.95% 2.33% 18.81%

8–Substandard 2.17% 10.26% 2.09% 16.39%

9–Doubtful 2.38% 10.59% 2.50% 18.46%

Total 2.29% 15.48% 2.40% 20.05%

Commercial RE Residential RE

Construction Construction

AQR–Risk Grade

Description Spread RAROC Spread RAROC

1–Prime NA NA 3.04% 22.69%

2–Minimal 2.98% 33.00% 3.15% 32.52%

3–Moderate 1.98% 22.25% 4.08% 31.81%

4–Average 2.40% 19.94% 2.50% 21.38%

5–Acceptable 2.51% 20.29% 3.87% 24.71%

6–Marginally acceptable 2.78% 21.73% 3.86% 27.85%

7–Special mention 2.75% 19.61% 3.98% 28.28%

8–Substandard 2.76% 16.81% 4.31% 27.56%

9–Doubtful 2.72% 13.75% 3.32% 20.99%

Total 2.58% 19.78% 3.75% 25.06%

Table 5: The bank is not being fairly compensated for risk, especially

in the C&I portfolio. The table also demonstrates the perils of relying

on spread rather than risk-adjusted return on capital (RAROC) to

measure whether the bank is being fairly compensated for risk.

Table 6

Bank XYZ

Consumer Lending

New Production Policy Exceptions (% of $): 3-31-05

Jan 05 Feb 05 Mar 05

% of total new consumer production 33.5% 36.5% 40.0%

with policy exceptions

Loan-to-value (LTV) 81.2% 78.9% 76.2%

Debt-to-income (DTI) 8.4% 8.0% 12.7%

LTV/DTI 7.9% 7.0% 5.2%

Payment-to-income (PTI) 1.0% 4.0% 4.2%

DTI/PTI 1.1% 1.0% 1.7%

LTV/DTI N/A 0.2% 0.0%

Other 0.4% 1.0% 0.0%

Total 100.0% 100.0% 100.0%

The large number of exceptions-especially in LTV, DTI, and PTI-suggests

the bank is being aggressive in its underwriting. Management should

question whether this practice fits the institution’s tolerance for

risk and priorities (i.e., asset quality vs. earnings and growth).

Management should also consider adjusting the bank’s policy if the

exceptions more accurately reflect the bank’s current approach to


Table 7

Construction and Income Property

Land Development Management

* Physical and economic occupancy * Physical and economic

by price point and market occupancy.


* Market data by submarket,

* Sales by price point and market property type, and grade:


* Physical and economic

* Aging by price point and occupancy.


* Permitted construction.

* Permitted construction.

* Under construction.

* Under construction (speculation

versus contract). * Absorption.

* Absorption. * Asking versus actual prices/


* Asking versus actual prices/


* Average sales time.

* Market data by market and price


[c] 2005 by RMA, John Barrickman is President of Near Horizon> Financial Group, a firm specializing in training and risk management consulting. Gary D. Stein is a partner with Capital Performance Group, LLC, a financial services consulting firm headquartered in Washington, DC.

Contact John by Brickman by e-mail at; contact Gary Stein at

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