One mistake Brian Vannoy has seen financial institutions make time after time during his more than 23 years as a lender: Stretching the credit boundaries when venturing into new territory.
“Whether it’s a new product, a new geographic market, or a new borrow type, it’s important to be disciplined around the credit standards we set, particularly early on,” says Vannoy, who in July was named chief credit risk officer for $1.1 billion asset Allegacy Federal Credit Union in Winston-Salem, N.C.
“Even though it’s hard to be patient when you’ve launched an exciting new venture, the long-term rewards of sticking to your credit standards will be worth the wait,” he says.
Vannoy recently shared his approach to credit risk management with Credit Union Magazine.
CU Mag: What are the biggest credit risk areas facing your CU?
Vannoy: The single biggest credit risk area for our credit union is the area of concentration management.
In some sense, concentration management actually encompasses all credit risks, since it really is the art of taking a macro view of the portfolio versus a micro view.
Certainly, making good decisions with each transaction will always be important. But as our credit union continues to grow and evolve, the most challenging task to ensure long-term performance will be to constantly assess and monitor the composition and performance of the loan portfolio as a whole while making sure we continually focus on meeting members’ needs.
Assessing concentration risk by loan category, by geography, and even by relationship within our member business lending (MBL) program, is critically important.
CU Mag: How are you mitigating credit risks?
Vannoy: Our entire Allegacy management team is attentive to concentration risk for the credit union as a whole, and is actively engaged in product pricing and structuring to help achieve the optimal balance in the loan portfolio.
My team and I are personally focused on making sure we provide thorough, meaningful analysis to support product and concentration decisions.
CU Mag: Does your approach to credit risk vary based on the type of loan?
Vannoy: The fundamental credit risk task is the same regardless of loan type: reasonably assessing the likelihood of timely repayment.
Our approach to making this assessment certainly differs somewhat depending on the type of loan and the type of borrower.
While traditional consumer loan risks can be fairly homogeneous, we are fortunate to have a highly qualified, seasoned team that takes pride in really understanding the individual member’s financial picture and living out Allegacy’s mission of “helping members make smart financial choices.”
The emergence and growth of MBL certainly necessitates a more custom approach to assessing and monitoring credit risk. In the MBL space, individual analysis is far more prevalent because it is necessary to understand the multiple repayment sources that may be employed to ensure timely repayment.
CU Mag: How has credit risk management evolved over the years?
Vannoy: In my 23 years in financial services, I have seen an almost cyclical evolution in credit risk techniques, concentrated around the degree to which the underwriting process is automated.
I have seen organizations migrate toward higher reliance on automated underwriting tools. Then, when the results are not quite as desirable or predictable as they had thought, they reverse course toward more traditional approaches while continuing to incorporate the new sources of data and analysis.
In my experience, it’s been a “two-step-forward, one-step-back” migration. The drivers of this evolution are the member and business borrower’s expectation for a rapid decision, and the massive availability of data and information with which to predict credit outcomes.
CU Mag: What are some credit risk best practices you’d advise your colleagues to follow?
Vannoy: Work with management and your board to set reasonable, measurable performance standards for the loan portfolio as a whole, and create the necessary reporting mechanisms to engage in meaningful conversations relative to these standards.
Be sure to include growth, profitability, quality, and concentration measures.
CU Mag: What other advice would you offer your CU peers?
Vannoy: Remember that, when taken as a whole, the loan portfolio is—for most of us—the credit union’s largest and most productive asset.
It’s important to periodically step back and think of the portfolio as an organism of its own, even though it is made up of hundreds or even thousands of individual loans.
From that perspective, protecting the performance of the loan portfolio comes into a different view, and making a hard decision about a particular loan request or a particular product change, or a response to a default, takes on a different hue.
I’m not suggesting we lose focus on the individual member, but taking a broader view can help balance the long-term interests of every member-owner.