Managing with a Forward View
July 7, 2018 by Mary Ellen Biery
Dealing with the day-to-day challenges of operating a bank or credit union 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 the 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.
Banks and credit unions, 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, resulting in inadequate risk identification. Another bank, meanwhile, was able to be more proactive in risk management, thanks to forward-looking metrics.
According to the FDIC article, an example of incorporating forward-looking credit metrics would be monitoring concentrations in relation to capital so that the institution can establish strategies to decrease, maintain or increase exposure to a certain concentration or identify concentrations approaching or exceeding limits. Metrics to aid in this approach include data related to:
– Loan category (C&I, CRE, unsecured, auto, etc.)
– Industry breakouts on C&I loans
– Individual and related borrowers
– Geographic concentrations
Another example of incorporating forward-looking data would be monitoring the institution’s performance and risk indicators against policy limits and the risk appetite statement. Tracking the volume of loan exceptions, underwriting trends, loan grade migrations and concentration risks would aid in developing this type of report, the FDIC analyst wrote.
“The FDIC is absolutely right to focus on this issue,” says Neill LeCorgne, vice president of Sageworks and a former bank president. “What typically happens in the banking world is when the economy goes well and everybody’s doing well, there’s not a deal that a bank doesn’t want to take a look at. When the economy starts to turn down, everyone starts to pull back. Now is the time to start getting your management information systems established and working and following some of these practices.”
LeCorgne says a banking technology platform that has heavy analytical capabilities at the portfolio level makes it easier to slice and dice concentrations and global relationship exposures, and to provide custom visual summaries to share with the board, auditors and examiners.
Data generated using technology at the front end of the origination process – such as an online loan application – can interact with an automated tickler system to track correspondence and data requests on a go-forward basis. That way, banking staff don’t have to manage all of the quarterly or annual reports on borrowing-base analyses, quarterly/annual reviews or renewals. Instead, time previously spent on those tasks can be used to look at the big picture regarding the potential future impact of credit exposures and underwriting trends.
At the other end of the loan’s lifecycle, technology that helps banks leverage the results of calculations for the allowance for loan and lease losses (ALLL) – especially results under the upcoming current expected credit loss model, or CECL – can also provide forward-looking insight. Institutions can use the results of CECL calculations to back-test risk rating models and scorecards and develop sound risk-based pricing systems. In this way, executives can more effectively manage profit in a CECL world.
While historical performance metrics typically convey what has occurred in the past in the portfolio, forward-looking metrics throughout the life of the loan can help financial institutions identify underlying risks that could potentially affect not just future performance but also future strategic decisions. Banks and credit unions strengthening credit management information systems with the assistance of automated data generation and tracking, as well as sound governance, will be better able to respond to emerging risks in the years ahead. Like their business customers utilizing forward-looking information, these institutions can aid their growth when they rise above “the weeds” to survey the entire credit and business landscape.
For the full story featuring Sageworks, visit FMS Perspectives – Managing with a Forward View