appropriate team members and automate routing and imaging. Easy access to data will also transform an institution’s approach to managing loan portfolios, ensuring FIs can maintain rigorous standards of due diligence while also focusing on growth and other initiatives. Transparency into comprehensive loan information, such as associated relationships, origination data and potential risk details, empowers bankers to make informed decisions without the hassle of digging through multiple systems for that data. THE POWER OF CONCENTRATION REPORTS In November 2023, Citizens Bank of Sac City, Iowa, failed due to overexposure in the commercial trucking industry. The trucking industry has struggled the past couple of years amid economic declines, which is part of the reason this caused the failure. However, this bank failure could have been avoided if their concentrations had been more diversified. By knowing where they currently stand in their concentrations, banks know where they can focus their growth efforts to reduce the need to implement heightened credit risk procedures as a result of being overly concentrated — in CRE specifically — or by growing portfolios in certain areas too rapidly. The Federal Banking Agencies’ joint guidance on CRE loan concentrations, recently updated in July 2023, recommends that institutions track their levels of exposure granularly enough to determine and adjust concentration limits as market conditions change. Keeping a close eye on current concentrations internally is often easier said than done. Access to data is key to doing this successfully, and many banks are unable to collect the data needed to produce reports this granular. It is common for institutions to operate with separate legacy systems that do not aggregate data. To gather needed data, many banks would need to search their core(s), other systems and hard copy files and backfill data into their current systems or spreadsheets, which requires a lot of resources most institutions can’t spare right now. It is also recommended that banks have a portfolio management system that provides the information needed to measure and monitor concentration risk. This includes data points relevant to a bank’s lending strategy, underwriting standards and risk tolerances, such as debt service coverage levels, loan segmentations to determine diversification within a portfolio and established concentration limits. For optimal efficiency and scalability, banks need a system that can be readily accessed and easily (or automatically) updated. Concentration reports suggested by the agencies’ guidelines include concentration by property type, borrower concentration reports, loans requiring loan policy exception approvals, number and volume of exceptions by nature, justification and trends, performance of exception loans compared with loans underwritten within guideline, and typical loan production and performance reports by type, region, officer, etc. Streamlining reporting processes can help institutions stay on top of data trends without adding extra lift. There are tools available to allow for more enhanced reporting and analysis. With these systems, bankers can easily build out reports such as these or even automate such reports and have them delivered via email. INTERNAL LOAN REVIEW AND AUDIT PROCESSES A recurring theme we’ve noticed with the bank failures that occurred last year is that many of their weak points could have been mitigated or avoided with appropriate internal loan reviews and audit checks. There is a lot of value in these processes. Regularly reviewing and auditing loan portfolios ensures that potential issues Staying mindful of the benefits of early detection, risk mitigation and portfolio optimization will help foster a proactive culture and maintain business strategy. 18 The CommunityBanker
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