Loan Focus

One approach focuses primarily on loans and rates individual loans, not borrowers. Support for this focus requires the ability to enter rating for individual loans, including all history of ratings, and the supporting analysis of the ratings. Reports typically are organized by relationship and present summary information for all loans in the relationship followed by more detailed information about each loan such as (a) the specific terms of the loan, (b) the financial condition of borrowers and guarantors, (c) analysis of any collateral that supports the loan. While individual loans are rated and analyzed the analyst is mindful of the ability of one borrow to support several loans in the relationship for which they are a borrower or guarantor.

Borrower Focus

The other approach focuses primarily on borrowers and rate only borrowers, not loans. We are told that some organizations associate no rating with any loan, while other organizations associate the borrower’s rating with all their loans regardless of the terms and condition of individual loans. Support for this focus requires the ability to enter rating for individual borrowers, not loans, and maintain a history of all ratings for the borrower. Presentation of findings is organized by primary borrower with an emphasis on the financial condition of the primary borrower and guarantors as a group often referred to as a global analysis, versus the total interest and principal obligations of the associated loans as a group more than individually.

Madison Support

As a software development company, or goal is to support the needs of the industry we server. Consequently, the Madison System will support both approaches described above. Historically, our support has been for the loan focus described above. We are now completing the development of a new capability that will allow lenders and loan reviewers to increase their focus and reporting by primary borrower. 

Both approaches clearly have merit and reflect the type of lending that is conducted by each organization. Whether the focus differs, both approaches evaluate the ability of borrows to repay the terms of their loans. They just come at the same task from different points of view.

The post Loan Review Primary Focus: Borrower or Loan? appeared first on Madison Associates LLC.

• Slice and dice the loan portfolio
• Stress test the loan portfolio
• Maintain a computer based loan review system

We have comments on Stress testing before, so today we will address the first of these issues – Slicing and Dicing the Loan Portfolio.

A problem with many cores systems is that they do not capture the data needed to slice and dice the 0loan portfolio. A second issue is that they are often designed to efficiently capture information necessary for the accounting system, not for flexibly reporting on the characteristics of the loan portfolio. A further limitation is that data that is not directly related to issues such as accounting and regulatory reporting is often incomplete or missing.

When clients acquire a system that is capable of slicing and dicing the loan portfolio, they obtain a much more comprehensive and robust view of the portfolio, the first consequence of which is to discover that data in the core system is inaccurate, incomplete or missing entirely. So task number one is to clean up the data, determine what additional information is necessary to support analysis of the loan portfolio, and then get the new and cleaned up information into the system. This can be a formidable task, to say the least!

Once the data is cleaned up, the portfolio can then be sliced and diced by a wide variety of characteristics such as:

• Geography (State, Region, Market, County, City, etc.)
• Lending Office
• Collateral Type
• Industry
• Loan Type
• Department
• Lending Officer
• Loan Program
• Loan Purpose
• Relationships
• Tenant Characteristics
• Occupancy Rates
• Tenants and Tenant Industry
• Loan Rating Distribution (and rating upgrades and downgrades)
• Lots more!

Also, it is valuable to evaluate the results of queries such as:

• What is the exposure to the high tech industry both in terms of C&I loan to that industry and tenants in that industry that occupy properties secured by CRE loans.
• Which loans are in a particular market and are secured by a particular property type?
• Which loans have leases that expire in the next few months where the tenants occupy more than a specific percent of the property?

Needless to say, all this analysis and much more can be done quickly and easily with the Madison System’s reporting and filtering functionality. But be forewarned, the easier it is to slice and dice the portfolio the more you will find that you are presented with the need to clean up the data on which the analysis is based.

The post What Regulators Want – Slice and Dice the Portfolio appeared first on Madison Associates LLC.

Concentration risk is the risk that a segment of the loan portfolio experiences a high level of loan losses, and that because the loan portfolio is highly concentrated in that segment, the losses may threaten the safety and soundness of the institution. Because of concentration risk, lenders monitor the concentration of the loan portfolio by loan type, collateral type, geographic market, borrower and tenant industry, and a variety of additional factors.

