• Home
  • Education
  • News and Resources
  • Advocacy
  • Associate Members
  • Contact
  • Search
  • Menu Menu
News
Products, Resources

Building a Strong Credit Culture

Triangle Background

By Eric E. VanDoren, CRC, Director, Wipfli

Building and maintaining a strong credit culture at your financial institution is no easy task. But that culture will go a long way in affecting the long-term success, or lack thereof, of your organization.

The COVID-19 pandemic brought with it plenty of stresses as lenders navigated various challenges and solutions. However, banks are coming out of a period in which credit losses are at historic lows, and problem loan reports and watch lists are about as small as they ever were.

Most lending institutions ended 2022 in a strong capital position (notwithstanding unrealized losses in the securities portfolio) with minimal credit issues, regardless of the strength of the institution’s credit culture.

However, current economic uncertainties are a reminder of the need to revisit your lending approach. Your institution needs a strong credit culture to weather volatility in market conditions and the economy going forward.

Here are the key components of a strong credit culture and some changes you may need to adopt to build yours.

An Effective Loan Policy

It starts with an effective, well-defined loan policy. This is not a one-size-fits-all document. The policy should be tailored to the institution based on the local area and economy, as well as the characteristics of your institution: size, strength, expertise, types of lending offered and the borrowing needs in the local economy.

This policy document should provide for effective supervision by senior management and the board of directors. It should not be a static document and should be reviewed and approved on an ongoing basis as the circumstances of borrowers, the economy and the institution itself change. The policy also provides guidance and outlines expectations for loan officers and staff.

Careful Underwriting

Gone are the days of the handshake loans with minimal to no underwriting. Effective loan underwriting is critical in understanding the risks in a borrowing relationship. Detailed underwriting and risk analysis will help management determine whether the level of risk in each credit application is acceptable given the expected reward.

Effective loan underwriting analyzes and discusses the five Cs of credit: character, capacity, capital, collateral and conditions (and some also add control and common sense). In most instances, underwriting is performed by the credit department, providing a view independent from loan production — although in some smaller institutions this may not be possible due to limited staffing.

Credit personnel should be knowledgeable and well-trained to provide the proper analysis and uncover the risks lurking within a credit and loan request and be able to effectively articulate any concerns held by internal staff, the credit committee, board of directors or others.

A Grading Matrix

To determine and quantify the level of risk in a credit application, a clear, measurable and objective-based loan grading system should be used. A grading matrix is a great tool to assist in determining the proper loan grade and helps provide consistency in grading throughout the organization.

While a perfect grading matrix does not exist, these key objective criteria carry the most weight:

  • Debt service ability
  • Collateral coverage
  • Leverage
  • Liquidity

Other criteria — including industry, type of collateral, guarantor strength and payment history — also matter but are typically weighted less.

Once the matrix determines the score, consider whether it seems appropriate. (If it doesn’t, an adjustment to the weightings or risk factors should be considered, and an adjustment may be appropriate.

Possible reasons for an adjustment might be the sudden loss of a significant customer or the untimely death of an owner or key employee.

A grading matrix is not a one-size-fits-all tool. The expectations for a commercial real estate credit may be different than a commercial and industrial credit. Underwriting and grading an agricultural borrower would not be the same as it would for a construction or development borrower. An institution may want to consider having three or four (or even more) different grading matrices in its arsenal.

A Diligent Credit Committee

The credit committee reviews new credit requests as well as previously approved and funded loans not just for approval but also to ensure the depth and detail of the credit underwriting and analysis is commensurate with the subject request. Is the type and structure of the loan appropriate and within policy parameters as dictated by senior management and the board?

If there are exceptions to policy, are they appropriately mitigated so the level of risk in the credit is reasonable given the risk appetite of the institution? The credit committee is also frequently a learning opportunity for junior personnel to become further immersed in the credit culture of the institution.

Proper Credit Administration

Another important but often overlooked part of the credit process is loan documentation and administration. This effort includes pre-lien searches, proper titling, approved terms and conditions and accuracy of documentation. Proper checks and balances and review of loan documents are needed prior to closing. It is too easy for something to slip between the cracks due to pressure from a loan officer, borrower or attorney, as well as myriad other distractions that administrators must face.

After the loan is properly booked and funded on the system, there may be follow-up filings and post-lien searches.

Thorough Portfolio Management

Effective loan portfolio management is imperative. More than just monitoring payment performance, it involves keeping in touch with the borrower performing a site visit, if appropriate. The institution may need to obtain and review periodic financial reporting from the borrower and/or guarantors as required in the loan agreement.

Check whether the financials raise any red flags or trip any covenant requirements. If so, investigate and find out why. Do not wait until a loan becomes past due to raise concerns with the borrower.

Effective loan portfolio management goes beyond individual loan monitoring. Is the level of risk in the portfolio changing and, if so, why? Stress testing is an important tool in determining the potential risk in individual credits as well as the portfolio.

