Continuing to Manage Your Portfolio Into the Future

One of our favorite family meals is pot roast with potatoes, carrots and gravy.  From my perspective this is a fairly easy meal to prepare.  When it’s dinner time, we simply open the Crock-Pot®, pull out the roast and vegetables, and within minutes we are sitting down to a succulent feast.  However, from my wife’s perspective the preparation is a lot more involved.  It usually involves getting up early in the morning, preparing the meat and vegetables and getting everything in the roaster before anyone else has even risen from bed.

Another favorite meal of ours is smoked turkey.  In this case, since I am the grill master, more of the work falls on me, because unlike the set-it-and-forget-it process of the pot roast, smoking turkey involves constant attention because the grill master (me) must keep an eye on the temperature to ensure that it’s constant and that the turkey is neither under or over cooked.  This involves checking and replenishing the wood chips that create the flavorful smoke at least once every hour over a five to six hour period.

Now that you know the dining habits and cooking methods in my household, you may be wondering what this has to do with loan portfolio management.  The question is, “Which approach do you take in your organization when it comes to managing your loan portfolio?”  Do you originate loans and hope for the best, or do you carefully monitor the performance of your portfolio, ready to take corrective action if necessary to prevent or mitigate negative performance?  As lenders are emerging from four to five years of high losses and delinquency, and low or negative loan growth, there is a temptation to set aside some of the lessons learned about loan portfolio management over these same years.  I submit to you that growing a healthy loan portfolio is more like smoking a turkey than cooking a pot roast.

As many lenders still struggle with creating a profitable balance between deposits and loans, a great deal of attention is now being paid to loan originations.  But, if methods have not been put in place over the last several years to identify risks in the portfolio, monitor those risks and improve origination strategies based on this analysis, or if those methods were put in place to only appease regulators, then whatever successes are achieved as consumer loan demand rises will be temporary.

The fact is more lenders are using loan portfolio performance data to identify emerging risks, understand borrowers’ behaviors better, and streamline their loan delivery to gain a competitive edge.  You may have heard a lot about “Big Data” in the last few years and that’s because it is the secret weapon that a majority of the successful financial institutions are using to stay out in front of the competition.  The data your credit union already owns may tell you more about how future loans will perform than the credit score alone. This data can provide you with insight into the products your borrowers’ demand, not to mention how often and when they wish to access them.  With margins remaining tight, it’s important to improve the efficiency of your lending practices.

Incorporating the right analytic tools provides lenders with regular loan portfolio performance data, allowing the lender to have access to key portfolio trends, enabling the lender to make strategic decisions on the fly.  More than a crystal ball that attempts to foretell the future, which is what many third parties purport to be able to do,  Implementing a true lending performance management solution provides your credit union with the key metrics you can use to make decisions about your organization, based upon its unique characteristics.

For more information on implementing successful business intelligence and risk management practices, contact Lending Insights’ Michael Cochrum at Michael.Cochrum@lendinginsights.com or by phone at (972) 814-1477.