A leading national SBA bank was looking to enhance their credit-monitoring practices and institute more effective early warning systems to actively identify risky customers.
The bank’s system lacked resources, appropriate data and effective analysis to detect problem customers early.
The bank needed to generate nine new good lending customers for each write-off.
The current loan review process resulted in an annual cost of $1200 per customer.
With the current review process, the bank would need 10 additional full-time employees.
Bank’s management, together with PayNet, implemented PayNet AbsolutePD® (APD) as a tool to anticipate problems of future deterioration. The APD model, developed to create probability of default estimates consistent with actual default rates, is calibrated to current macroeconomic conditions and self corrects on a quarterly basis to adjust for past variances.
The bank was able to form quarterly risk ratings on each borrower without gathering and reviewing financial statements on each of the bank’s small business borrowers.
Future staffing costs were reduced by $625,000 (87%).
The cost of compliance, account monitoring and the overall loan review process were reduced 30%.
The bank experienced an enhanced ability to monitor and anticipate risk changes.
Forecasts for each of eight future quarters are provided for every small business in their portfolio through an online reporting platform.
V.P. Risk Officer for a major regional bank tasked with evaluating and revising or replacing the current origination and pre-approval process.
Current credit decisioning process is manual and costly, utilizing a combination of scores and attributes that cause confusion in the field.
Overall approval rate is 68% but lacks consistency across high and low credit quality deals.
Mandate to automate more declines and pre-approvals to be more proactive in pre-approval strategy.
PayNet conducted a retro and swap set analysis utilizing PayNet MasterScore® v2 to determine the economic impact of rejecting more low credit quality deals and approving more high credit quality deals – included analysis of new booked deals and new application files.
Current decisioning practice showed approval/decline rates for low credit quality deals at 57%/43% respectively and 70%/30% approval/decline rates for high credit quality deals.
New decisioning practice showed approval/decline rates for low credit quality deals at 40%/60% respectively and 100%/0% approval/decline rates for high credit quality deals.
Overall default rate 3.7%; LGD 29% based on bank loss data; profit margin 4%.
Credit losses reduced by 6.9% and originations increased by 3.0%.
The Head of Analytics and Credit Administration for a major finance company responsible for conducting quarterly credit reviews on 1500 customers was charged with making the process more efficient and less costly.
The process took days per review for five to six full-time employees.
Process called for running manual credit reports and manually pulling financial statements to conduct reviews.
Hard and soft costs were estimated to exceed $1.5 million per year.
Employ PayNet Credit Review ExpressTM to more accurately monitor and manage risk, manage staff and track account performance.
Assigns probability of default (APD) to each borrower for risk rank ordering.
Utilizes dashboard for information at a glance: segment portfolio by any variable (i.e. APD, Exposure Dollar Amounts, APD Migration).
Provides a drill down feature from dashboard for a granular review of each borrower and the relevant details.
Customizes business rules based on risk tolerance to determine loan review type. Identifies borrowers automatically for loan review type: (1) Light, (2) Medium, (3) Full.
Produces management reports to track portfolio performance over time and benchmark portfolio vs. industry statistics.
Expect one-tenth the amount of time to review each credit.
Project cost of credit review to be reduced from $250 per review to $9.25 per review.
President and CCO of small bank-owned commercial finance company were facing regulatory pressures from auditors who required more transparency in the bank’s measurement of their portfolio’s credit risk
Need for deeper analysis of loan portfolio
No triggers in place to justify strategic changes affecting the risk dynamics within portfolio
PayNet AbsolutePD® delivered this functionality:
Provided vintage analysis (looking year-over-year) and residual analysis Dissect borrower portfolio using a scoring method Create a geographic distribution reporting methodology
Acquire metrics to benchmark their own portfolio by vendor, market segment, geographic segments and applicant profile
Implement triggers initiating strategic change
Achieve ability to view borrowers that are outliers in a typical credit migration range
Aid in detecting problems before they occur
Reduced annual review time on their specific borrowers under an exposure size of $250,000 (87% of borrowers in their portfolio)
Saved a minimum of $73,500 on the annual review process
Chief Financial Officer of a regional bank in a high growth mode needed to rapidly comply with stress testing requirements. The bank needed to demonstrate commitment to continuous stress testing across their portfolio in order to gain regulator approval to acquire more banks.
