Chief Investment Officer
Commercial Loan Automation
BirdsEye Viewteaching our employees how we make money
Second quarter earnings season is wrapping up. Anecdotally it looks to me like there's a brighter line being drawn between those who are in a world of hurt due to credit woes, and everyone else. It seems as if 75% of the reports are well below estimates, almost exclusively due to credit deterioration in its various manifestations, and the rest are at or beating estimates, almost exclusively on solid credit quality and revenue growth. We'll know more in a couple of weeks.
Dan Wagner of St. Louis wrote:
"Agree with your "Midyear Review". I want to
offer an additional item as mentioned while meeting with a bank CEO
and CFO yesterday here in St. Louis (small bank, about $450M in
assets, with about $12M in BOLI). When discussing the macro
environment, the CEO said that Washington is saying that banks need
to start lending again, but he said that the examiners are looking
through the loan portfolio like a hawk. He said that the
examiners "are making it tough to make a loan". They
don't have a lot of problems (at least compared to some peers) in
the loan portfolio; about 1.4% of loans are nonperforming and they do
a really good job of knowing their customers (helping to avoid
major problems in the commercial loan portfolio) and building
Here's what your employees will appreciate understanding: The bank rents money to customers (loans) and gets a rental fee from it. It also serves as a parking spot for clients' money (deposits), and it pays a parking fee for the use of the money. Interest-free checking accounts have no fee associated with them, which is what makes them most profitable for the bank. The difference between the two numbers is our margin. This part accounts for about 80% of most community bank's income.
We also charge fees for the services we provide, and those account for 20% of our income. The greater this amount, the less capital we need to have in order to operate the bank.
The rest is self explanatory.
I further believe that employees can readily understand that all bank capital, whether you're private or public, is allocated heartlessly, based upon returns. Further, capital markets raise their expectations for returns every year, which explains why banks must expect greater results from their own employees every day. It's not executive management's whim that bring them to ask for more each year; it's their own boss, the board, as a representative of the shareholder(s), which is the reason why the bar gets raised annually, to ensure that the bank continues to hold on to its capital and make an attractive investment for others.
If you want your employees to consider shareholders in their decision-making, you need to give them the tools to do so. This doesn't necessarily mean pricing models, although those can be excellent reminders of the importance of products such as core deposits and Treasury management to the overall profitability of the bank. It does entail a commitment to educate your employees on how banks make money, including entry-level people in both the front and back offices, and following up on that education with periodical reporting to all team members on the bank's financial performance and their contribution to the results. Armed with that knowledge, your employees will be far more likely to limit behaviors that benefit one group and not another, from reducing rate exceptions to ensuring that customers get placed in products that are truly best for them. Optimizing performance to all three major constituencies will ensure that your people will indeed do the right thing for both customers and shareholders