Publications & Resources

May/June 2009
Focus: People - Your Most Important Asset

 

Why Real, Live Bankers Still Matter

By Chris Nichols

Back in 1868, the Atchison, Topeka & Santa Fe Company started in the largest railway of its time. The Santa Fe railroad was to run from Topeka all the way to Santa Fe. After years of hard work, laying tracks across relatively flat Kansas, the line came to La Bajada Hill, a steep, 800 ft. elevation incline 20 miles outside of Santa Fe. Unfortunately, the construction engineers were not talking to the locomotive engineers and when the latter came out to inspect the track, it was determined that the Baldwin steam engines could never make it up the grade under full load. Seeing the mistake, the company did what any determined company would do – end the railway, save the budget and call it a success. As a result, the Santa Fe Railroad never actually made it to Santa Fe.

In similar fashion, banks that set out to achieve a 15% ROE can come up short because they fail to properly plan and manage profitability. To help, we have gathered some interesting facts culled from 2007 profitability data (the latest available) for more than 135 banks. While the data may seem somewhat dated given the current market performance, the concepts still hold true.

For starters, bankers should know the first question when it comes to producing superior performance – Just how important are people to the bottom line? The answer: Extremely important, particularly in today’s difficult operating environment.

It Pays To Have Great Bankers
That’s just not a nicety, but an empirical fact. Just compare the risk-adjusted contribution to the bottom line from a branch and a banker. According to an analysis by Banc Investment Group, the broker-dealer arm of PCBB, in 2007 the average branch contributes about $177,000 per year of risk-adjusted profit. By contrast, the average commercial real estate lending officer brings in about $380,000 of risk-adjusted profit. Top performers – those in the 10% – contribute an average of $1.2 million. Very few branches, can match the prolific earning capabilities of the average branch.

When it comes to branches, the average, well-run, profitable retail branch has $130 million in loans, $190 million and in deposits, 9,000 accounts and 4,000 customers. The cross-sell ratio averages 2.8. Branches that can achieve this profile tend to produce a 23% ROE.

When it comes to loan calling officers, the average top performing officer manages $45 million in loans and $8 million in deposits. ROE for this group averages 18%. When it comes to deposit calling officers, the average officer is responsible for $25 million in deposits and $16 million in loans for an average ROE of 44%. Interestingly, the top 10% of profitable customers utilize 3.48 different products, while the least profitable customers utilize 3.50 different products.

What To Avoid
The top 3 items which hurt bank profitability according to the 2007 data are:

  • Poor loan pricing/structuring (contributes 60% to lower than average ROE)

  • High rate CD promotions (contributes 22%)

  • Excessive fee waiving on deposit accounts.

The most profitable account at the bank is business checking, while the least profitable is student checking. The most profitable CD structure in 2007 was the 1 year or 1.5 year, which were tied. The least profitable CD structure had a 5-year maturity, but it was closely followed by the 3-month CD.

An interesting deposit fact: A bank had an equal chance of losing money with public funds than making money last year. For that matter, 21% of the average bank accounts lost money for the institution (compared to 14% for 2006) due to mispricing. As in year’s past, the 90-10 rule still applies: The top 10% of profitable customers for the bank contributed more than 85% of profits.

Five Ways To Increase Profitability
Based on this data, what are the top 5 things banks can be doing to increase profitability in 2008?

  1. Find out who the top 10% of your customers are and aggressively protect them – having a profitability system can help bankers start measuring these metrics

  2. Figure out how to market, bundle products, segment customers and sell more business DDA accounts

  3. Get a loan pricing model so you know if the loans you make contribute to profitability or take profitability away. If banks can increase the average life on profitable loans (through prepay protection, longer maturities, etc.), loan profitability will exceed credit risk (i.e. most of a loan’s credit risk is between years 2 and 3, not on the tail end).

  4. Cross-sell profitable products to your profitable customers, particularly on the deposit front.

  5. Figure out who the most profitable customers are, figure out ways to keep them and figure out why they are profitable. Then work to develop programs to target similar accounts.

Bottom line: Bankers matter now more than ever. With a thoughtful strategy focused on maximizing profitability and avoiding mistakes, financial institutions can manage through challenging times.

Chris Nichols is CEO of Banc Investment Group, the broker-dealer subsidiary of San Francisco-based PCBB, which serves banks in 13 western states. He can be reached at cnichols@bancinvestment.com, 415-399-5800.

Unauthorized reproduction of all or part of this material without the express written consent of the author is strictly prohibited. All rights reserved.