business credit and risk management innovation · Best Practice Article: Business Credit & Risk Management Innovation – Final August 26th 2009 Page 2 process for certain loans in

Canadian Business Owner Strategy Best Practice Article: Business Credit & Risk Management Innovation – Final August 26th 2009

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Business Credit and Risk Management Innovation: What Credit Unions are doing and why it counts

Business credit and risk management innovation: what it is and why it matters Credit Unions and bank competitors alike consistently strive to improve their risk management and delivery of commercial banking. Quiet innovations are happening that are driving huge business benefits. So why does continuous innovation in this space matter? Firstly, because a member-centric financing experience, backed by smart risk management, is central to how credit unions create value. Second, because antiquated credit policies or processes can simply hold credit unions back: from great portfolio management, maximizing profit opportunities, driving efficiencies or maximizing employee engagement. Deal-by-deal, Credit Union Managers have to manage the delicate balance between minimizing write offs and protecting the strength of their portfolios on the one hand, and achieving aggressive growth targets on the other. Competition is stiff, and business members have high service expectations. Therefore finding smart ways to manage your portfolio risk in a targeted manner, while driving credit policy or process improvements to support a great member experience and growth is more crucial than ever. How some Credit Unions are leading in this space Five credit unions from various sizes and provinces across Canada were interviewed to find out how they are moving forward in the area of business credit innovation. Each has a great story to tell, and some practical tips for other credit unions also looking to drive improvements to support their business banking goals. Salmon Arm Savings and Credit Union: New Credit Renewal Process Drives Huge Efficiencies Salmon Arm in B.C. has $500 million in assets and 20,000 members, of which around 2000 are business members. Ninety percent of its commercial loans are real estate secured. The commercial portfolio represents 25% of the overall book. The goal is to grow this conservatively to 30%. The credit union has innovated in a serious way by vastly simplifying its credit renewal process for all business loans up to $350,000. It successfully brought its regulator the Financial Institutions Commission of British Columbia (FICOM) on board throughout the process, and gained approval for changes creating massive efficiencies. Annual Reviews are very important both from a risk management and deepening relationships perspective. However before enhancing its process, Salmon Arm reviewed 100% of its commercial accounts, every year. This was onerous for members, gobbled resources, and prevented Account Managers from spending their precious time on business development. Under the leadership of Ken Hawrys, Salmon Arm’s COO, the credit union challenged the status quo, and made big changes. It significantly accelerated and cut down the renewal


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process for certain loans in a targeted manner, based on their amount, type of security and term length. Now, unsecured loans up to $25,000 are renewed automatically, as long as there are no delinquencies or NSFs (Non Sufficient Funds). An automatic renewal letter is sent to members simply renewing their credit. For unsecured loans between $25,000 and $50,000, employees just have to fill in a one-page renewal form, with no new information needed from the member. The same is the case for loans secured by real estate between $50,000 and $350,000, again based on the common-sense principle of no delinquencies or NSFs. But importantly, if any of the accounts have payment or NSF issues, they must go through the normal ‘full’ review, accompanied by updated financial statements. This pragmatic risk management approach has been accepted by FICOM and gone down well with employees serving members. “Thanks to the changes, we’ve reduced the tidal wave of accounts that have to go through a full review in April from 45% in 2007 to just 19% in 2008. And most reviews now take no longer than 10 minutes to complete. This has freed up a lot of capacity for higher value business development work,” says Dan Morin, Commercial Manager. Michael Wagner, Salmon Arm’s CEO, says the simplicity of the new process has also helped to deepen relationships with members. “It has helped maintain our high business member satisfaction of 90%, and increased employee engagement through freeing up our employees for more meaningful work.” Most importantly, these changes have been made with no negative outcomes: delinquencies range between 0.11% and 0.78%. What did Salmon Arm learn that it could share with other credit unions? Michael’s tip: “Don’t assume that you have to review 100% of your credits ever year to live up to your regulator’s ‘model’ policies. Make changes, but make sure you bring your regulator on board, showing them what you are doing from the risk perspective. This definitely worked for us.” And Dan’s advice? “Don’t assume you need lots of fancy tools or technology: often a simple approach and challenging the status quo is all you need.” Meridian Credit Union: New Tools and Supports for Quality Risk Management Meridian Credit Union is Ontario’s largest credit union with 218,000 members, $1.9 billion in commercial assets and eight Commercial Banking Centres. It is leading some exciting initiatives from its Business Credit shop. John Peters, Senior Manager of Commercial Credit, views these initiatives as “best practice”, rather than “innovations”, because what Meridian is implementing is “best in class” commercial lending practices, regardless of institution type or location. But the initiatives are innovative and exciting all the same. As one of Canada’s top 100 employers, Meridian has been lucky to be able to hire highly experienced lenders and credit adjudicators, which has been central its success. John and his team are constantly building tools and models to improve the quality and efficiency of their credit adjudication. As John says, “Our credit turnaround times were already very good (well under two days on average), and so our more recent focus has been to continuously increase the quality of our analysis and risk management.” For example, Meridian’s new financial analysis tool enables Meridian’s bankers to spread upwards of five


