Bankers: Think about what gets measured.

"What gets measured, gets managed." Why did we need Peter Drucker to point this out? Educators are forever carping about standardized tests because they are spending a lot of time on teaching kids to improve their test scores.

Baseball players are measured on batting average, on base and slugging percentages. So they are spending significant energy to improve them. Why is this a bad thing?

Because in banking, what we measure is not always consistent with where we want our institution to go... i.e. with our strategy. We measure branches by number of accounts opened. And we're surprised that Wells Fargo gets accused of opening accounts without customers' knowledge. We measure lenders by size of portfolio, and we're surprised that we drop rate, points, and covenants to get deals done.

I recently did a podcast for PrecisionLender regarding this subject for lenders entitled: Using Bank Data to Get Better Results. That's right, I did a podcast. I only learned a few months ago what a podcast was.

But if you didn't invest the twenty minutes to listen to the interview, I'll exemplify my comments about another way to measure lender performance. The age-old measure by portfolio has led to what we have today... lenders willing to make any concession to get a deal done. A done deal is the best deal.

But what if your strategy revolves around superior service to a certain commercial customer segment? How would you measure it. Most likely the size of the lenders portfolio plays a part. But should the lender be the best price if he/she provides the best advice? That runs the risk of providing Four Seasons service at Motel 6 prices.

So I suggested using different measurements, such as coterminous spread, coterminous spread less provision, pre-tax portfolio profit, and ROE. See my suggestion exemplified in the table below.

Now this lender's portfolio may be considered small, at $30.3 million in the current period. But it has been growing, while maintaining its spread. When considering the provision expense, which brings credit quality into the picture, spread has grown from 1.95% to 2.01%, all while growing the average balance of the portfolio.

You can see this portfolio took a credit hit in CP-1, as the provision spiked a bit, possibly due to a loan downgrade and the resulting provision increase. 

But overall this lender's trend is good, as represented by the ROE increase from 15.89% to 17.34%. Which brings us to a second report I suggest for lender accountability, the Schmidlap National Bank Lender Ranking Report.

It is clear from this report that Jeff's portfolio is relatively small, ranking him 8th of 12 lenders. This contributes to the bottom half ranking in Net Asset Spread on a dollar basis, Net Asset Spread Less Provision on a dollar basis and ROE.

But the portfolio is growing, ranking him 3rd, and the Net Asset Spread percentage has him 2nd, even when considering the provision. So there are some positives in Jeff's performance. Which is good because I wouldn't want to be let go from my fictitious lending job at a fictitious bank. 

Imagine the behavior that would ensue if you held your lenders similarly accountable? The performance review would go like this: "Jeff you are doing an excellent job maintaining pricing while growing your portfolio with strong credits. Your biggest challenge is continuing to grow the portfolio. For this upcoming period, Schmidlap will do x, x, and x to help you accomplish this while staying in the top quartile for spread. Let's do this!"

I know Jeff pretty well, and being ranked in the bottom half of his peers won't sit well. Let me get back to some fictitious work!

How do you measure lender performance?

~ Jeff

Dear Mr./Ms. Bank Regulator

My firm will occasionally provide feedback on correspondence to our clients' regulators. Today we did just that. Our advice: don't come off as combative. Since hitting send on that e-mail, I reflected on how a half Italian, half Irish firebrand like myself became so melancholy. 

Truth is, I haven't. I thought about what we should have said to the regulator, versus the sweet words I was encouraging our client to use. I mentioned to him that we should keep two versions of the letter: one that we will send crafted to get our intended result, and one that says what we mean. Below is a sample letter to your regulator, saying it like you mean it.

August 2, 2014


Mr. John Whatshisname
Examiner In Charge
Bank Regulatory Body
1 Bureaucrat Way, NW
Washington, DC 20429

Mr. Whatshisname,

Below is our response to the Matters Requiring Attention ("MRA") that were included in your most recent examination report on Schmidlap National Bank ("Schmidlap"). 

Although our Tier 1 leverage ratio is greater than 10%, you criticized us for our stress scenarios contained in our capital plan. You opined they lacked analytic rigor. Aside from the clear lack of analytic rigor you exercised to come to this conclusion, it is important to remind you that estimating future negative events that impact our capital is guesswork. We like our guesses better than yours, and our spreadsheets are bigger than yours. So, no, we are not re-doing our capital plan.

Our level of investor commercial real estate is trending closer to your guidance levels. We get that. What you suggest we do is create greater diversity in our loan portfolio. We have a lot of small restaurants in our markets that can pledge pizza ovens as collateral. We are now training our lenders on pizza oven market valuations and setting a pizza oven loan to value limit in our loan policy. We will be dispatching lenders to pizza shops up and down our valley in the coming months. Mangia!

In the management section, you had two items for us: our succession plan and strategic risk. If I win the lottery, Frank will take my slot. If Frank gets hit by a beer truck, Jane is up to the task. If Mary goes buh-bye, Alex will step in. There's our succession plan. The Board is a little more difficult, because getting local luminaries to get paid twenty five grand a year to put up with your bullsh*t is difficult. We're working on it.

In terms of strategic risk by the recent new products and delivery channels we have added, we will need further definition from you on "strategic risk". When sending your clarifying statement, also send your resume containing the qualifications you possess to dictate product and delivery channel strategies. Also, please clarify the definitions contained within CAMELS, because we didn't think the S meant strategic. If our memory serves correctly, and the S does not stand for strategic, then we don't give a rats a** what you think about our products and delivery channels.

