Regulatory & Risk Analytics

Loan Portfolio Analysis

Brean Strategic Advisors’s loan portfolio offering serves to aggregate, extract, enrich and analyze as much historical data as our client has about the historical performance of their loan portfolio, including paystrings for active, prepaid and charged-off loans as well as all relevant origination characteristics.  When origination characteristics and performance data are married at the loan-level and regressed, analytical insights result which inform regulator and business line decision making and reporting.

Brean Strategic Advisors’s approach to loan data aggregation, enrichment and analysis is detailed below.

  1. Aggregate dataset

Regulators expect banks subject to the DFAST ($10 billion +) stress testing requirements to have a robust loan-level dataset so they can apply the macroeconomic scenarios to the geographies and products within each bank’s loan portfolio.  The remaining set of banks’ loan-level reporting requirements will be required by the Current Expected Credit Losses (CECL) accounting model. 

Many of Brean Strategic Advisors’s banking clients have stitched together businesses over a series of acquisitions and bulk pool purchases.  Origination loan tapes captured, retained and aggregated from retail origination may be limited to those required by the core solution, such as balance, coupon and reset.  Wholesale channel loan origination was generally accompanied by full bid tapes yet this data is often retained on separate spreadsheets for each pool and may have loan ids which are not mapped to the core deposit solution or servicer reporting. 

  1. Historical

The first step in data aggregation and normalization is capturing a comprehensive set of origination characteristics normalized across origination channels and into a single source.  For example, Brean Strategic Advisors ingests loan tapes acquired in hundreds of transactions by multiple predecessor banks.  In some cases, such as lower volume retail origination to local customers, the only way to extract the relevant information may be scanning loan files stored in a warehouse and using a combination of programmatic or human review to extract the relevant document metrics. 

The second step of aggregation is pulling historical performance.  The difficulty of this exercise will vary with the nature of the assets and the volume of servicers.  Many smaller bank clients purchase whole loans on a servicing retained basis, meaning there could be hundreds of servicers.  In some cases bank clients direct all of the servicer cashflows to a third party to aggregate but the data is aggregated at the pool rather than the loan level. 

Brean Strategic Advisors tailors the extent of historical data aggregation to our clients’ budget.  For clients with clean data sets and fewer servicers we may be able to pull in decades of historical data.  For a client with a more limited budget and messier data we may only be able to bring in historical data for the largest whole loan pools and going back only a few years.

  1. Monthly ongoing updates

Going forward, Brean Strategic Advisors will aggregate monthly servicer reports.  Brean Strategic Advisors ingests, normalizes and enriches the servicer loan tapes.  For example, Brean Strategic Advisors will dynamically update home price-adjusted loan-to-value ratios.  We will aggregate servicing reporting across sectors and subsectors and marry the performance data with the origination data.

  1. Regression

On a monthly basis, Brean Strategic Advisors tracks the composition of the loan pool by key origination metrics.  For consumer loans, these include FICO, LTV and DTI, among others.  For commercial loans this includes debt-service coverage ratio and sector.  Performance data is also tracked.  This includes trends in prepayment speeds, default frequency and loss severity.  We break performance data into buckets by sector, product and credit characteristics, among others. 

Brean Strategic Advisors regresses the origination data against performance trends to highlight macro and micro drivers of performance within the portfolio.  The regression analyses inform the application of the regulatory stress scenarios to our clients’ portfolio.  To the extent we identify drivers such as differences in underwriting or servicing which are proven to account performance differences, these are reflected in the results of our regression analyses. 

  1. Outputs

Brean Strategic Advisors uses the insights from the performance trends to drive growth in the underlying businesses.  In some cases we develop customized models, such as a client concerned about entering a new geography who desires an assessment of how the new region varies from the bank’s existing geographic footprint.  In other cases, a bank may be interested in expanding its underwriting guidelines and altering loan terms and is interested in how to price this risk and implications for potential losses.

Clients concerned about expanding volume in today’s low rate environment increasingly engage Brean Strategic Advisors to perform probability-weighted credit risk adjusted return analyses.  The objective is to determine the likelihood of various macroeconomic drivers occurring, such as the probability of various home price and unemployment paths.  Given these weightings, Brean Strategic Advisors is tapped with calculating the expected losses, existing coupon and the target return.  Our objective is to determine if our client would benefit from pricing certain risks more aggressively or should reduce its exposure or increase prices for other risks given the economic outlook. 

Once Brean Strategic Advisors has ingested our client’s data, developed a framework to track origination trends, portfolio composition and performance on a monthly basis, our goal is to report this information in the formats customized by clients. 

