Growth has been a good problem for Heartland Financial USA, one that has called for new software. "As we continued to get larger, we certainly couldn't know the details of every customer anymore," says Ken Erickson, chief credit officer at the Dubuque, Iowa-based bank. "So we needed ways to be able to manage that through better reporting and slicing and dicing." It also wanted to upgrade its loan risk management.
While reading revisions to the Basel II framework, Erickson noticed something interesting. If the bank could glean better insight into its lending risks, it might be able to reduce the cash it needed to set aside for estimated loan losses by holding itself to standards typically reserved for bigger banks.
"We were seeing some of the value, in that the large banks were going to be able to start using their capital better, with better allowance management," Erickson says.
The idea was to deploy software across the $4.4 billion, multi-institution commercial bank holding company that could boost overall the firm's ability to manage and apply stress tests to its business loan portfolio. About 70 percent of Heartland's loans are commercial transactions.
Heartland was having to make too many assumptions about loan characteristics and impacts of various scenarios on the credits.
But by the end of 2006, Erickson had his eye on two solutions, Optimist and Portfolio Strategist from Melbourne, Australia-based Inmatrix, which Heartland signed a contract to use in 2007. Optimist was rolled out later that year, and in 2009, Heartland deployed Portfolio Strategist. "There was a fair amount of product development for us as we talked to them about the dual-risk rating and collateral," Erickson says.
Heartland gave Optimist a private label name, ProfitMax. SunGard acquired Optimist and Portfolio Strategist with Inmatrix in January 2010, and renamed the solutions Ambit Credit Assessment and Ambit Credit Portfolio Monitoring.
ProfitMax allows Heartland to analyze a corporate customer's financials, including side-by-side, peer and ratio comparisons, plus details on collateral. ProfitMax also calculates a quantitative risk rating. "We got into a risk rating module that we built within that, so it helps guide what we feel is the probability of default for that customer," Erickson says. ProfitMax will also automatically import all the financial and collateral data "so it saves us from having to reenter that to create a different approval document," Erickson says.
The system also lets Heartland's loan officers consult with corporate customers on financial strategies using a tool enabling what-if scenarios called "Goal Seek."
If a customer is unhappy with yearend cash of $100,000 and instead wants $300,000 of positive cash flow next year, staff can change the cash variable to the desired number, which brings up a screen that shows different variables a client can toggle to achieve the target. For instance, they can estimate more product sales than the year before; assess what raising prices by two percent might bring; assume a better cost of goods with suppliers; bring down lease costs; reduce the number of personnel; cut inventory waiting to be sold from five months to three months; reduce receivables from 45 days to 30 days; and stretch payables out by five days.
"It helps customers see that they can manage their business by making small tweaks to allow different variables, rather than just thinking, 'To make more money, I need to make more sales,'" Erickson says.
Ambit Credit Portfolio Monitoring allowed Heartland to transition to its new allowance methodology using a defined dual-risk rating, which involves probability of default based on a primary source of repayment, typically cash flow generated by a business' ongoing operations; and a loss given default, based on a secondary repayment source, like collateral put up, including sale of the business. The system additionally enables Heartland to apply stress tests against individual credits versus pools of loans assumed to have similar characteristics.