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For financial institutions in growth mode, loan-level detail is key

According to a recent Deloitte report, there were 216 total transactions in 2021 and that pace is expected to continue through the remainder of this year. Now midway through 2022, the mergers and acquisitions market for financial institutions remains robust.

Whenever two institutions are consolidated into one, it presents a litany of logistical and operational challenges, and as the lifeblood of most institutions, particular attention must be paid to lending departments. Profitability drives growth and whether as part of an M&A initiative, or simply a bank that is organically growing, bankers are recognizing the value of having the ability to centralize their loan level accounting and reporting along with their commission calculation capabilities within a single software system.

In an increasingly competitive lending environment characterized by higher interest rates and a changing economy, bankers need to know which lending strategies are generating the most profit. For example, banks sometimes compensate their loan officers more for a self-generated lead than for a bank-provided lead. But does this always make sense? The answer is: not always.

Consider residential mortgage lending. Bankers should be evaluating which mortgage loans are ultimately more profitable in the end to ensure that their compensation incentives are properly aligned with their profitability margins at the loan level. Banks must be able to evaluate the profitability of each loan originated by an individual loan officer. Doing so might uncover that the production of a bank’s top producing loan officer for the last year is weighted heavily on refinance loans, for example, but now they are vulnerable to the rate shock that the market is experiencing today. This level of accounting, analysis, and reporting – at the loan level – provides bankers with the information needed to more intelligently direct their lending departments.

The challenge for bankers is that the bank’s core accounting system often does not provide this level of detail. If it does, the loan level detail and the commissions and compensation calculation data is often housed within two or more disparate systems which bank staff must attempt to reconcile on their own, often through an inefficient, spreadsheet-laden, manual process. Alternatively, today’s modern loan accounting systems provide excellent, reconciled loan level detail and loan level reconciliation, with the ability to push resulting detailed accounting entries to the bank’s core system. The lending department gets the reconciled detail, commission calculation and reporting that they require while feeding the cash management data to the core system using automated tools, thus ensuring that both the lending department, and the bank’s CFO, get what they need.

For banks that are going through a merger or acquisition, and consolidating technology from two institutions, having accounting and general ledger capabilities supported through a single, core agnostic system helps simplify the complexity of the process and enables the new, larger institution to continue to focus on the daily work of lending and generating profits. By then pairing that with tools that automate commissions and compensation, bank executives gain a much clearer, more timely, actionable view into the current state and overall health of their loan pipelines and portfolios – an essential capability in any market, but particularly a quickly changing one like we see today.

When two banks merge, staff from the two organizations will likely be located in different geographies. Some FIs are shifting to a remote work model to better recruit and retain talent. Regardless of the reason, for institutions that may be staffed by a remote or hybrid workforce, that level of flexibility for workers comes with some key considerations from a technology standpoint as bankers require a highly secure, stable, scalable framework that individual staff (or in some cases, even entire departments) can use to work together effectively.

The truth is that some areas of the business tend to benefit more from automation and are able to function better in a remote officing environment than others. The key for bankers is in recognizing those areas. Loan accounting is one such area as it serves as an “end point” for a host of activities and initiatives that have already happened. At the end of the day, bankers want to know how many loans they have in their pipeline and of those, how many loans were successfully closed, how many failed to close and the reason(s) why.

With interest rates now at their highest level in more than 5 years and projected to increase more as the year progresses, bankers who have the right information at their disposal, in the right place, at the right time, will be in a better position to more profitably manage their lending operations in the current market environment. For those institutions currently on a growth trajectory or in the midst of an M&A event, having the right level of automation (or the lack thereof) could be a key factor in realizing long-term success.

Joe Ludlow is Vice President for Irvine, Calif.-based Advantage Systems, a provider of accounting and financial management tools for the mortgage industry. More information on the company can be found at www.mortgageaccounting.com.   

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