Bank had 10,000 credits under 1 million dollars, totaling approximately 2 billion dollars in exposure.
Bank collected financial statements for over 10,000 credits.
Hired additional employees in risk management and compliance.
Running stress testing processes on smaller exposures would cost in excess of 2 million dollars in operational costs or 20 basis points of the assets.
Implement PayNet Absolute PD® Portfolio Manager and Stress Test Simulator providing quarterly reporting to fill the gap of current manual processes to collect financial statements and apply risk ratings.
The bank implemented the PayNet stress testing process to risk rate 10,000 loans under a million dollars in exposure, yielding a cost savings of 2 million dollars.
The Chief Risk Officer of a major commercial bank instituted a project to make major improvements to the current underwriting process that was overburdened with high touch human intervention and information requirements. The scope of the project was to build an infrastructure to optimize the straight through process from identification of the opportunity to funding the transaction. PayNet was engaged to leverage commercial credit information and assist in the development of a decisioning strategy.
Need to streamline the underwriting process to deliver credit faster and with safety. It is currently taking 30 days to process credit.
Need to transition from an expert checklist to an expert scorecard to enhance the manual process through automation and improved conversion rates.
Need to grow in the face of competition from FinTech and other banks. Majority of loans are made to existing clients and attracting new clients requires speedy decisions.
Retro/swap analysis to estimate the profit and loss impact of improved credit decisions.
Expert Judgement Scorecard was created to standardize, leverage and accelerate the credit processes using various commercial and consumer scores (PayNet MasterScore®, FICO consumer score and FICO SBSS).
Express credit process was designed to reduce credit decisions from 30 days current time to 5 days.
Earning assets increased 10%.
Credit losses estimated no change.
Profit jumped from $339,567 to $373,523 for a 10% increase in net income.
The Chief Risk Officer of a major commercial bank was concerned about the proper appropriation of capital for loss reserves. Capital allocation is driven by risk ratings, which are often not kept up-to-date and can be difficult to obtain on certain borrower segments. Any portfolio that contains a broad spectrum of credit risk needs a broad spectrum of risk grades.
Lender was using a pass/fail risk system.
Risk ratings were only adjusted in the event of adverse performance.
The pass/fail system resulted in sub optimal allocation of capital.
The quarterly AbsolutePD (APD) data is transformed into risk ratings and loaded into their system of record.
APD allows the bank to analyze a wide range of asset classes using the same Risk measure.
APD applies forward looking credit ratings to set capital levels.
An automated approach to maintaining up-to-date risk profiles, saving 1 day, or 8.3 hours, of FTE work for every 100 borrowers.
Quarterly updates of risk ratings for a specific segment of the lender's business using AbsolutePD.
A regional bank wanted to enhance their credit monitoring practices and improve the effectiveness of their early warning systems to actively identify risky customers. The bank’s systems were unable to identify emerging credit problems as they lacked the resources, appropriate data and analysis to detect at-risk customers earlier.
Efficient identification of risk levels and risk trends across a small business portfolio.
Identify borrowers to put through the “audit review” process.
Seeking earlier detection of changes in credit risk to allow for management action.
PayNet AbsolutePD® Portfolio Manager enables lender to identify borrowers with emerging increases in their risk profile within their portfolio.
APD provides regular and periodic updates on credit conditions for borrowers without increasing staff or pursuing timely financial statements.
Identified 2 borrowers with $450,000 worth of exposure risk who had upcoming renewals.
Managed out of the relationships with the 2 borrowers that were identified as having increasing risk as a result of using PayNet solutions.
The Senior Management Unit, Senior VP of Credit Risk and CCO of a large bank with 13 billion in assets was concerned with audit issues regarding loan review of small business loans. The bank was looking to add an automated system to solve this issue rather than add 2 FTE’s to the current staff of 15 FTE’s.
The bank currently has 13,000 loans and are in a growth/acquisition mode with 15 FTE’s reviewing these loans. B2B loan review transactions per FTE grew from 200 to 320, 2012 vs. 2010.
Total loan review transactions grew from approximately 2000 transactions in 2010 to 4700 in 2012.
An increase of 2 FTE’s at an annual salary of $45,000 would not provide the capacity to review the large quantity of loans in their portfolio.
