Articles & E-Books


Profit Improvement: It's Not Rocket Science

May 01, 2016

Wipfli sends your financial institution the Financial and Operational Performance Analysis quarterly to help you understand the significant factors impacting profitability and what differentiates your financial institution’s performance from others in your state. The data is captured from your quarterly call report. If you do not receive this quarterly analysis and are interested in receiving it, please forward your email address to myself or your Wipfli contact and we will make sure we add you to the list.

The Financial and Operational Performance Analyses allow me to review the state averages to note significant trends, and I want to make you aware of a few of those trends from the December 31, 2015, reports and offer ideas for you to review so your financial institution can increase or at least maintain your current profitability.

The reliance on larger dollar time deposits seems to be trending downward from 2014 by 2% to 3%. During the same time, borrowed money has stayed level; the funds from the large time deposits went primarily into savings accounts, which pay a much lower interest rate, which in turn increases your overall net interest income. However, during this same time period, yield on loans has decreased by an average of 9 basis points.

While loan concentrations have remained very similar to the prior year, average loans as a percentage of total assets increased by 2%. The loans you are putting on your books are being funded from your investment portfolios. The good news is that even with this increase in loans, nonperforming loans continue to decrease.

There were double digit increases in asset growth between 2012 and 2015, whereas the number of full-time equivalent employees only grew by approximately 50% of the asset growth. This is great news if we are working smarter and not just working longer hours. But as we all know, salary and employee-related expenses continue to be the largest expense on your financial institution’s income statement.

People tend to be creatures of habit and find it easier to continue to do things the same way regardless of the inefficiencies that may be in a process or the amount of stress they feel; many times long-term employees don’t even realize there is a problem. We often hear that employees do something because they’ve always done it that way. Good managers are typically able to notice where issues may be but are not always able to detect what the inefficiencies are. One way to confirm whether there may be a valid concern is to benchmark your financial institution’s numbers. Examples of benchmarking are: the number of employees performing a process, number of loans or deposits opened or handled, or volumes in your operational areas. While benchmarks are merely comparisons and numbers alone do not always tell the entire story, they at least give management an idea of whether a department may be appropriately staffed. Benchmarking can assist in the early stages of the process to determine where opportunities may lie.

Once you determine the areas of your financial institution that need improvement, you can dive into the processes to better understand where inefficiencies are and where opportunities may be. We use a Discovery Event approach that involves using a team of your employees so they can learn how to develop a culture of continuous improvement. In today’s financial world, between compliance/regulations and our environment, change is continuous. So the sooner you get all of your employees thinking about how they can improve the processes they are involved with the better!

Another area of opportunity I noticed was in service charge income on deposit accounts; from 2012 to 2015, it has declined by 8%. A large portion of this income is reflected in overdraft charges. I recently did a study for a client who had concerns in this area. The institution forwarded one month of reports to me, and after an analysis of its information, depending on the branch, it was determined the institution was waiving between 15% and 53% of its overdraft charges. We made numerous recommendations to increase these collections beginning with centralizing the overdraft approval process. Studies show when any process is centralized, it becomes more efficient and, in this case, it allows a nonbiased employee to make the decision of whether to charge or waive, and pay or return. We also recommended management develop an overdraft policy to clearly lay out its expectations about whether an account should be charged or waived for an overdraft based on the number of times the account had been overdrawn and the number of debits being presented. If this client could change its procedures to collect even 80% of the waived charges in the month of data we reviewed, it would be able to increase its annual overdraft income by 54%!

The last area I found that offered profit opportunities was in noninterest expense, which increased by 20% from 2012 to 2015. Some larger increases occurred in the following categories: legal fees increased by 32%, advertising by 25%, and telecommunications increased by 24%. A thorough review of the individual expenses or invoices may be merited to better understand the related expenses. While there is a chance the expenses are appropriate, a third-party review of the activity in expense accounts allows management to consider alternatives. As noted previously, we can get stuck in our ways. Sometimes you can use the same vendor or justify a practice because you have always done it that way. A nonbiased review allows you to look at your expenses in a different light.

As the title of this article indicates, it does not require a rocket scientist to increase your financial institution’s earnings, but it does take time, the proper tools, and the knowledge of where to look. My primary job at Wipfli is to assist financial institutions in finding ways to increase their net income. I would love to talk with you to determine how we can partner to make your financial institution more efficient and profitable.

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