We have been in a season of good times - a strong economy, low unemployment and high consumer confidence. Lending has been easy and delinquencies low. But there are clouds on the horizon, and we need to be prepared. In this session, we discussed the basics of proactive portfolio management and why you need to prepare now for tomorrow.
1. Stephanie L. Butler – Director, Advisory Services
Angela Eikenbary – Technical Doc. Analyst, Lead
Is Your Loan Portfolio Ready for
Tomorrow?
2. Welcome
• Introductions
• Let’s get back to the basics
– Definitions
– Examples
• Why embrace proactive
portfolio management?
– Manage risk using behaviors
– Holistic view of the portfolio
• Reporting
recommendations
4. Warning clouds are on the horizon
Top 10 Economic Predictions for
the Next 10 Years*
• A few of the predictions
– The U.S. economy will boom then bust
– Healthcare costs will escalate
– Federal debt will increase
– The dollar will continue to decline
* “Top 10 Economic Predictions for the Next 10 Years” (2019). Amandeo, Kimberly.
Retrieved from: https://www.thebalance.com/top-economic-predictions-for-the-next-
10-years-3305699
5. Is your loan portfolio ready?
• Direction, not intention, equals destination*
Or
• Proactive portfolio management, not discussions about
proactive portfolio management, equals a strong portfolio
* “The Principle of the Path” (2008). Stanley, Andy.
6. What is proactive portfolio management?
• Focus is on credit risk and review/renewal processing
– Find the risk prior to delinquency using behaviors, not financial statements
– As a function, includes all activities associated with a loan post-booking (excluding new money)
• Renewal/review
• Collateral changes
• Guarantor changes
• Rate changes
• Declines in trends/scores and other changes in behavior
7. Who is a Portfolio Manager?
• Small Business, Commercial or Consumer lending experience, as
appropriate
• Lending authority
• Client-facing experience
• Strong credit and negotiation skills
• Portfolio Manager may or may not directly speak with clients
– This varies by institution
• One PM can manage 1,500 SB notes or 3,000 consumer notes
8. Proactive behaviors/indicators
• Rules
– Score changes
– Line of credit usage
– Deposit behaviors
• Trends can show financial
stressors prior to any impact
on financial statements
9. Proactive behaviors/indicators
• Portfolio concentrations
– Where is your potential risk concentrated?
• No issues today does not mean no issues tomorrow
– What economic changes would impact these concentrations?
• If you are concentrated in construction, what would an increase in the minimum wage do?
Increase mortgage rates?
• You should know the economic factors to monitor for each area of portfolio concentration
10. Proactive behaviors/indicators
• Exception management
– While exception management may
seem reactive…
– Missing or late information like financial
statements, insurance and accounts
receivable aging is indicative of
potential future problems
11. Why should you embrace this method?
• Every loan is good at
origination
– No one ever booked a bad loan…
– But loans do go bad
• Delinquency alone does not
predict future repayment
• Debt service coverage calculated
once a year does not predict
future payment
– Anticipate risk early in the loan
lifecycle
• Which can help limit charge-offs
12. Small business and commercial portfolio management
Good quality
Poor quality
Origination
Charge-
off
Deterioration
Retain
Cross-sell
Salvage?
Work out?
13. Why should you embrace this method?
• Understand a holistic view of
the portfolio
– Concentrations
• By NAICS Code
• By Call Code
• By Collateral
– Exception management
• Missing or late financial
statements, insurance, A/R aging
14. You’ve gathered valuable information…
• Now what do you do with it?
– Exception management
• Missing or late financial
statements, insurance, A/R aging
– Across the portfolio
– By client
17. You’ve gathered valuable information…
• Now what do you do with it?
– Concentrations
• By NAICS Code
– By Client
– By Loan
• By Call Code
• By Collateral
18.
19.
20. You’ve gathered valuable information…
• Now what do you do with it?
– Rules
• Score changes
• Line of credit usage
• Deposit behaviors
21.
22. Remember…
• Long before a financial
statement shows insufficient
debt service coverage
– The guarantor’s credit bureau may
drop
– The business’s score may drop
– NSF/OD behaviors may increase
– Lines of credit may be maxed out
– Hazard Insurance may not be renewed
– Accounts receivable agings show slow
collections
23. Next steps
• Is your financial institution proactive, reactive or a bit of both?
• How are exceptions and portfolio concentrations analyzed
today?
• Are proactive, behavioral triggers used?
• Is all data being considered at a macro and micro level?
– Or do you have a lot of information, but no one is looking at it?
• Do you have a Portfolio Manager (or managers) who
– Analyzes all behavioral data, exceptions, concentrations and other information?
– Reports this information to appropriate levels of management?
• Determine a plan to move to proactive portfolio
management!