Thriving in today’s unpredictable environment requires establishing and maintaining critical strategies for safeguarding your portfolio, including streamlined portfolio management processes and procedures to identify and mitigate risks earlier.
Simplify Annual Loan Review
One of the primary defenses against portfolio vulnerabilities is for institutions to ensure they’re doing appropriate Annual Loan Review (ALR). Having an established procedure in place for conducting ALR enables institutions to proactively address potential issues before they escalate.
When establishing a consistent procedure, it of course should be as easy as possible. Many of the cumbersome tasks associated with ALR, such as identifying and aggregating loans eligible for review, assigning them out, and digging for the needed data can be automated with the right technology.
Once the ideal procedure is identified and the essential tools have been determined, institutions can also consider workflow automations that set clear deliverables and deadlines, provide notifications to appropriate team members, and automate routing and imaging.
Easy access to data will also transform an institution’s approach to managing loan portfolios, ensuring FIs can maintain rigorous standards of due diligence while also focusing on growth and other initiatives. Transparency into comprehensive loan information such as associated relationships, origination data, and potential risk details empower bankers to make informed decisions without the hassle of digging through multiple systems for that data.
The Power of Concentration Reports
In November 2023, Citizens Bank of Sac City, Iowa failed due to overexposure in the commercial trucking industry. The trucking industry has struggled the past couple of years amid economic declines, which is part of the reason this caused the failure. However, this bank failure could have been avoided if their concentrations had been more diversified.
By knowing where they stand in their concentrations currently, banks know where they can focus their growth efforts to reduce the need to implement heightened credit risk procedures as a result of being overly concentrated—in CRE specifically--or by growing portfolios in certain areas too rapidly.
The Federal Banking Agencies’ joint guidance on CRE loan concentrations, recently updated in July 2023, recommends that institutions track their levels of exposure granularly enough to determine and adjust concentration limits as market conditions change. Keeping a close eye on current concentrations internally is often easier said than done. Access to data is key to doing this successfully, and many banks are unable to collect the data needed to produce reports this granular.
It is common for institutions to operate with separate legacy systems that do not aggregate data. To gather needed data, many banks would need to search their core(s), other systems, and hard copy files and backfill data into their current systems or spreadsheets, which requires a lot of resources most institutions can’t spare right now.
It is also recommended banks have a portfolio management system that provides the information needed to measure and monitor concentration risk. This includes data points relevant to a bank’s lending strategy, underwriting standards, and risk tolerances, such as debt service coverage levels, loan segmentations to determine diversification within a portfolio, established concentration limits. For optimal efficiency and scalability, banks need a system that can be readily accessed and easily (or automatically) updated.
Concentration reports suggested by the agencies’ guidelines include concentration by property type, borrower concentration reports, loans requiring loan policy exception approvals, number and volume of exceptions by nature, justification, and trends, performance of exception loans compared with loans underwritten within guideline, and typical loan production and performance reports by type, region, officer, etc.
Streamlining reporting processes can help institutions stay on top of data trends without adding extra lift. There are tools available to allow for a more enhanced reporting and analysis. With these systems, bankers can easily build out reports such as these or even automate such reports and have them delivered via email.
Internal Loan Review and Audit Processes
A recurring theme we’ve noticed with the bank failures that occurred last year is that many of their weak points could have been mitigated or avoided with appropriate internal loan reviews and audit checks. There is a lot of value in these processes. Regularly reviewing and auditing loan portfolios ensures that potential issues are identified and addressed timely, maintaining the health and integrity of the institution’s portfolio.
Streamlining and standardizing this process can significantly enhance operational efficiency and decision-making accuracy. Consistent processes are critical for increasing operational efficiency, especially amid talent shortages, and they help avoid oversights or missing information.
Adopting technology for these processes can help aid in identifying loans in need of review, speed up the time it takes to complete the review, and ensure accuracy of reviews by aggregating data from multiple cores and systems. Technologies that offer integrations into imaging systems would further streamline the review process and workflows.
The right approach not only simplifies the internal loan review process but also ensures it is consistent and trackable across the entire organization, whether it's a small team within a single region or a larger department across multiple states.
Embracing Automation and Continuous Monitoring
Bankers should not consider these measures as a response to negative outcomes or difficult times, but rather as having the tools in place to remain ahead of the curve.
It’s easy to not worry about the bad times when things are going well, which is where automation of these processes adds an extra benefit. Automating these processes not only increases efficiency and accuracy of portfolio management, but also allows institutions to easily stay on top of their portfolio and uncover any potential surprises before they become problematic.
Staying mindful of the benefits of early detection, risk mitigation, and portfolio optimization will help foster a proactive culture and maintain business strategy. In doing so, institutions can ensure the stability and health of their portfolios, safeguarding against the unforeseen and securing their future regardless of the economic environment.