Reporting options include:

  1. Detailed Loan Analysis
    1. Report detailing historical data regarding the performance of the portfolio, including paystrings for active, prepaid and charged-off loans as well as all relevant origination characteristics. 
    2. Track trends in origination over time by key credit metrics and sector.
    3. Track performance over time by sector. 
    4. Stratification of the portfolio by sector, performance and origination credit metrics. 
  2. Credit Stress Testing
    1. Expected losses using different macro scenarios.
    2. Documentation of data sources and methodology in level of depth sufficient for regulators.
  3. Interest rate and prepayment stress testing.
    1. Use of various interest rate scenarios to evaluate total return and optionality. 
    2. Down 100 bps parallel shock to up 300 bps.
  4. ECAP.
    1. Expected one year losses in the 99.95th percentile scenario.
  5. Incorporation into institutional what if scenarios.
  1. Portal

Brean Strategic Advisors has developed a secure, proprietary analytical tool, Brean Strategic Advisors Analytix, which houses, renders, enriches and analyzes our client’s loan data.  On the back end, our team of data scientists will work with your servicer and core data solution to ingest loan data on a monthly basis.  We will integrate this data and make the reporting described above available to select users over time.

Investment Portfolio Analysis

Brean Strategic Advisors’s investment portfolio analysis is a tool clients use to optimize their investment portfolios.  Prepared periodically for customers of Brean Capital, LLC, the investment portfolio analysis highlights the composition of client portfolios, performance across various interest rate scenarios and risk sensitivities. 

Brean Strategic Advisors’s analysis begins with receipt of a client’s securities position.  We ingest CUSIPs, portfolio type (e.g. available for sale or held to maturity), book values, yields and face values.

Next, we enrich our client’s data, with market values and descriptive characteristics pulled from industry recognized vendors.  This data enables us to segment our client’s portfolios and report their portfolio’s performance across key buckets such as available-for-sale and held-to-maturity and asset classes. 

Brean Strategic Advisors reports our clients’ portfolio composition and performance as indicated by yield, duration and total return.  We report total returns probability-weighted by the likelihood of various interest rate scenarios.  Securities are broken out into return quadrants, including securities which are:

  • Non-productive and perform poorly in the probability weighted scenarios and the upward rate shock scenario.
  • Defensive and perform well in the upward rate shock but poorly in the probably weighted scenario.
  • Productive securities which perform well in a probability weighted and uprate scenario.
  • Aggressive securities which perform well in a probability weighted scenario but underperform in a rate selloff. 

The worst performing securities are brought to the fore and to facilitate discussion about risk mitigation or disposition strategies.

Regulatory Stress Testing

Brean Strategic Advisors performs regulatory stress testing for a number of financial institutions.  On stress testing mandates, Brean Strategic Advisors’s objective is to apply the regulator mandated stress scenarios to the unique risk and composition of each client’s loan, security and deposit assets and liabilities.  Regulators are looking for evidence of statistical and analytical prowess and data grounded in each institution’s recently experienced data.  Similarly, Brean Strategic Advisors helps clients extrapolate from national macroeconomic scenarios such as home prices and unemployment to local indices using regression analyses.  The localized scenario forecasts extrapolated from the regulator scenarios are then regressed against recently observed performance and run through Brean Strategic Advisors’s models.  Brean Strategic Advisors’s results and methodology are documented in a whitepaper prepared by our team which includes quants and attorneys. 

Brean Strategic Advisors and members of the team have been engaged to perform regulator stress testing, prepayment and loss forecasting by institutions subject to the CCAR and DFAST stress testing regimes.

In a typical stress testing mandate, Brean Strategic Advisors is engaged to use industry standard methodologies and datasets for each instrument, both assets and liabilities.  We will then overlay the regulator stresses in a transparent and defensible manner and explain the methodology for applying the regulatory stress in a whitepaper.  Critically, we recognize the importance of tailoring our analysis to reflect each bank or credit union’s unique instrument composition while retaining the regulator stress scenarios.  Ultimately, we will forecast pre-provision net revenue, allowance for loan and lease losses, net income and the impact of potential capital actions on capital ratios. 

Once we have calculated a bank or credit union’s stress test capital ratio, we will assess the sensitivity of each bank or credit union’s balance sheet and income statement to key variables ranging from convexity, rates and defaults to origination volume.  We recognize our assessment will be used by the regulator (e.g. the OCC, NCUA or Fed) to inform its assessment of the credit union’s risk exposure and sensitivity tables alone will not be sufficient.  Brean Strategic Advisors will prepare a qualitative assessment of these sensitivities.  Where we deem the materialization of a given risk or variable to be particularly likely, we will explain why and further detail how changes in this variable will drive the performance of the credit union’s specific assets.

The first step in our analysis is to assess the quality of the data and reach out to the bank or credit union to clarify fields and/or values in extracts and data tapes and confirm our understanding of the data.  We will onboard and aggregate the data onto the Brean Strategic Advisors platform as we receive it.  Critical to our approach is taking data from multiple sources—often various spreadsheets with securities investments, database extracts with liabilities (checking accounts) and servicer reports for whole loans—and locking it down to maintain its integrity.  In addition, we will load the bank or credit union’s balance sheet into our asset-liability management model.  Results will be validated by comparing current balances with the credit union’s call report. 

