A “Surprise Free” Portfolio
None of us ever plan to originate a bad loan, especially during an economic downturn. (Full disclosure: I might have had one or two loans go delinquent.) But some loan relationships do end up having issues. Consequently, lending is not a “set it and forget it” function. Regardless of collateral type, loan structure or any other factor, your portfolio requires ongoing monitoring and management. In the face of these unprecedented times, portfolio monitoring will play a huge role in how your financial institution will eliminate the element of surprise.
In the past, small dollar loan relationships were typically managed by exception. As long as the payment was current, no one worried. Commercial relationships were more high touch, but it was understood that as long as the financial institution was getting regular payments and updated financial statements, everything was OK.
We all know our history and how everything changed during the financial crisis beginning in 2007. Loans that had always paid suddenly stopped, catching the financial institution by surprise. But should it have been a surprise? Were there behaviors prior to delinquency that could have been a red flag for the financial institution? Perhaps relying on financial statements for the whole story just wasn’t enough.
This is where portfolio management comes in to play. Constant, automated monitoring of the portfolio allows for various behaviors to be monitored and flagged. This gives the financial institution information on declining behavior trends prior to delinquency, which will be crucial in the coming months. Those behaviors include but aren’t limited to:
- Declining score trends
- Declining deposit balances
- Closed DDA account
- High line utilization
Using a system that gathers the information in one place gives the portfolio manager easy access to the data needed to monitor loan behaviors. These behaviors can aid in catching potential problem credits prior to default, alleviating surprises at annual review and renewal!
The ability to share information across all parts of the financial institution has never been more important.
Remember, these same types of behaviors can also indicate positive information. This positive information is an excellent source of cross-sell opportunities. Improving loan balances, increasing deposit balances, line usage, etc. can indicate the need for new loan or deposit products. Many times, a financial institution’s best new loan or deposit volume can be found in its existing client list. Credit risk (or cross sell) portfolio management allows a financial institution to fully understand its portfolio and anticipate issues or opportunities before it is too late.
To learn more on portfolio management, join us online May 12th for a webinar. Kevin E. Dooley, Jr. from Baker Hill’s Advisory Services and I will discuss this topic of proactive portfolio management, what data to analyze, how to eliminate surprises in your portfolio and how this information can streamline your overall review and renewal process.
For additional resources on managing your portfolio in an economic downturn, visit our resource page.
Posted on Friday, May 1, 2020 at 9:15 AM
by Stephanie Butler
As Director of Advisory Services, Stephanie Butler guides the implementation and strategic consulting for new and existing Baker Hill clients. Butler coordinates the Business Process Consultant team and is responsible for analyzing client goals and objectives and providing recommendations for best practices. Relying on more than 25 years of experience within the financial services industry, she successfully maintains a client base of banks and credit unions ranging from $100 million to $100 billion in asset size.
Butler earned her bachelor’s degree in Accounting from Davenport University and received her master’s degree in Management from Aquinas College.