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years worth of financial statements in just one fifth of the time it used to take. It also provides a standard presentation, which is more insightful and readily identifies variance trending. John’s credit team has automated the monitoring of industry credit exposure on a weekly basis, plus ‘out of order’ reporting to readily identify problem situations. A Watch-List report identifies higher risk loans and requires management to build strategies to manage these appropriately. Lending policy guideline documents, ‘priority’ fast tracking of time-sensitive deals, and standard credit application processes across all centres also help drive consistencies and efficiencies. This in turn leads to a great member experience, and helps to build employee engagement. And the results are paying off. Meridian has grown its commercial portfolio year-on-year by 15-20% over the past few years. In spring this year, Meridian also launched a new internal business credit website. This allows employees to access application forms, credit guidelines and useful industry-specific information to help them get deals approved, and better serve their members. Industry-specific lending guidelines are updated on a regular basis, and the Credit Department also offer up tips and key questions that Business Account Managers should ask members, to help them ‘sell’ Meridian, and get deals approved based on clear lending guidelines. John admits that Meridian’s economies of scale and leading employer status give it unique advantages that other credit unions may not enjoy. Yet he’s positive that credit unions can collaborate to jointly create the same spreadsheets, manuals or guidelines that have helped Meridian grow. “It’s also important to focus on smaller implementation wins, build brick by brick, rather than try to build the entire wall with one initiative,” John advises. Coastal Community Credit Union: An Integrated Approach Beyond Lending Coastal Community Credit Union on Vancouver Island has $1.6 billion in assets and 80,000 members, of which around 9,000 are business owners. It has strong risk management capabilities, including sound underwriting, good controls and solid policies and procedures. However it is the credit union’s entire business banking model that truly sets it apart. While focusing on fast delivery of credit, Coastal takes a holistic approach to serving needs of business members beyond lending. With its three regional Business Centres, Coastal Community has a very flat approval structure, highly experience lenders, and a pride for great member service. “We have an internal target of responding to member calls within four hours, and an approval turnaround target for nearly all loan applications of 24-48 hours,” says Carmon Henderson, Vice President, Commercial Services. For small business loans up to $50,000, Coastal Community has also launched an ‘Instant Credit’ program, where loans are approved ‘pretty much on the spot’, mainly based on the member’s personal information and credit score. But in addition to super-fast turnarounds, one of the keys to Coastal Community’s success is its business model, which includes locating a Business Services Manager in each Business Centre. These are effectively Cash Management and non-credit product experts who are accountable for being the quarterback to deepen relationships with business members with potential on the deposit or cash management side. They are the primary contact and liaison with Retail, Insurance and Wealth Management specialists to provide integrated solutions tailored to their members’ business. These managers partner with Business Account