The second step is to enrich the bank or credit union’s own data set.  Our analysis will begin with the raw data about holdings, as reported by the credit union.  Such raw data would be instrument extracts and securities holdings and values used for purposes of preparing the credit union’s call report.  While historical datasets and independent regressions may generally inform our analysis, we recognize only verifiable credit union data can be incorporated into our forecasts.  Accordingly, we will turn to industry recognized, citable sources to enrich our dataset.  Such sources will vary with each asset class but might include comparable securitized loans, indices, rating agency data, broker-dealer research and government publications.  Historical macroeconomic data will also be incorporated into our analysis.  For example, we might use local and reliable home price changes from origination to refresh loan-to-value ratios.  For securities and whole loans Brean Strategic Advisors will also independently classify the instruments using industry-recognized criteria to assure granularity.  Residential mortgage loans may be stratified by credit sector, product, loan balance and weighted average loan age.  Equipment leases, loans and securities might be broken out among leases and loans and then by “ticket” size (e.g. small, mid, large) and industry, as applicable.  The objective is to balance the need for granularity with the availability of an industry-recognized and citable data set and the regulators’ desire to standardize the process.

Third, Brean Strategic Advisors develops an initial work plan to identify key segments of the balance sheet.  We can make a preliminary assessment of trends in the bank or credit union’s performance and areas of growth.  We use this data to help the bank or credit union apply the regulator promulgated scenario to model inputs such as forecasted new volumes. 

Fourth, with a stress testing framework in place, Brean Strategic Advisors uses models informed by our regression analyses and calibrated to each bank or credit union’s own data to estimate: 

  • Pre-provision net revenues;
  • Loan and lease loss provisions;
  • Net income; and,
  • Stress test capital ratios.
  • Consideration of proposed capital actions.  Assess the potential impact of proposed capital actions and maintenance of an allowance for loan losses appropriate for the stress test horizon.  Brean Strategic Advisors shall not grant any credit for risk mitigation actions by the credit union except those existing and identified on the credit union’s balance sheet on the as of date of the stress test.
  • Sensitivities.  As necessary, Brean Strategic Advisors will prepare a quantitative (sensitivity tables) and qualitative analysis of each credit union’s key performance drivers.  Based on Brean Strategic Advisors’s assessment of the stress test results, Brean Strategic Advisors will assess the sensitivity of each credit union’s balance sheet and income statement to changes in key variables we believe to be particularly significant to each credit union.  Depending on what Brean Strategic Advisors deems the bank or credit union’s performance drivers our sensitivity assessment may include:
    • Assets.  Changes in the collateral performance of assets material to the credit union’s balance sheet, such as prepayments, default frequency, loss severity and spread widening.
    • Rates and convexity.  Interest rate sensitivities and convexity.
    • Income statement.  Volume and assumptions about the elasticity of deposits.
    • Macroeconomic sensitivities, such as home prices.

Fifth, our multi-faceted team of quants and attorneys will document Brean Strategic Advisors’s model and methodology.  The writeup will include an overview of the methodology and dataset for each component of the stress test, key assumptions and analytical approaches, an assessment of data integrity, a description of the results, a summary of key risk drivers and sensitivities of the stress test results to key variables.  Supporting documentation will include a detailed description of the application of the regulator stress scenarios to each bank or credit union’s assets and liabilities, model validation and backtest results, where applicable, and a discussion of regression variables.

Loan Loss Forecasting

Mortgage and consumer loan loss and prepayment forecasting is Brean Strategic Advisors’s forte.  Our team includes seasoned professionals who have traded, modeled, valued and analyzed loan assets across sectors ranging from residential and commercial mortgage credit to equipment and commercial and industrial loans.  We currently analyze whole loan and related security assets for a client roster which includes six money center banks, two federal home loan banks, regional banks, credit unions and insurers.  We benefit from loan-level data sets, proprietary technology and the guidance of seasoned professionals who have traded and advised on billions of similar assets. 

We currently perform loan prepayment and loss forecasting in contexts ranging from:

  1. Dodd-Frank Act Stress test: econometric stress of an institutions capital; with a focus on loan portfolio loss forecasting.
    • Brean Strategic Advisors has been the primary analytics provider for the DFAST process for a $25+ billion financial institution for the past three years.
  2. RC-O: quarterly loan-level forecasted two year default frequency for consumer loans and leases.
    • For the past 2 years, Brean Strategic Advisors has provided forecasted quarterly loss forecasting for RC-O based on historical losses information from historical loss information, tailored to clients’ experienced defaults and losses.
  3. CECL: lifetime losses forecast based on origination information, macroeconomic forecasts and adjusted to the clients experienced history.
    • Brean Strategic Advisors is well equipped to provide forecasting on consumer loans and leases for CECL given our capacity to provide forecasting for other regulatory mandates.
  4. Economic Capital: the 99.95% confidence interval for one year losses.
    • Brean Strategic Advisors has been engaged by multiple clients to calculate the potential losses as an impact to economic capital
  5. Transactional due diligence. 
    • Prospective bank or whole loan pool acquisition. 
    • Estimate value and weighted average life. 
  6. Hedge optimization
    • Make sure hedges are appropriate to pool’s duration and are executed as efficiently as possible. 
    • Determine if changes in interest rates or the pool’s recently observed performance merit a different hedging strategy.