Using Credit Scores to Capture Regional Banks’ Portfolio Credit Risk: The Case of East Texas, USA

Credit scoring is the industry-standard methodology for quantifying the creditworthiness and default risk of individual loan applicants. However, assessing the risk at the portfolio level—across different branches or regions—requires more than just aggregating individual scores. This paper presents a simple, pragmatic model for evaluating overall commercial bank portfolio risk by analyzing accumulated credit scores, facilitating effective inter-branch benchmarking. The proposed model is validated using credit score data from two distinct regions of the bank. Logistic regressions by region show that both northern and southern banks maintain low overall risk profiles due to strong portfolio credit scores. However, a nuanced analysis reveals regional discrepancies: the southern region appears riskier when segmented by credit score groupings (indicating a higher concentration of lower-tier borrowers), whereas the northern region exhibits higher risk when analyzed against a broader set of factors, such as approved amounts, maximum potential exposure, and approved versus book rates. This research suggests that portfolio risk is not one-dimensional; effective risk management requires analyzing both individual scores and the interaction of loan characteristics, particularly when comparing regional performance.