The Rundown

• Farmers Insurance Group FCU and technology company, Portfolio 360, develop a new predictive modeling software solution.
• The solution uses forward-looking analytics based on statistical probabilities rather than look-back analysis.
• Farmers Insurance Group FCU leverage Mosaic to uncover marketing 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 that would enable him to actively manage and grow the credit union's diverse portfolio of 31,000 consumer, residential and commercial loans.

Within three years, Leonard saw his dream turn into a reality by working with a technology firm that developed a proprietary forward-looking analytical solution, enabling the credit union to prevent unreserved loan losses, identify marketing opportunities and meet compliance and regulatory requirements and reporting processes.

Leonard met Carl Meiswinkel, CEO of Portfolio 360 in Laguna Niguel, Calif., a few years back and was impressed with his extensive expertise in both financial services and technology. Meiswinkel has more than 20 years of experience in the mortgage banking industry in data aggregation, software development, due diligence, underwriting, loan file management and valuation. Leonard also has more than two decades of financial services experience with expertise in credit, risk, strategy, loss mitigation and portfolio management.

“I knew Carl could provide me a tool that would make my job easy,” recalls Leonard, who hired Meiswinkel's firm for loan risk analytics and reporting services about three years ago. During their conversations, Leonard described his dream of a software solution that would better manage the portfolio's risk, visibility and growth by leveraging forward-looking analytics based on statistical probabilities. Meiswinkel shared Leonard's belief that forward-looking analytics is more effective in managing portfolios than look-back analysis of past loan performance and setting aside loan reserves based on last year's budgets.

This coupling of Meiswinkel's expertise in technology and financial services with practical feedback and pilot testing from Leonard over the last three years led to the development P360's recently launched Web-based Mosaic Loan Intelligence Platform, a loan repository and predictive modeling tool.

“When you have large credit unions with 50,000 loans or more, it is difficult to find software that you can apply forward-looking analytics to and be able to push the button to stratify the portfolio,” said Leonard. “The Mosaic database platform and repositories are very easy to use, the screens are very easy to understand and it's basically point and click to stratify portfolios, monitor reserves and apply forward-looking analytics.”

But the huge advantage Leonard didn't have before, and what he believes no other solution provides, is Mosaic's forward-looking analytics, which protects Farmers Insurance Group FCU against unreserved loan losses with a statistically proven 99.5% confidence level. Rather than performing a look-back analysis and budgeting for probable loan losses that's based on last year's results that is used many financial institutions, Farmers Insurance Group FCU determines portfolio loss reserves evaluating cash flows at the asset level across different stresses.

“These stresses reflect changes in the macro and micro economic conditions that impact the credit, collateral and capacity associated with the portfolio,” explained Leonard. “The loss reserves are then derived from a combination of financial engineering, stochastic and statistical analysis of the portfolio's assets, which also gives us the probability of default and loss severity for each loan in the portfolio.”

Mosaic's forward-looking analytics works by essentially digging deep into loan details as well as a wide range of factors that may affect those loans. The solution then analyzes all of that data, which can help executives make proactive decisions instead of reacting 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 of data, while others will look at 80 pieces of data. We believe that the more information you have the more probability you have for visibility and accessibility. The more pieces of data you are able to put together, the clearer the picture is. That's how our technology is designed.”

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

Leonard knew the credit union was losing auto loan opportunities with members because auto dealers were providing quicker loan approvals. When a member would apply for an auto loan with Farmers Insurance FCU, however, it would take a day or more to secure loan approval.

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

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

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

Mosaic also can be leveraged in other areas such as merger and acquisition analysis as well as compliance and regulatory requirements and reporting processes.

Matt Piazza, vice president of finance at $98 million Atlantic Financial Federal Credit Union in Hunt Valley, Md., said Mosaic made its merger activity easier–a welcome feature for a process that 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 provided analytics we didn't even think to ask for. We were thoroughly pleased with the results.”

On the regulatory and compliance side, Mosaic can be useful in compiling reports quickly and easily for regulators, examiners and board members.

Harland Bengs, chief financial officer for Farmers Insurance Group FCU, said Mosaic has helped with compliance and reporting processes.

“Our board and [the board's asset liability committee] have been impressed with P360 and their analytical capabilities that we have contracted with them to perform quarterly analysis for us,” Bengs said. “With the state of the economy and the challenges facing the credit union industry, I believe others would be keenly interested in what the Mosaic platform has to offer.”

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

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

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