We recognize that there are so many laws and regulations that apply to banks that you can couch any criticism you have for us under some law, such as the Truth in Lending Act. It reminds me of high school geometry, when the teacher asked me to solve for a triangle, I would say "CPCT", knowing it could be so. So you can say, "I don't like this checking account... BSA/AML", and I would have to enlist regulatory attorneys to investigate the matter only to come to the conclusion that "you can't fight Uncle Sam".

That, Mr. Whatshisname, is the definition of tyranny. And Schmidlap is not gonna take it.

Warm Regards,
Schmidlap National Bank

Five Ideas on How to Consolidate a Bank Branch

Fellow blogger Jim Marous asked me what I thought were hot stove issues for banking in 2014. Top of my list, branch consolidation.

During the second quarter 2013, bank branches generated a relatively low 2.04% total revenue as a percent of average deposits. Average deposits per branch were approximately $53 million. This is according to my firm's profitability measurement peer group. Total revenue includes asset spread from branch-originated loans, liability spread from deposits, and fee income. 

So let's do some math: 2.04% x $53 million = $1.1 million. On the surface, this looks good for a branch that might cost $600 thousand per year in operating expenses. But hold on. What about paying for that army of operations, IT, compliance, finance, and executives back there at home office? According to my firm's profitability peer report, support/overhead centers cost branches approximately 0.99% of deposits. In the case of the $53 million branch, that's $525 thousand per year. Where are the profits now?

The cold hard truth resulting from the math is that branches have to be larger to deliver meaningful profits. Many if not most financial institutions are looking hard at smaller branches in smaller markets to consolidate and create a bigger branch that can deliver better results.

But what should you do to minimize customer attrition and negative perceptions if you decide to consolidate a branch? I have a few ideas.

1. Personnel - It all starts with your people. If you are consolidating a branch into another in the next town over, select your best people to run the consolidated branch, ideally with residents from each community. And by best, I don't mean longest tenured. By best, I mean those that have the greatest potential to execute on your strategy. 

2. Communicate with community leaders - One of the most often cited reason for leaving a struggling branch open is the perception closing it would have with the community. I suggest sending a bank executive, with your current/prospective market/branch manager to sit down with key community leaders to communicate your decision process, identify how you will continue to benefit the community although you won't have a brick and mortar facility, and ask how your financial institution can continue to play a meaningful role in helping community leaders execute their long-term plans. Then take those ideas discussed and execute on them.

3. Be charitable - I am an advocate of giving branch/market managers a charitable budget for small ticket giving such as to the local little league, scout troop, etc. I also believe that financial institutions should focus their charitable dollars and time around few causes so they can have the maximum impact. Look for an opportunity to support a cause important to the residents of the community where you are consolidating the branch, either through dollars or time, and ideally both. 

4. Be social and be local - Here is an idea that will have your compliance officer spinning... have locally run social media accounts that focus communication with people in very small geographies. That's right, I'm proposing having a Schmidlap National Bank Morris County New Jersey Twitter account @schmidlapnbmorris. By being local, following local residents, promoting local causes, and highlighting local events, your bank will be followed back by locals that find value in what you are communicating. And don't forget to add personality to the account. Nobody likes to follow a bland Twitter account that tweets the daily CD rate. If you closed the Parsippany branch, you could keep Parsippany residents better engaged by being the go-to source for super-local news, events, and causes.

5. Lend, lend, lend! - In the months before and after a branch consolidation ensure that your business development folks focus dedicate resources to finding business in the affected community. Make sure to actively communicate your continued commitment with signage such as "Another project financed by Schmidlap National Bank".

Those are my ideas. What are yours?

~ Jeff

Bank Shorts: Sales Culture Gone Wild

When I was a branch manager, I fondly recall competing with a friend and fellow branch manager for the quarterly sales title. My bank, First National Bank of Maryland, had a very transparent incentive compensation system. I could calculate my own and my team's quarterly bonuses to the penny. It was called RAISE... Recognizing Achievement In Sales Excellence.

The challenge was that it was a sales incentive system. So we sold. This may have motivated us to focus on the product de jour rather than customer needs. I think my friend and I were conscientious enough leaders to mitigate this risk. But it did cause us to focus on the types of customers likely to "buy" promoted products and not focus on the bank's strategy.

Enjoy the Bank Short below. If your incentive system revolves around sales versus profitability, then don't be surprised if this is going on in your branches.

Bank Shorts: Sales culture gone wild.
by: jeffmarsico

Bank Shorts: Schmidlap National Bank Exit Interview

A client lost his temper with his regulator after one of the more youthful examiners threatened to force the bank to write down the entire consumer loan portfolio based on the information that was given to him. The result, an informal enforcement action. There is a lot of tension between examiners and the examined these days, and I thought this would make an appropriate time to launch an animated series, Bank Shorts.

We shouldn't lose our temper with regulators. Below is my perception of how a difficult exit interview between a fictitious banker and examiner in charge would go. Notice the composure maintained by the banker. I was impressed with his performance. Also note who is sitting in the desk chair versus the visitors chair.

Hats off to Bryan Allain, at http://www.bryanallain.com/ for giving me the idea regarding these shorts. He has created movies at his blog. He is a witty guy and you should visit his blog, in spite of him being a Red Sox fan.

Enjoy.

~ Jeff