The ability to quickly and easily monitor concentration risk is a characteristic of commercial loan applications such as the Madison System. Concentration risk can be measured by the concentration of the current loan balance by segment, or of total exposure where exposure is the current loan balance plus the additional amount that may be drawn under existing lines. For example, if there is a high concentration in the Detroit market, if that market experienced significant economic weakness, the bank might have higher loan losses.

If the loan portfolio is further concentrated by other factors such as collateral type, potential losses could be even greater.  If the portfolio has a high concentration of loans collateralized by office properties in the Detroit market, and there is a weakness in that segment, losses could have an adverse effect on bank capital. So it is valuable to be able to drill down into portfolio segments to gain a fuller understanding of concentration risk.

For commercial real estate loans it may also be important to measure exposure by the industry of major tenants. If there were a high concentration of tenants in the auto industry the portfolio might be riskier than if tenants were more diversified by industry.

Another key dimension of concentration risk is by borrower industry, especially for C&I loans.

Concentration Policy Limits

Because of the importance of concentration risk, most lenders have policy limits designed to prevent undue concentration of risk. So it is valuable to be able not only to easily view concentration risk, but also compare it to policy limits.

 The Madison System includes automated features that allow users to measure concentration risk quickly and easily with the simple click of a mouse. The easier it is to see concentration risk, the easier it is to manage it, and present reports to the Loan Committee and Board of Directors.

The post Measuring Concentration Risk appeared first on Madison Associates LLC.

That analysis can be filtered by a variety of factors:

• Loan Origination Date. If, for example, you feel that loans originated in the year 2005 and 2006 were underwritten more aggressively, you can filter the report to include only loans originated in 2005 and 2006 so you can better understand how the ratings of these loans have changed.
• Collateral Type. How have the ratings of loans collateralized by a particular collateral type changed over time? You can filter reports by one or more collateral types.
• Geographic Market or Region. Some geographic regions or markets may have experienced greater weakness than others so it will be important to understand how the ratings for loans from these locations have changed over time.
• Other Filter Categories. The Madison commercial loan software allows you to filter by many other loan characteristics so that you can best understand how ratings have migrated.
• Combine filters. Filters can be combined for greater depth of analysis. For example, you can evaluate loans in a particular market(s) that were originated in 2005 and 2006. Or loans collateralized by (a) office properties (b) in a particular market(s) (c) that were originated in a particular year(s).

 For presentation purposes, the Madison commercial loan software provides a summary matrix that displays percentages, a summary matrix that displays dollar amounts, and a detailed matrix that shows the performance of each loan.

The post Loan Rating Migration appeared first on Madison Associates LLC.

To help manage this process the Madison commercial loan software provides a convenient checklist feature.

• First, you may specify an unlimited number to checklist types such as checklists for various loan types, or collateral types, or loan process steps.
• Second, for each checklist type you may specify the default list of tasks that users will see when they open the checklist.
• Third, you may allow (or not allow) users to add or delete checklist tasks for a particular loan so that the tasks are just what needs to be completed for that loan.
• Fourth, when tasks are completed, users can check them off as being completed, enter the completion date, and enter any comments that are appropriate.
• Fifth, to enable a tickler report, users can identify a future completion date and it will appear on a tickler report. The tickler report list tasks by date and highlights in red tasks that have passed their completion date and in yellow for tasks that are within 7 days of completion.

The check list feature can be shared by all users on a view only or edit basis, as appropriate for each user. You no longer need to call and play phone tag or send emails to find out the status of task for each loan. Instead, users can go to the checklist reports or checklist module and see the status of each loan.

The post Loan Checklists – Manage Tasks More Efficiently appeared first on Madison Associates LLC.

1. 1. Comprehensive portfolio risk reporting. That is, an automated process for preparing standard risk management reports such as watch lists, delinquency reports, stress test reports, trend analysis, missing or out dated information, etc.
2. The ability to slice and dice the portfolio — the ability to quickly and easily prepare reports that evaluate the portfolio based on factors such as loan type, collateral type, loan officer, region or market area, and numerous other parameters.
3. Portfolio Stress testing — the ability to stress items such as collateral income, collateral value, borrower income and expenses, increases in interest rates, and other factors to determine whether loans are strong enough to withstand the stressed conditions.
4. Loan Rating Migration — how have loan grades changed over time. Is the distribution of ratings over time is an important measure of the credit quality of the portfolio as seem by bank management, and has important implications for the allowance for loan losses.
5. Automation of the Loan Review process. In the past Loan Review Departments captured the results of their analysis on paper forms that made it difficult to then prepare reports that summarize the results of their analysis of a portfolio. Hand entry of data is also inefficient since much of the information about the loans is already in the bank’s core system.

