Saturday, May 16, 2015

Bank Board Reports: War and Peace or Cliff Notes?

Today, Board reports closely resemble War and Peace. Why? The same reason regulators focus on the little things... to CYA! We don't want to be criticized that our Board was uninformed, so that little embarrassment about the audit exception that turned into employee fraud is on page 262 of your Board report. 

You mean you didn't see it? That's on you, fella.

Are we trying to fool ourselves into believing that all of our Board members are reading the 300+ pages we send to them two days prior to the Board meeting every month? Sure, there will be some that do. But my suspicion is there are more that do not. How could they? It's 300 pages! In two days! And most Board members have full time jobs!

According to the FDIC pocket guide for directors, a financial institution's Board should:

- Select and retain competent management
- Establish, with management, the institution's long and short-term business objectives in a legal and sound manner
- Monitor operations to ensure that they are controlled adequately and are in compliance with law and policies
- Oversee the institutions' business performance
- Ensure that the institution helps to meet its community's credit needs

How many pages per month do we need to fulfill Board responsibilities? What is not in the above list are the following things that I often see Boards debating:

- Selecting contractors for the buildout of the new branch
- Determining raises for employees that are not Senior Management
- Credit underwriting
- Small ticket charitable donations
- Loan administration's $100 budget variance

All of these distractions take valuable time away from Boards doing what they should be doing, described above. Here is what I suggest for Board reporting:

1. Financial reports for the current period, and trends. 
2. Budget variance reports
3. Financial progress towards strategic plan
4. Financial condition and performance versus peer
5. High level risk management reports (because more granular risk reports are reviewed in Committee) and trends.
6. Compliance and audit reports, not included in 5 above
7. Other business such as approving policy changes, large/exception credits requiring Board approval as per policy.

Aside from including a whole policy (changes are blacklined so Board member doesn't have to search for them), or a credit package, I can't see why a Board package has to be more than 100 pages.

Executive recruiter Alan Kaplan recently wrote an article for Bank Director magazine titled What Makes Great Boards Great. His number one characteristic was quality dialog, debate, and discussion. With Board packages that are 300+ pages and agenda's crammed with unfocused topics not directly related to Board responsibilities, how can there be quality dialog, debate, and discussion?

Especially since most directors don't have the time to read 300 pages for their upcoming Board meeting. So they sit in silence when they should be focusing on debate emanating from what is on page 262.

Do you think Board packages focus on the right things?

~ Jeff


Saturday, May 09, 2015

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

Saturday, May 02, 2015

Hire a Vet: Part Two

Five years ago I wrote that bankers should look outside the typical talent pool for our next generation of leaders. This week, an executive recruiter contacted me again for an "experienced banker" to be the heir-to-be CEO of a community bank. Problem: the last heir-to-be that this bank hired didn't pan out. I can only speculate why, but I told an industry friend that I suspected that the candidate probably had new-fangled ideas on banking that didn't jive with the old-schooler.

If the old-schooler comment fits you, let me tell you this: what brought you and your bank to success in the 1990's will not do so tomorrow. There were 14,000 banks in the 1990's. Only 6,500 today. Think about it.

But this post is about something greater than your succession issues. In April, my wife spearheaded a county-wide lacrosse community campaign to benefit the Wounded Warrior Project. I still believe very strongly that banks should dive heavily into recruiting veterans. But some veterans will return home broken. And the Wounded Warrior Project was formed to help them adapt and overcome.

Here is the address delivered before most lacrosse games during our Assisting Our Defenders week.

"Ladies and Gentleman,

Thank you for coming out and supporting our players. This week, nine Lancaster-Lebanon League lacrosse teams show their support for the Wounded Warrior Project. 

Today, as you listen to these words, defenders of our country are engaged in hazardous training, patrolling dangerous villages, and fighting battles and skirmishes in the world's most volatile countries.  As a nation, we asked them to go, and they heeded the call.

Not all will come back the same person that left. Some will return home with emotional or physical scars from the dangers we asked them to endure. Through your support of the Wounded Warrior Project, our lacrosse community shows our commitment to returning soldiers, sailors, airmen and marines.

With our players' and volunteers fundraising efforts, our collective community has raised over $12,000 to benefit our wounded warriors! Let's give a round of applause for the collective efforts of players and volunteers, and to send a loud message to our wounded warriors that WE ARE WITH YOU!

Because this post drifted from banking, I apologize. But if nothing else, you feel motivated to actively seek vets in positions of leadership at your bank or support a charity that helps returning veterans, then your attention would have been well worth it!

~ Jeff

P.S. Plus I'm pretty proud of my wife!