Paul Davis, Founder, Bank Slate.
Loan growth remains challenging for banks and credit unions due in part to high rates and overall uncertainty.
In response, more institutions are turning to the secondary market as a strategic lever—buying whole loans or participations to grow assets, diversify risk and enhance earnings. But success in this space depends on more than just finding a good deal.
Acquiring loans requires a comprehensive view of how a portfolio fits your risk appetite and overall strategy. You must evaluate credit performance, term structure, underwriting consistency and portfolio composition in that context. A misaligned asset, or one that doesn’t complement the broader balance sheet, can introduce unexpected risk.
Here’s a look at some of the factors you should consider when buying loans.
Start with performance and credit quality.
The first step is understanding how the loans are performing. This includes looking at delinquency trends, charge-off history, credit scores and payment performance. For seasoned loans, review prepayment speeds and modifications.
A portfolio filled with performing loans may look solid on the surface, but even small pockets of underperformance can quickly impact a balance sheet if the risk isn’t properly priced and understood.
Dig into the portfolio’s composition.
Not all portfolios are created equal. Banks should analyze the underlying structure: What types of loans are included? Are rates fixed or floating, short- or long-term? What industries or regions do they represent? Geographic and sector concentration can present hidden risks, especially if a portfolio is heavily weighted toward CRE or a specific consumer segment. A diverse portfolio aligned with the bank’s strategic goals will offer a stronger foundation for long-term value.
Banks must also consider deposit composition. The funding base—including cost, duration and volatility—affects how a portfolio will perform once acquired. Buying a long-duration, fixed-rate portfolio funded by short-term, rate-sensitive deposits can create a rate mismatch and liquidity concerns.
Understand the underwriting.
An important aspect of a loan purchase is understanding how the loans were underwritten. Are they based on strong income verification? Are the credit models reliable and well-documented? Were the loans originated by a regulated bank or a fintech lender with looser standards? These questions matter. Loans originated under weak or inconsistent criteria can carry hidden risks, even if they’re performing.
Consider how diverse the portfolio is.
Banks should be mindful of concentrations—collateral type, loan structure, borrower industry and geography. A portfolio too heavily weighted in one area can look attractive in good times but quickly sour if conditions shift. Diversity is a form of risk insurance. I’ve seen banks chase yield by overloading on asset classes such as CRE, only to face steep losses as vacancies rise or valuations drop. The same goes for portfolios concentrated in a specific region or industry. What looks stable now can go sideways tomorrow.
Variety is the spice of life. In this case, it might just help your institution avoid a major blowup.
Diversifying across multiple factors—fixed and floating rates, short- and long-term maturities, and consumer and commercial borrowers—lets banks build more resilient portfolios that are well-equipped to weather market cycles. The goal is sustainable, well-managed growth. Diversification strategies can help manage risk and optimize portfolio performance.
Evaluate servicing and operational readiness.
Another consideration is how the loans are serviced—and whether you are equipped to take over that responsibility. If the loans are serviced by a third party, the bank should evaluate that servicer’s performance and reporting standards. If the servicing is being transferred in-house, operations and onboarding teams must be prepared. Clean documentation, efficient data transfer and compatible systems are essential for smooth acquisitions and ongoing management.
Price and value loans accurately.
Determining a portfolio’s fair value isn’t always straightforward. Banks must weigh the purchase price against the unpaid principal balance, expected yields and risk-adjusted returns. Discounted cash flow models, market benchmarks and stress testing are essential. Overpaying for loans can backfire—especially if credit conditions worsen or prepayment speeds increase.
Understand regulatory and accounting implications.
Loan purchases can have regulatory and accounting consequences. Risk-weighted capital treatment, accounting recognition and potential BSA/AML exposure merit reviews. Fintech-originated loans may have unique compliance or reputation risks, especially if prior practices were aggressive or unregulated.
Watch for legal risks and documentation issues.
Legal and compliance reviews are a critical part of due diligence. Banks must confirm the loans are legally enforceable, fully documented and free of outstanding claims or litigation. A portfolio tied to past servicing violations, consumer complaints or lawsuits could create liabilities long after the deal closes. Legal counsel should be involved early to flag any structural or jurisdictional concerns.
Ensure it supports long-term strategy.
Any acquisition should fit within a bank’s broader strategic goals. Whether that’s growing small-business lending, expanding into a new region or diversification, the deal must align with long-term objectives. Not every portfolio is a good match. The best acquisitions support balance sheet optimization, earnings growth and sound risk management.
Build your sourcing network.
The best deals rarely show up unsolicited. Banks should build a network of trusted counterparties—including brokers, other financial institutions, fintech lenders and whole-loan marketplaces. Establishing and maintaining relationships gives banks early visibility into opportunities, ensuring they have access to high-quality, strategically aligned loan portfolios before they’re broadly marketed. Regular interaction expands potential deal flow and positions you as a credible and efficient buyer, capable of quickly responding when attractive opportunities arise.
With organic loan growth under pressure, buying loans, if done right, can drive asset growth, diversification and earnings. But success hinges on deep due diligence—evaluating credit quality, underwriting standards, portfolio composition, servicing readiness and strategic fit. Institutions must consider regulatory and legal implications, pricing accuracy and funding strategies. Building a trusted sourcing network and aligning acquisitions with long-term goals can make portfolio purchases a valuable—and sustainable—growth engine.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
Read the full article here