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Managers, attend joint member visits where appropriate, and support branch staff with information and advice related to serving the business member from a more holistic banking and cash management perspective. Marnie Weeks, Senior Manager, Business Services, was asked the outcomes from this integrated model. The results have been fantastic. “We wanted to increase our business deposit base by fifty percent over five years, or ten percent per year” she said “But within just eighteen months [between December 2005 and July 2007] we’d achieved our five year goal!” As a tip for other credit unions, Marnie advises:” Make sure you pay enough attention to the non-credit side of the business. The number of businesses that need to borrow is very small, so if you only focus on borrowing business, you miss out on huge opportunities.” Newfoundland & Labrador Credit Union: Streamlined loans for faster turnarounds With $370 million in assets and a $35 million commercial lending portfolio, Newfoundland and Labrador Credit Union (NLCU) serves its 700 business members through its 12 branches and one commercial lender. The credit union has recently developed an exciting new credit offering of up to $50,000 to profitable or established businesses. “The turnaround time for these loans was originally two to three weeks, which we realized was too slow,” said Kent Farrell, Director of Credit. “So we significantly streamlined the process, and all loans are now approved within three days, and many within our 24-hour target.” How did NLCU drive these improvements? ”We spoke to other credit unions to get ideas,” says Farrell, “Now we require less information to approve loans, and do less financial analysis. Decisions are based on three key areas: debt service coverage, personal beacon score and the member’s personal net worth.” With faster loan delivery, members and staff are very happy. Only launched three months ago, it is still too early to measure positive outcomes beyond turnaround time. But Farrell plans to ‘test and learn’ with the product over the next two to three years, and then potentially expand out the offering in terms of raising the loan limit or making other product or process improvements. Like Coastal Community, NLCU has also started to reduce requirements for its loan renewals, to make things easier for members and staff. For example commercial mortgages with low LTV (Loan to Value) ratios are only renewed every two years, based on a quick renewal form. The credit union has also implemented ‘Customer Relationship Planning’. When a Branch Manager conducts the business owner’s annual review, it is now a conversation to uncover business owner needs and opportunities, rather than an administrative exercise. “We are improving our advice-focus, based on more meaningful dialogue with our business owners. Branch Managers are accountable for uncovering opportunities on the personal as well as business side, and then implementing a plan to capture opportunities over the next 12 months.” explains Farrell.


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Again, all these improvements were driven through a simple common sense approach to risk management, without any fancy tools or analysis. What advice can Farrell give other credit unions also wanting to innovate? “First, always listen to your business owners. They are often approached by other financial institutions for their business, so are very capable of telling you what your main gaps are versus the competition. Second, always considering buying off-the-shelf products where you can as a way to fill your gaps.” Vancity: Simplified Credit Process thanks to a LEAN approach Like Meridian, Vancity has the benefit of size. It has over $3.8 billion in commercial assets and 38,000 business members. However, the credit union has had challenges with the complexity of its business loan processes and turnaround times. Vancity has attacked this issue duringthe past 12 months, using a process called LEAN, to revamp both its application-to-approval and approval-to-funding processes for managed business loans over $250k. LEAN is an eight-step innovation process often used in the automotive industry (by Toyota, for example) and in manufacturing. It is a grass-roots way to drive efficiencies, improve customer service, and employee engagement. Through a employee-empowering process, involving staff in design and implementation, LEAN ensures that through collaboration, employees design and develop a new process and set of solutions and take ownership for implementation. Ken Lim, Technology Manager at Vancity, is responsible for leading LEAN initiatives in business banking. Ken explains that first, they brought together a multi-functional team which included sales and credit people. An intense two-day workshop focused on addressing major bottlenecks where there was typically a lot of ‘back and forth’ between the credit and sales departments. Through a guided process, the LEAN team found pragmatic solutions to overcome the most important pain points to simplify and reduce turnarounds. The outcome was a ‘stage-gate’ process, where it became crystal clear to everyone which pieces of information and documents were critical to get the deal through the next stage of the process. Thanks to this approach, Vancity has reduced its average turnaround time for $250k-plus loans from 11-15 days, to just four days in 60 per cent of loans. The majority are turned around within 10 days. This improvement has been great for members and staff. Vancity has also used LEAN to improve its traditionally complex approval-to-funding process and will also now harness the innovation technique to enhance its business account opening process. Although it’s too early to measure improvements, error reduction, increase increased member satisfaction and employee engagement are already showing up as positive outcomes. Summary There are many ways your credit union can innovate in terms of your business risk management and credit delivery. Size or the ability to invest in sophisticated risk management models or tools matters less than your ability to challenge the status quo and look afresh at your business credit policies and processes. Seek out simple solutions, and find out what has worked with other credit unions with similar capabilities or memberships.


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Coastal Community Credit Union cannot emphasize enough the value of visiting other credit unions to share successful models and fast-track innovations. “We are in constant contact with our peers in the Lower Mainland,” says Carmon Henderson, VP Commercial Services “It’s incredible what you can learn from each other. There are also resources we can share.”

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business credit and risk management innovation · Best Practice Article: Business Credit & Risk Management Innovation – Final August 26th 2009 Page 2 process for certain loans in