Lending and support expenses significantly grew since 2010 driven by the addition of personnel and business expenses impacting the bank’s efficiency ratio.
The purchase of PayNet Absolute APD Portfolio Manager allows the business unit to zero in on the 4% of the portfolio that is improving or declining.
Streamlined and enhanced loan renewal process.
Provides a risk rating APD applied to the banks internal one dimensional historical loss model.
Allows the bank to take control of their entire portfolio and maintain their current headcount of 15 FTE’s.
A bank with 11B in total assets has a majority of CRE and C&I exposure lacking the resources to create important timely management reports. The staff is lean with few quant analysts and have inefficient risk management systems in place. Board reporting is a month long process to report on risk. The CRO’s current methodology for allocation of capital was over weighted by the recession.
Rising regulations causing higher costs.
Too many separate asset classes to manage Consumer, CRE and C&I.
The bank targeting a lower efficiency ratio in the 30’s. Qualitative adjustments suggested further release of capital, but the lack of granularity reduced confidence in this analysis.
PayNet risk management tools allow the bank to work smarter not harder. These tools provide capabilities equivalent to those of larger size banks and abide by the same regulations and meet the same guidelines as bigger banks with greater analytics, IT and staff resources. PayNet APD is a time saving tool for the CCO. PayNet provides the risk management and reporting resource that they cannot afford to build in house.
The bank found APD was more effective in identifying early warning default and justified using PayNet solutions by identifying the opportunity to further reduce reserves by 20 million dollars and save administrative costs.
The Chief Financial Officer of a regional bank in a high growth mode needed to rapidly comply with stress testing requirements.
The cost to the bank to comply would be 2 million dollars.
The bank had 10,000 credits under 1 million dollars, totaling approximately 2 billion dollars in exposure.
The bank collected financial statements for over 10,000 credits.
The bank hired employees in compliance with risk management experience.
The bank needed to demonstrate commitment to continuous stress testing in order to be able to acquire more banks without regulators blocking acquisitions.
Incorporating the processes on the smaller exposures would cost in excess of 2 million dollars in operational costs or 20 basis points of the assets.
The bank utilized PayNet Absolute PD and stress testing providing quarterly reporting to replace current processes as the bank will not be able to continue the cost of collection and manual review of financial statements and ratings.
The bank implemented the PayNet stress testing solution for 10,000 loans under a million dollars in exposure saving the bank 2 million dollars.
A Senior Collections Manager at a commercial finance company with a $2 billion portfolio realized the limitations of calling past due accounts as a collections strategy and was looking to integrate a more predictive early warning system.
The company’s delinquencies started trending higher in the second half of 2014.
As the delinquencies started rising, the company increased calling efforts to collect payments utilizing the same call prioritization process with the same resources.
Due to a hiring freeze and tight budget constraints, the collections manager was unable to increase head count.
Using Portfolio Risk Manager (PRM), the commercial finance company was able to more proactively monitor delinquencies and better prioritize calls based on borrower performance with other lenders.
Using the PRM early warning feature, the collections manager was able to uncover hundreds of troubled accounts that were already significantly past due with other lenders.
Account payments increased an average of 5% without additional levels of calls.
A Portfolio Risk Manager of a regional bank with $200 million in assets had limited resources and was seeking a more “pro-active” way to prioritize collections efforts to maximize impact without hiring.
Over the past few years, delinquencies had been at record lows. Collections activity was down, and the bank was operating with a downsized collections team.
There were early signs that delinquencies were on the rise which meant that collections activity would pick up as would the need to hire additional collections personnel.
Due to tight margins and slow growth, the bank had recently imposed a hiring freeze and cost controls.
With little borrower information and limited systems support, the bank had prioritized its collections activity based on exposure size and number of days past due.
The bank needed a cost effective way to streamline its collections activity without spending money on pulling credit reports or hiring new collections people.
By subscribing to Portfolio Risk Manager (PRM), the bank was able to implement an early warning system that prioritized collections activity according to degree of risk, past due exposure, size, and probability of default.
Portfolio Risk Manager provided the bank with timely borrower credit information that allowed the bank to focus its collections activity where it was most needed and avoid having to hire more collections staff.
With PRM, the bank was able to address its mounting collections needs with greater efficiency at a fraction of the cost of hiring and training additional collections personnel.