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Commercial Lending

Best-In-Class Series, Part Four - Portfolio Management

Kristin Zell
Jun 28, 2019


Portfolio management should not only be about using data analytics to monitor risk, but also as a tool to fuel portfolio growth.

To date, we have published several articles addressing the core elements of a portfolio management system. This blog post, however, will focus on the deeper issue of why these systems are so critical to the success of any lending function within your financial institution. Most of the technology created in the last 10 years has been concentrated in loan origination, documentation, and closing processes. While those are all critical, we must ask ourselves, what about the other 99% of the time you spend in relationships with your borrowers?

Why do we need portfolio management?

  1. Because it is federally-mandated in a highly-regulated industry.
  2. Because we have a fiduciary responsibility to our clients and stockholders to manage risks.
  3. Because we need to track loan covenants.
  4. Because we must be able to chart a course forward for our employees as business circumstances change and loans mature or come due for renewal.
  5. Because an effective portfolio management strategy nurtures growth.

While the first four are necessary to the continued survival of your organization, the fifth is what really drives your business forward. This moves us into the field of predictive analytics and market determination. The portfolio management systems we build today should go far beyond basic risk management to shine a light on potential solutions you can offer your clients in the months and years ahead. That is the true end-game for the technological wave we are seeing in lending today.

Think about the normal cycle of a business from product introduction through growth, maturity, and decline. The information housed within your portfolio management system should be able to reveal likely business needs based on the metrics and ratios you are already tracking. When you merge that information with outside data relating to the industry the business client is operating within, you begin to expand your horizons. Armed with this information, your lending officers and branch staff can take the discussion to a much higher level than they do today.


Banker's Hours by Trevor SpauldingSource: Independent Banker, February 2019


So, what kind of metrics are we talking about? In addition to tracking loan covenants and exceptions, the portfolio management systems of the future should be able to offer a continuous underwriting feature. When required financial statements are received, they simply become part of an updated spread, so your institution already has most of the work done when new loan requests are initiated. Better yet, when you see certain metrics moving, like the relationship between accounts receivable and accounts payable, your officers can make proactive offers for lines of credit, equipment financing and more. In the future, the “best-in-class” institutions will take their portfolio management systems to this level. They will not just use data analytics to monitor risk, they will use it as a tool to grow their portfolios.

In prior articles, we’ve discussed the nine core elements of an effective portfolio management system:

  1. Financial statement tracking
  2. Collateral evaluations
  3. Covenant tracking
  4. Exception tracking
  5. Renewal facilitation
  6. Notices alerts for lenders and C-Level managers
  7. Profitability evaluations at business level
  8. Predictive tools to determine additional lending needs of your business clients
  9. General portfolio level measures to include (concentration management, NAICS analysis, stress testing, risk scoring, portfolio level profitability analysis, and integration with ALLL & CECL)

Many systems in the market today do a pretty good job with the first four or five elements. As new solutions are developed, there is an opportunity to expand further into the next five elements through integration with other internal systems and third-party industry level analysis. That will create a path for much deeper relationships between you and your business clients.

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