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

3. Warning clouds are on the horizon

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

15. Across the portfolio

16. 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

20. You’ve gathered valuable information…
• Now what do you do with it?
– Rules
• Score changes
• Line of credit usage
• Deposit behaviors

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!

24. Thank you!
Angela.Eikenbary@bakerhill.com
Stephanie.Butler@bakerhill.com