The Rundown

• Farmers Insurance Group FCU and technology company,Portfolio 360, develop a new predictive modeling softwaresolution.
• The solution uses forward-looking analytics based onstatistical probabilities rather than look-back analysis.
• Farmers Insurance Group FCU leverage Mosaic to uncovermarketing opportunities to grow loans.

Soon after starting his new job as chief lending officer at the$614 million Farmers Insurance Group Federal Credit Union in Los Angeles,Brian Leonard began his search for his dream software solution thatwould enable him to actively manage and grow the credit union'sdiverse portfolio of 31,000 consumer, residential and commercialloans.

Within three years, Leonard saw his dream turn into a reality byworking with a technology firm that developed a proprietaryforward-looking analytical solution, enabling the credit union toprevent unreserved loan losses, identify marketing opportunitiesand meet compliance and regulatory requirements and reportingprocesses.

Leonard met Carl Meiswinkel, CEO of Portfolio 360 in LagunaNiguel, Calif., a few years back and was impressed with hisextensive expertise in both financial services and technology.Meiswinkel has more than 20 years of experience in the mortgagebanking industry in data aggregation, software development, duediligence, underwriting, loan file management and valuation.Leonard also has more than two decades of financial servicesexperience with expertise in credit, risk, strategy, lossmitigation and portfolio management.

“I knew Carl could provide me a tool that would make my jobeasy,” recalls Leonard, who hired Meiswinkel's firm for loan riskanalytics and reporting services about three years ago. Duringtheir conversations, Leonard described his dream of a softwaresolution that would better manage the portfolio's risk, visibilityand growth by leveraging forward-looking analytics based onstatistical probabilities. Meiswinkel shared Leonard's belief thatforward-looking analytics is more effective in managing portfoliosthan look-back analysis of past loan performance and setting asideloan reserves based on last year's budgets.

This coupling of Meiswinkel's expertise in technology andfinancial services with practical feedback and pilot testing fromLeonard over the last three years led to the development P360'srecently launched Web-based Mosaic Loan Intelligence Platform, aloan repository and predictive modeling tool.

“When you have large credit unions with 50,000 loans or more, itis difficult to find software that you can apply forward-lookinganalytics to and be able to push the button to stratify theportfolio,” said Leonard. “The Mosaic database platform andrepositories are very easy to use, the screens are very easy tounderstand and it's basically point and click to stratifyportfolios, monitor reserves and apply forward-lookinganalytics.”

But the huge advantage Leonard didn't have before, and what hebelieves no other solution provides, is Mosaic's forward-lookinganalytics, which protects Farmers Insurance Group FCU againstunreserved loan losses with a statistically proven 99.5% confidencelevel. Rather than performing a look-back analysis and budgetingfor probable loan losses that's based on last year's results thatis used many financial institutions, Farmers Insurance Group FCUdetermines portfolio loss reserves evaluating cash flows at theasset level across different stresses.

“These stresses reflect changes in the macro and micro economicconditions that impact the credit, collateral and capacityassociated with the portfolio,” explained Leonard. “The lossreserves are then derived from a combination of financialengineering, stochastic and statistical analysis of the portfolio'sassets, which also gives us the probability of default and lossseverity for each loan in the portfolio.”

Mosaic's forward-looking analytics works by essentially diggingdeep into loan details as well as a wide range of factors that mayaffect those loans. The solution then analyzes all of that data,which can help executives make proactive decisions instead ofreacting to situations.

“We are used to analyzing 1,500 to 1,800 data fields per loan,”Meiswinkel said. “Our competitors will look at 30, 40, 50 pieces ofdata, while others will look at 80 pieces of data. We believe thatthe more information you have the more probability you have forvisibility and accessibility. The more pieces of data you are ableto put together, the clearer the picture is. That's how ourtechnology is designed.”

Farmers Insurance Group FCU also has used Mosaic to spotmarketing opportunities to grow its loans portfolio.

Leonard knew the credit union was losing auto loan opportunitieswith members because auto dealers were providing quicker loanapprovals. When a member would apply for an auto loan with FarmersInsurance FCU, however, it would take a day or more to secure loanapproval.

The Mosaic system now enables the credit union to simply type inthe vehicle identification number and approve the loan inminutes.

“When we can assess risk in a very quick and prudent manner wecan increase the opportunity to lend,” Leonard said. “Mosaic helpedus with the risk-based pricing and pricing the loan right upfront.”

Farmers Insurance Group FCU used Mosaic to review its auto loanportfolio of funded loans and assessed them over time. That allowedthe credit union to adjust its FICO bands and price the loans morecheaply up front than it had in the past. For members to get thecredit union's best auto loan rate, a FICO score of 760 or betterwas required. But Mosaic's analytics revealed the risk profile ofmembers with a 720 FICO score was the same as member with a 760FICO score. This information allowed Farmers to launch a newmarketing campaign to offer more members the credit union's bestrate. As a result, Farmers increased the auto loan portfolio by $21million this year from $55 million to $76 million.

Mosaic also can be leveraged in other areas such as merger andacquisition analysis as well as compliance and regulatoryrequirements and reporting processes.

Matt Piazza, vice president of finance at $98 million AtlanticFinancial Federal Credit Union in Hunt Valley, Md., said Mosaicmade its merger activity easier–a welcome feature for a processthat can be laborious and time-consuming.

“P360 delivered on what we requested, but it didn't stop there,”he said. “They went way above our expectations and providedanalytics we didn't even think to ask for. We were thoroughlypleased with the results.”

On the regulatory and compliance side, Mosaic can be useful incompiling reports quickly and easily for regulators, examiners andboard members.

Harland Bengs, chief financial officer for Farmers InsuranceGroup FCU, said Mosaic has helped with compliance and reportingprocesses.

“Our board and [the board's asset liability committee] have beenimpressed with P360 and their analytical capabilities that we havecontracted with them to perform quarterly analysis for us,” Bengssaid. “With the state of the economy and the challenges facing thecredit union industry, I believe others would be keenly interestedin what the Mosaic platform has to offer.”

Although Mosaic is not cheap, it may be more affordable forsmall and midsize credit unions than other analytic softwareprograms that can cost up to six figures a year.

Mosaic's modules range in price from $750 to $2,000 a month. Butthese amounts do not include other costs for other third-party dataand optional services.

“On the services side, we provide analytics to accounting firmsas well as credit unions in areas such as servicing rightsvaluation, mergers and acquisitions, portfolio pricing andstratification, third party value and credit updates includingvalue reconciliation, risk-based pricing,” said Meiswinkel.“Third-party data expense such as appraisals and credit reports mayor may not be included depending on the extent and costs. We alsooffer full service annual contracts where we provide 24/7/365support with immediate response to reporting requests andpresentation material.”