August 29, 2010

Software company provides early warning system for banks

Steve Falconer, CEO of Lender Sentinel, a start-up company ready to test drive its banking software.
Union Leader Correspondent
DERRY – Long before Wall Street tumbled, Steve Falconer had a big idea. What if there were a user-friendly software tool that could be applied to community banking records that provided an early warning system for troubled assets, something to bring general transparency to every portfolio?
It was the fall of 2007 and my brother and I were thinking that community banks really needed some kind of tool to evaluate whether they wanted something in their portfolio. All this was coming together right before the world came crashing in,” said Falconer.
Timing was not quite right for going out on an entrepreneurial limb. So Falconer made good use of the downtime as the economy continued to reel and slowly recover, tweaking his software, developing a prototype and preparing a business plan.
That big idea has since developed into a start-up company, Lender Sentinel, an innovative software system that could prove to be the missing link bank regulators have been seeking to stabilize the still-fragile investment market.
Lender Sentinel has the potential to bring community banks up to speed and then shift them into overdrive, said Falconer. Not only does the system gather up all existing portfolio data into one tidy program, but it provides access and analysis of third-party information.
Banks are all over the place, electronically speaking, in terms of loans. You can't look at your portfolio or collateral electronically because all that information is still on paper. I haven't been to a bank yet where it's not done that way – and I've been in four or five dozen banks recently,” Falconer said.
Used to be a community bank could look out the window and see the properties it owned. But with the secondary market of collateralized debt obligations, the packaging on Wall Street of these subprime, regular and jumbo mortgages, eventually things got dicey,” said Falconer.
As real estate became a commodity, like silver and gold, loans were packaged along with other properties and sold to investors, explained Falconer. But the packaged assets were impossible to unpack, in terms of assessed value.
The problem remained: How does an investor in Tokyo know the true market value of, say, a property in Derry that's sold in a 'bag' of investment properties along with a house in Cape Cod and a house in Albany?” said Falconer.
That is the pivotal question that, until now, has not had a good enough answer.
Our idea was to database the information which, right now, still exists in a big fire proof cabinet in bank vaults. Lender Sentinel will go into that vault, transfer all that information into an electronic data base, and then continue to watch the market and track portfolios against the daily changes that are happening,” said Falconer, a former software developer for Verizon who has partnered with his brother, Paul Falconer, and also John Powell of Massachusetts, both experienced real estate appraisers.
Lender Sentinel has signed on three clients so far, one on Boston's South Shore two in Connecticut, with another dozen or so proposals already in the hands of regional community banks, including several in Southern New Hampshire.
Falconer expects the client list to grow exponentially once the system goes live at New England Bank in Enfield, Ct., the first bank in the country to test drive the software.
New England Bank Executive Vice President John Parda is looking forward to being part of the buzz.
There are different competitors out there that can digitize your portfolios, but the value of Lender Sentinel, and the uniqueness it's bringing to market, is that it's building a better mousetrap. They're bringing in outside information, public data from assessors records and peer data – data from other institutions,” Parda said.
“What I really need to measure my portfolio against is third-party information. There's plenty of software that will slice and dice existing data, but nothing that tells me what's happening in the marketplace. They've married two functions with this software,” Parda said.
Parda is preparing to present the system to the Board of Directors in September.
While there is some calculated risk in being the first, there is also a sense of excitement over the potential Lender Sentinel has to offer.
“There are other people looking at it in the banking community, and people I've recommended it to. When community bank meetings get rolling in September, the word will spread,” Parda said.
“I'm hoping more banks get involved because this isn't a competitive tool; it doesn't make our money any greener. But from a regulatory standpoint, the more community banks that get on board and build a peer data bank, the more we all know about the marketplace.”
Clients can set parameters based on existing or anticipated market conditions with a feature for customizing stress and shock testing of assets. By combining bank data and local market information, clients are alerted to conditions that arise as they arise and take action before an asset becomes a liability.
Rounding out the start-up team is Dave McPherson, a former senior manager with Fidelity Investment, and Jim Heneghan, a retired banker and principal with Trinity Appraisal in Hartford, Ct.
We extract certain data points that have to be maintained,” said McPherson. “Banks are always cutting new loans. That's where we differ from the CPA who comes in and does a spread sheet of your assets. A portfolio is a living and breathing entity that needs to be maintained, and that's what we offer.”
Heneghan said a selling point is that the system was designed by non-bankers who were able to solve a long-standing problem within the industry just by coming at it from a different perspective.
This system is dynamic. If there's a potential problem, you'll know before the market tells you there's a problem. Gathering information that normally takes weeks and months to get together can now be gathered in seconds,” said Heneghan.
After 28 years a correspondent banker doing loan participations for community banks, Heneghan is convinced that this software will be a game changer.
It was designed for community banks, but can be used by any bank. Some of the larger banks may have a group that monitors this stuff manually, and some banks design Excel spread sheets to do some of this work. But to my knowledge, there's nothing out there that gives you the complete package, like this,” Heneghan said. 

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