A Dashboard for Computer Aided Banking

Minnesota bank boosts ROE and ROA with system that looks into the future.When Arnie Skeie, a supercomputer engineer and owner of Ultima Bank Minnesota, set out to create an all-encompassing, bank management system, he knew human beings would continue to make the decisions in the bank. His vision was to enhance the bank's staff with the predictive capabilities of computers.."The idea was: What if we could foresee the consequence of every decision before we made it?" Skeie said. "The goal was to create a system that used up-to-date data to perform all kinds of 'what-if' scenarios. I wanted to be able to test our thoughts before any action was taken – not after.".The resulting system, called the Ultima Dashboard Suite, has helped the bank manage its way to a return on assets higher than 2 percent for the last four years. The bank had a 2.24 percent ROA in 2013. For return on equity, the bank has been higher than 20 percent for the last four years as well. It closed 2013 with a 25.33 ROE. The workhorse behind the Winger, Minn.,-bank's high numbers is its net interest margin which has only fallen below 5 percent once in the last 10 years; at year-end 2013, NIM stood at 5.26 percent..Building bank management into a digital tool.When Skeie bought UBM in 1976, he didn't have a day's experience in a bank but he did know how to design and build supercomputers, some of which were used by the U.S. Department of Defense. With an electrical engineering degree from South Dakota State University in Brookings, he had worked for Control Data Corporation, IBM's main competitor at the time, for 15 years..A native of Winger, Skeie returned to his hometown of 220 people and learned that the owner of what was then called the Farmers State Bank of Winger had passed away. Skeie was invited to purchase the bank with other local business owners in northwest Minnesota. But when bidding day came, he was the only potential buyer still interested in the bank. He closed the deal on the $6 million bank on his own..Skeie continued to work for CDC for another five years before leaving the company in 1980 to work in the bank. With his experience from CDC, Skeie developed a subsidiary business for the bank called FARMChek, which sold a software package that helped farmers manage their finances. The bank sold the business in the early 1990s..Then Skeie became president of the bank. It occurred to him that computers could do the thinking that went into managing the bank's finances. In fact, a computer could be used to foresee the financial effect of lending decisions and loan terms ahead of time. "We could perform all kinds of 'what-if' scenarios. I knew it could be done," he said..So Skeie began to build his system in 2003. He created the first spreadsheets in a program called Lotus, which has calculation and programming features similar to Microsoft's Excel. Skeie hired Mark Finstad, a 24-year Wells Fargo veteran, to be president of the bank in 2006. Since then, Skeie has developed Ultima Dashboard Suite, an end-to-end bank management system. Skeie is now working to move the system to a more robust format; it has become so comprehensive that Excel can no longer handle it..Computer aided banking.In December 2013, Tyler Page, a lender at UBM, heard his email chime with a message from a customer he had been courting for months. The email was a window of opportunity to win over a $2 million relationship. But the customer's email didn't offer Page the full relationship; he had to prove himself and the bank first..The customer needed $450,000 to buy a farm. If UBM didn't wire funds by the end of the week, the customer would miss out on the deal and UBM would miss out on the customer. "He came to me because his bank was slow in getting an answer to him on the deal," Page said..The customer emailed Page his financials and tax returns. "I entered the information into Ultima Dashboard Suite's credit system," he said. "I will never have to repeat that step for that information again.".The system immediately scored the customer as a risk weighting "2." A rating of "1" represents the lowest risk, a "7" rating represents the highest risk. "When I created the loan application, it immediately told me the overall yield the bank would require for its risk on the customer. I could tell the customer right away that we could get it done, we just needed formal approval," he said. "Our system calculates the balancing act between the bank's risk and its return. I didn't need to spend time figuring out what terms the loan committee were likely to accept. Since the system is the digital representation of ownership's requirements, as the lender I could shop loan terms within those requirements for the customer.".Since Ultima Dashboard sorts loan applications to the required lending authority, Page knew a $450,000 loan would require loan committee approval. "I received the request on Monday. It so happened that our loan committee meeting was the next day," Page said. "I stepped out of the meeting and called the customer to tell him he was approved.".Page said he wasn't ever worried that the bank wouldn't turn the loan around in time. If the committee wasn't meeting for a week, the system has an 'e-approve' button. When the lender clicks it, the system sends an encrypted email with a time sensitive stamp on it to every decision-maker required for loan approval. "No matter what, we would have gotten an answer to him within a day," he said..The majority of the bank's loans are approved using the system's e-approve function, Finstad said. "We either approve loans at the time of application or within a few hours," he said. "We also usually fund the same day.".In the case of Page's customer, the bank wired funds by Friday as requested, five days after receiving application. "The customer was very impressed by that," he said..Widening the margin.A month later, the customer called Page. "He asked me if it would work to move his whole relationship over," he said. "To wrap up the $450,000 the customer already borrowed and refinance him out of his old bank required about $1.5 million. My immediate answer was, 'you're already approved.' I had already submitted an application at the time we were approving the previous deal.".The bank accomplished a little more than $1 million of the financing through a Farm Service Agency guaranteed loan, which is a program of U.S. Department of Agriculture. UBM is a preferred lender with both the Small Business Administration and USDA. About 15 percent of the bank's portfolio is guaranteed by SBA or USDA. About 50 percent of UBM's relationships which exceed $250,000 utilize government guarantees..UBM's wide NIM doesn't come from low cost of funding. It comes from a system that requires adequate reward for the bank's risk, but it also comes from utilizing government guaranteed loans like FSA loans. In the case of UBM's new customer, 90 percent of the $1 million financed as an FSA loan was guaranteed by the USDA. UBM sold the guaranteed portion to Farmer Mac and retained a 1 percent trailing fee which resulted in a $9,000 fee in the first year. UBM held the remaining 10 percent in portfolio. The trailing fee plus UBM's 5.5 percent rate on the $100,000 it retained resulted in a yield of 14.5 percent. "For the risk we keep, we earn a substantial amount," Finstad said..The system showed Page the financial effect of an FSA loan for the customer's total return if it closed the loan. He was able to price financing for the customer's equipment, assuming the 14.5 percent yield of the FSA guaranteed loan, before the loan was closed.."I can see all pending applications, approved applications and funded deals in the system. It allows me to see what will happen. For example, I can see the yield on the total relationship if a loan that's pending goes through," he said. "Since the system shows me the net return of the total relationship, I could see months beforehand that we could be very aggressive on the pricing if we got the customer's full relationship.".When the customer who came to Page wanted to refinance $750,000 in equipment, "I already knew how I would price the equipment," he said. "I also knew that while I was quoting an aggressive price next to what the customer would find in the market, I was still meeting ownership's requirements from a total return-on-relationship standpoint.".Lenders can be like messengers between the customer and bank ownership, Page said. "The customer always wants a lower rate and the ownership always wants the rate higher. The lender ends up going back and forth trying to work things out," he said. "That is not the way it is here. The Skeie family already has stated their terms. If I enter the customer's desired rate and it shows in red in the system, I can adjust the doc fee higher so that the overall yield meets policy. I also can tweak the customer on the credit side by improving their risk rating with additional collateral. If none of these bring an acceptable deal for all parties, the government guarantee programs are a very common tool to improve the risk weighting. There are 100 ways to do it for every loan.".Meeting plan.After UBM's board lays out the bank's goals for NIM, ROA and other metrics, management can use Ultima Dashboard to daily monitor performance in relation to plan. The system also uses the most current data to project how close the bank will be to plan at yearend without intervention. "Last year is a good example of a time that the system showed we were not on track next to plan," Finstad said. "In about April last year, we saw that our NIM was running significantly short. We needed to do something to hit plan.".With the one-two punch of UBM's system and government guaranteed loans, Finstad could chart a course to meet plan by the end of 2013. The bank's system showed Finstad that if the bank could do larger deals that bring larger doc fees, it could hit its targets. "We decided to focus on large prospects like hotels and apartments. We used SBA's 504 program to manage the risk," he said. "We ended up finding a few of these loans. They had lower, fixed rates over 20 years but came with a nice fee. The loans improved our performance so much that we came in at 2.24 percent ROA, our plan was 2.18 percent for the year.".This year the bank needs more floating rate loans to hit plan. "We want 75 percent of our loans to be floating rate loans with floors. We aren't quite there yet," Finstad said, adding that the bank uses Farmer Mac to serve customers who need long-term, fixed-rate financing. "The system shows me each loan category and their contribution to NIM. I see the floating rate loan section has 74 percent highlighted in red. That means I have been preaching a lot about floating rate loans," he said with a chuckle..No secret sauce.UBM's performance doesn't come from some strategy that's unavailable to other banks, Finstad said. "All we have done is capture the data in the bank, and organize it into knowledge which we use to create our strategic plans," he said. "After that actions are all that separates us from success.".Skeie and Finstad believe the performance of their $148 million bank is attainable for every bank, no matter the asset size. "I am convinced this system and management style would bring these results for any bank in the country," Finstad said. .A bank's locations and economy need not hinder its performance either, said Dawn Skeie Crane, Arnie Skeie's daughter and the bank's CEO. "We have a saying: this is God's country because only he can find it on a map," she laughed..Nearby Bemidji, Minn., and Fosston, Minn., have populations of 14,000 and 1,600 respectively. "Our story is about a small, rural bank that believes in itself," she said. "We see technology as a tremendous opportunity, not only for small, rural community banks but for small, rural communities in general.".Technology advances strengthen UBM's culture.In addition to helping management run the bank, UBM's Ultima Dashboard Suite also helped foster a competitive culture and peer-to-peer training..The system allows the bank's staff to see the performance of the bank as a whole as well as the performance of each individual branch. The transparency spurs Tyler Page, manager of the bank's Plumber, Minn., location, to do better than his peers. "I see my asset size, net interest income and contribution to the bank's total ROA," he said. "I can see the shifts in my loan portfolio. I can see if I am getting stronger or weaker. I can also see the same information for each of the other branch managers. I want to do better than my peers; we like the competitive culture it creates.".The ability to examine peer branches provides useful training, Page said. "As I watch how other managers are doing, I can see how they drive performance with the assets they have," he said..The first thing UBM bankers do in the morning is to review their two most important sales activities, said Mark Finstad, president. Each week, all UBM sales staff members participate in a web call during which each lender reports their progress toward their goals. "This webinar lets younger bankers see what pleases management and what doesn't," Finstad said. "I can also see where I need to be involved in bringing an opportunity into the bank."