Concentration levels need to be monitored. Are the various loan types within the concentration parameters outlined in the loan policy? If not, what is the plan to return to the policy threshold? Are those threshold levels still appropriate? If exceptions are made to the policy, consider whether the level is appropriate and be sure the exceptions are being tracked and reported to senior management and the board.

Another important aspect of loan portfolio management involves the management of problem loans. Even an institution with a strong credit culture will have the occasional hiccup. The question becomes how does the lender deal with the hiccups. The earlier the loan officer can identify a potential problem, the easier it is to consider more potential solutions.

Many pieces must come together to build a strong credit culture. For management to be diligent in its oversight, having the right people in place is critical. The quickest route to financial decline for a lender is to allow complacency to take hold in any critical aspect of the lending process. While every loan is a good loan at the point of origination, a strong credit culture improves the chances it remains so.

How Wipfli Can Help

At Wipfli, we are tuned into the concerns of financial institution clients on underwriting risks. The appropriate policies help build lasting relationships and create a positive impact. Our team’s seasoned lending professionals are ready to provide guidance on best practices and help your organization achieve its goals.

Contact us today, so that we can help gain confidence in the integrity of your loans.

Content Sponsored by Wipfli, a WBA Silver Associate Member.

Print 🖨
March 7, 2023/by Hannah Flanders
Tags: Associate Members, Credit
Share this entry
  • Share on Facebook
  • Share on Twitter
  • Share on WhatsApp
  • Share on Pinterest
  • Share on LinkedIn
  • Share on Tumblr
  • Share on Vk
  • Share on Reddit
  • Share by Mail
https://www.wisbank.com/wp-content/uploads/2021/09/Triangle-Backgrounds_Lime-Green.jpg 972 1921 Hannah Flanders https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Hannah Flanders2023-03-07 08:22:322023-03-07 08:22:32Building a Strong Credit Culture
You might also like
Triangle BackgroundWBA Welcomes New Associate Members in 2022
Triangle BackgroundThree Emerging Ways to Tap into Telemedicine
Vaccination CardAre Banks Required to Comply with the Federal Contractor COVID-19 Vaccination Mandate?
Making the Most of WBA’s Associate Members
Ten Years of Midwest Bankers Insurance Services
First American Capital Corporation, Inc. Celebrates 20 Years
Cinnaire Awarded $55 Million New Markets Tax Credit Allocation from CDFI Fund
Banks Serve Communities with Invisible Credit in an Effort to Develop Financially Capable Consumers

Categories

  • Advocacy
  • Community
  • Compliance
  • Credit Unions
  • Education
  • Member News
  • News
  • Products
  • Resources
  • Uncategorized

Recent Posts

  • Nelson Celebrates 30 Years at National Exchange Bank & Trust
  • Bakalars to Retire
  • PWSB Mortgage Lenders Receive the Five Star Mortgage Professional Award
  • Executive Letter: Wisconsin Supreme Court Upholds Priority of Secured Creditor Under Receivership Rules
  • Peshtigo National Bank Announces Promotions

Archives

  • March 2023
  • February 2023
  • January 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • July 2021
  • June 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • December 2020
  • November 2020
  • October 2020
  • August 2020
  • July 2020
  • June 2020
  • May 2020
  • April 2020
  • March 2020
  • February 2020
  • November 2019
  • October 2019
  • September 2019
  • August 2019
  • July 2019
  • May 2019
  • April 2019
  • March 2019
  • November 2018
  • September 2018
  • August 2018
  • June 2018
  • April 2018
  • March 2018
  • January 2018
  • November 2017
  • October 2017
  • September 2017
  • May 2017
  • April 2017
  • December 2016
  • November 2016
  • August 2016
WBA logo
  • About
  • Community
  • Subsidiaries
  • Staff

questions@wisbank.com

608-441-1200

4721 S Biltmore Ln.
Madison, WI 53718

Get our Newsletter!
Subscribe

© 2023 Wisconsin Bankers Association. All rights reserved. | Website Design by Bizzy Bizzy
Oostburg State Bank Celebrates 115th AnniversaryTriangle BackgroundZaffino Promoted to Market President – Adams
Scroll to top

This site uses cookies. By continuing to browse the site, you are agreeing to our use of cookies.

OKLearn more×

Cookie and Privacy Settings



How we use cookies

We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.

Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.

Essential Website Cookies

These cookies are strictly necessary to provide you with services available through our website and to use some of its features.

Because these cookies are strictly necessary to deliver the website, refusing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.

We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.

We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.

Other external services

We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.

Google Webfont Settings:

Google Map Settings:

Google reCaptcha Settings:

Vimeo and Youtube video embeds:

Privacy Policy

You can read about our cookies and privacy settings in detail on our Privacy Policy Page.

Terms of Use
Accept settingsHide notification only

Subscribe

* indicates required








Membership