Community Banking Analytical Must - Haves to Improve Performance Management

November 26, 2012 at 11:20 AM

Executives at smaller community banks are responsible for devising and executing strategies to improve performance; however, they are often handicapped by limited information. In part, this is attributable to that fact that executives at these institutions have relied primarily on consolidated financial statements to manage their business. This approach is inadequate to compete in today’s environment. Rather, to make fully-informed decisions, it is important to delve into the factors that drive financial results. There are basic analyses that can substantially assist executives at community banks to make better decisions. These tools do not require a significant capital expenditure.

Forecasting. It is critical to quantify the bank’s anticipated performance to determine what, if any, course adjustments are needed. Ideally the bank should be able to project performance for a rolling 24-month period (or a minimum of 18 months). The forecast should include projected period end and average balances based on production inputs and calculated runoff.

Productivity scorecards for both frontline and back office functions. Many banks need to improve efficiency ratios but often lack quantitative information concerning where inefficiencies and productivity problems reside. Performance scorecards that contain a manageable number of key productivity and staffing metrics and comparable industry benchmarks can be immensely powerful. The scorecards help to provide a factual framework for subsequent discussions on where to invest and where to trim. While branch staffing has been a focal point of productivity and efficiency efforts in recent years, it is important to not overlook lender productivity and staffing in the commercial lending area.

Branch profitability. The branch network comprises a significant portion of operating resources. Decisions about closures and consolidations should start with an understanding of the profit contribution from each branch. Ideally the general ledger should support responsibility center definitions so that direct income, costs, and balance sheet items at the branch level can be tracked. A simple but powerful funds-transfer-pricing methodology can be easily developed that does not require a complicated software solution. Executives can then evaluate the potential to improve profitability through increased deposit and revenue generation or through cost management.

Profiles on the retail and commercial customers. Understanding customer households is critical to help inform marketing and sales efforts. The bank should have information on the number of customer households, average balances, product and service cross-sales, number of single-service households, etc., and use this information proactively.

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