Dealing with the day-to-day challenges of operating a community bank can keep top management “in the weeds” of lending or credit operations. This can leave little to no time for surveying the entire “field” of the portfolio, its risks and its impact on the institution’s financial results.
It’s the same challenge that the financial institution’s small business customers often face. When owners’ days are filled with handling current-day issues and reviewing recent results, they end up with little time for big-picture planning. It’s not until these businesses begin forecasting sales and expenses, and managing with a forward-looking perspective, that they are able to generate meaningful growth.
Community banks, many of which are small businesses themselves, can also make more informed strategic decisions that aid growth when they manage with a forward view. Managers may currently rely solely on Excel-based reports of last month’s loan delinquencies, charge-offs, and the like. But executives can quickly understand trends in the portfolio and use insights to inform strategic planning by incorporating forward-looking indicators, many of which can be generated automatically through technology.
Indeed, in a recent FDIC Supervisory Insights article, an analyst for the FDIC’s Division of Risk Management Supervision emphasized the importance of forward-looking risk indicators. Such indicators, senior analyst Michael McGarvey wrote, “can be indicative of future performance and should be the focus of a sound credit management information system program to proactively identify and mitigate risk exposure.” The article described a scenario where one bank relied heavily on lagging risk indicators and resulted in inadequate risk identification. Another bank, meanwhile, was able to be more proactive in risk management, thanks to forward-looking metrics.