The Madison System includes comprehensive support for these and many other features requested by regulators. The trick for banks is to be able to create the necessary information, analysis and reports with a minimum of effort so. A fully automated system for doing so is often the best solution.

The post Commercial Loan Risk Management – Regulatory Issues appeared first on Madison Associates LLC.

In each case, the Loan Review Department may wish to have reports that document the review of each loan that contain information about the loan as it existed at the time the sample was selected rather than current information. Madison addresses this by creating a snapshot of data as of the date that the sample was selected. That way loan review reports can contain information about the loan as of the date the sample was selected, or as of the current date, or both.  This feature affords greater flexibility in documenting and saving the findings of each review.

The post Loan Review Snapshot Information appeared first on Madison Associates LLC.

First, if loans in the import file could not be imported, Madison provides a list of each loan, collateral or borrower that could not be imported along with the reason why it was not imported so that user can easily identify and correct import errors. When that step is done, totals in Madison should be the same as totals in the core.

Second, but that may not always be the case. The import file may not have included a loan or two that should have been in the file. Or some loans that should have been marked as paid off may not have been marked. Issues such as this give rise to reconciliation differences.

To assist in identifying the source of the difference it is useful to present lists and subtotals of loans in Madison that match similar lists and subtotals in the core. For example, most core systems have groupings of loan types that may be called class codes, minors, or other terms that signify a very granular grouping of loans. Madison often has these values in the loan category field so that reports can be grouped by loan category and then the subtotals compared to comparable subtotals in the core to discover the source of the difference. Since there is often a much small number of loans in these grouping it is much easier to identify the source of the difference.

The post Reconciliation appeared first on Madison Associates LLC.

Their first effort is to simply identify when loans will reprice or mature with indications of:

• The loan balance that will reprice,
• The current rate and spread,
• The index on which the loan reprices, and
• The current coverage ratios.

With this information in hand, clients are able to identify situations where the coverage is thin and will be significantly adversely affected by higher rates. They can also identify any concentration of repricing in future time periods  –  for example, do a lot of loans reprice in three years?

Once the repricing schedule is available, analytics can be applied to it to automate measuring the impact on future coverage ratios.

• The current balance can be amortized down to the repricing date to better estimate the impact of higher rates on coverage.
• Potential exposure from utilization of available lines can be measure.
• Interest rate projections can be established, future loan payments can be recalculated, and stressed coverage ratios can be presented.
• Projected coverage ratios that are below a user specified threshold can be identified for further analysis.

While all the information necessary to perform this analysis is resident in most core systems, the ability to create reports that present the information and perform the analytics is more difficult to achieve. Systems that easily provide this information to clients allow them to better measure this component of credit risk.

The post Stress Tests – Effect of Higher Rates on Coverage Ratios appeared first on Madison Associates LLC.

With commercial lending, many hands will touch a loan from origination through closing and on to portfolio administration and risk management. In many cases, each set of hands looks at a loan from its own perspective associated with its business function. The information that each set of users wants to see about a loan will be different and the work or analysis that they perform will differ.

Consequently it is not uncommon for each set of hands to rekey information about the loan into a Word document or Excel spreadsheet or Access database. Each time the same information is rekeyed, efficiency is lost.

And when one set of users wants to see information that has been assembled by another user or group of users, the information is requested often by email or a voice mail, with hours or days lost as one person finds time to pass on information to another person. Time lost further reduces efficiency.

The ability to provide effective reporting is diminished when little information resides in a central database so the time is devoted to pulling together information from many sources to support reporting requirements and portfolio risk management analysis.

Operating with information in a central, shared database can have a significant positive impact on productivity. Information can be accessed more quickly, reports prepared more efficiently, and risk management analysis performed that could not have been performed if data were scattered throughout the organization. Productivity can be further improved by metrics that display the time required to complete each step in the lending process and productivity measures such volume per person.

The post Increase Productivity with Information Sharing appeared first on Madison Associates LLC.