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Lending Doesn’t Have to be Such a Risky Business

By: Tracey C. Frederickson

The credit crisis has been a wake-up call for lenders. The residential mortgage industry collapsed. And now, loose lending practices for the more complex credits (i.e. commercial real estate, commercial and industrial, small business, construction and agriculture) are leaving institutions further exposed across all of these loan disciplines. This has caused an undeniable shift in the market that no lending institution can ignore — every bank’s practices are now under the looking glass.

However, beyond the doom and gloom, there has been a much-needed emergence of new technology, and institutions like Citizens State Bank of Finley, a $110 million asset institution in North Dakota, are fully embracing it. Citizens State is taking advantage of one of the solutions available today that gives lenders the visibility into their loan portfolios needed to streamline and proactively manage loan practices. The community bank is also beginning to use an innovation for effectively assessing and mitigating credit risk in ways not possible before. All of this has positive bottom-line implications for the way the bank drives its loan operations moving forward.

Single System of Record

In today’s more stringent regulatory climate, banks are expected to have a handle on the risk that lies across their lending portfolios. They must be able to demonstrate to examiners how you manage the risk of each credit — before it hits the books and throughout the life of that loan. But for many institutions this is a tall and almost impossible order. Most banks are housing credit data in disparate systems, or silos, within their organizations. They are using desktop applications like Excel and Word — that don’t “talk” to each other — to make multimillion dollar loan decisions. Among other concerns, there is no security with these applications, the data is highly susceptible to manual errors and access to this loan data is severely limited.

At Citizens State, Senior Vice President of Lending Chad Aberle and his team use the WebEquity on-demand solution, which aggregates data into one system of record for the lending area, similar to what the core processors provide, giving them visibility into all loans across the bank’s agriculture and commercial portfolios. This one system of record feeds into a new tool that is enabling Citizens State to manage loans and mitigate risk.

“Our single system eliminates manual error and increases our productivity,” said Aberle. “It also appeals to the state and federal examiners because we can demonstrate to them that we have a repeatable, uniform process for managing each and every loan.”

Predictive Analytics

One of the most compelling advances in lending technology is the predictive power offered by new tools like the risk management dashboard that Citizens State has recently begun using. The dashboard provides the bank with modeling and pre- and post-approval stress testing capabilities that allow the institution to take steps to avoid potential credit issues well before they become problem loans.

“We get a complete view of our portfolio never possible before in a highly visual format across our loan disciplines,” said Aberle. “We have the ability to look at risk loan overviews by interest rate and risk rating, evaluate risk concentrations and run sensitivity analyses that can help us proactively manage borrower’s risk.

“For example, we are able to shock test our entire portfolio and easily see movements in credit ratings based on whatever scenario or economic factor we choose. By delving down into each loan in this way, we can see how much equity will be lost if a particular event were to occur well ahead of the game — no more guessing.”

Bottom Line Implications
Technology has unequivocally stepped up in the aftermath of the industry crisis to improve the lending process and help banks increase loan profitability. Citizens State is able to reduce loan production costs and drive efficiency while maintaining a single system of record for lending versus multiple disparate systems. At the same time, automation streamlines the loan process, enabling Citizens State to handle more volume. Because the solution is available on-demand; there was no software installation and no infrastructure costs.

Also, Citizens State can now foresee what factors or events could impact a borrower’s ability to pay back his loan, proactively identify potential problems up front and take action to prevent that loan from ever making the watch list.

Finally, many banks charge higher rates on good credits and lower rates for the bad; this should be reversed, but they don’t have the visibility they need to set rates accordingly. Through the technology, Citizens State gets a granularity of data that allows the bank to determine whether it’s charging the right interest rates based on risk. Officers can see trends and whether covenants are broken so that they can better manage interest rates for each loan.

“It’s crucial that every bank adopt technology to analyze its credits — automation is the only way to get consistency, take out the subjectivity that can sometimes be detrimental and really get to the bottom of where your portfolio is at all times,” said Aberle. “Even small banks can make this investment because lending solutions do pay for themselves over time. They drive efficiencies and provide insight that enables you to take on less risk and much more actively manage existing loans. We haven’t had a major loan loss in well over 10 years.”

New technologies can enable an institution to easily navigate the rough waters of today’s stringent regulatory environment, but equally important, give banks the visibility needed to make good, profitable loans — decisions that will improve the overall performance of their lending businesses.

Tracey C. Frederickson is a freelance writer with Critical3 Marketing.

Copyright © August 2010 BankNews Media