The Five Metrics that Matter

MEASURING PROFITABILITY

Most Metrics are like party appetizers: You want to offer a nice spread, but not go overboard

By Adam Craig

Think about the last few times you attended a party that served appetizers—or hors d’oeuvres, if you want to be fancy. Were there about five items for you to enjoy?

I’ve noticed that five seems to be the right number. Just enough to satisfy hungry guests without making them too full for the turkey noodle casserole.

Coincidentally, five seems to be the right number for community banks when it comes to using performance metrics. Five is just enough to be manageable, without causing the analysis paralysis that comes from consuming too much measurement data.

Like an appetizer spread, community banks metrics should cover a broad array of categories. Successful banks try to cover categories such as financial, process, operations, customer, business generation and innovation. Whatever your bank’s metrics are, it’s important that they be geared toward helping your bank reach its business objectives. You should be analyzing up-to-date data that helps your bank spot—and act upon—trends, opportunities and risks right away.

If my colleagues and I were to host a dinner party for community bankers, we know exactly which five appetizers we would offer. And if, over the crawfish étouffée, you asked for our advice regarding which five metrics you should consider right now, we’d serve up the following categories:

1. Margin. The net interest margin represents the single biggest contribution to your community bank’s revenue. At most community banks, the contribution is about 90 percent. By reviewing margin data on a daily basis, you can act immediately upon opportunities to maximize this number. For example, since mid-2008, community banks with a daily margin-management routine showed a steady improvement in their net interest margin compared to other financial institutions (14.9 percent versus 1 percent, according to 2013 Banker’s Dashboard Research). Their best-practices approach involves using Web-based technology to provide daily, aggregated insight on margin movement.

2. Cost of funds and loan pricing. One of the best earning opportunities for community banks right now is to improve the pricing of new loans. Most high-performing community banks identify opportunities by using technology to collect six or more months of forward-looking data regarding upcoming maturities. This allows them to analyze historical balance, yield and risk, and prevent future pricing inconsistencies. If your community bank reduces its cost of funds through mix and through pricing, then it immediately increases its net interest margin. All other things being equal, this increases your institution’s pre-tax income.

3. Branch performance. Although fewer transactions are happening in the branch, the branch is still the place where you earn your sales revenue. Therefore, it’s important to find ways to maximize and monetize every branch visit. You can do this by keeping your bank’s staff and branch systems performing well. There should definitely be some metrics that provide insight on customer experience, service, satisfaction, loyalty and employee sales proficiency. Providing branch managers with this type of qualitative data, as well as quantitative financial data, allows them to adjust branch activities and manage to your bank’s business objectives.

4. Efficiency. Most banks will never achieve an ideal efficiency ratio, so community banks are left focusing on removing time, costs and other resource drains from processes and procedures. Although it seems like you’ve done all that hard work, there are still additional opportunities. Adding technology is a first place to look. There are new, cost-effective options available all the time.

Additionally, an emerging idea is to look at staff efficiency. Community banks compare the cost of employee salaries and benefit packages to measures such as deposit dollars, loans and accounts. Then they see whether they are getting enough of a margin on the value employees deliver versus what they cost. Not enough value? Perhaps it’s time to rewrite employee expectations.

Another emerging idea is to put extra tasks in employees’ job descriptions to ensure that employees are never standing around doing nothing when the branch is slow. Think about tasks your bank would ordinarily outsource or pay another employee to do, including customer-engagement calls or emails, monitoring social media for mentions of your institution, cleaning out storage rooms or taking inventory of office supplies.

5. Business generation metrics. It’s critical that community banks understand where their new business is coming from. At the very least banks should be asking, “How did you hear about us?” It’s one of the best ways to know which awareness-building strategies are working.

More sophisticated community banks are trying to build in measurement all along the customer lifecycle. From the data collected, it is often possible to look for correlations that can guide your bank’s future marketing decisions. For example, can you determine whether people who came to your community bank because of a personal referral have a larger initial deposit? If so, you might create an incentive-based referral program that rewards your bank’s existing accountholders for bringing in new consumers.

High-performing community banks also track the reasons why they lose customers, understanding that it is more cost-effective and efficient to keep existing customers than to acquire new ones.

What’s right for you?

Like parties, every community bank is unique. Each has its own culture, strategic direction, mission and definition of success. You need to choose a handful of metrics properly aligned with your bank—and where it’s heading.

Additionally, it’s important to balance your ability to measure with your ability to act upon your findings. We have seen community banks expend all their resources gathering data on things they will not or cannot change.

So pick your metrics carefully. If five seems about right, then great. The important thing is to have a nice spread but not go overboard. After all, we want you to have the energy and appetite to take action.

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