How to Measure Lender Performance [Podcast]

Performance measurement has become a hot topic recently within the banking industry. In this podcast, we sit down with Rollie Tillman, VP of Delivery & Client Success here at PrecisionLender, as he discusses how performance measurement within PrecisionLender has increased value for banks. You’ll learn where to start when measuring performance, what types of metrics to use, and how to work through any struggles you may face along the way.

Podcast Transcript

Maria Abbe: Hi and welcome to the Purposeful Banker podcast. The podcast brought to you by PrecisionLender where we discuss the big topics on the minds of today’s best bankers. I’m your host Maria Abbe, content manager at PrecisionLender, and I’m joined today by Rollie Tillman. He’s our VP of Delivery and Client Success. Thank you all for joining us.

Today we’re talking about a topic that’s been a big priority for many of our clients and it’s also been in the news after the Wells Fargo cross selling scandal. We’re talking about performance measurement for bankers. Rollie, can you start by introducing yourself?

Rollie Tillman: Sure, I’m Rollie Tillman, VP of Delivery and Client Success at PrecisionLender. I help clients achieve their goals through the configuration and use of our solution. I spend a fair amount of my time working with clients on the integration of information created in our solution into their organization to help them understand and measure performance. Prior to joining PrecisionLender I spent about 27 years in banking, various positions including enterprise information management and incentive design and compensation.

Maria Abbe: Before we jump in we should probably clarify, we are definitely not a company that specializes in incentive plans. Rollie, can you explain how we’ve gotten involved in these kinds of discussions with our clients?

Rollie Tillman: Sure and you’ve touched on something very important. We are not a company that specializes in incentive plans, though we are a company that has given the topic a fair amount of thought. We recognize that many of our clients are trying to measure or even incentivize the outcomes of their relationship managers. The discussion we frequently have internally with our clients is the notion of first do no harm. What do I mean by that? First do no harm to customers, do no harm to employees and shareholders, and then of course we have a whole framework of laws and regulations we need to be mindful of. I think you get the idea. We believe that for every positive outcome that an incentive system might create, there are a multitude of unintended and undesired outcomes that have the potential to crop up.

With that being said, Maria you asked about how we have become involved in these types of conversations with our clients. I think the topic of performance management comes naturally based on how we fit into a client’s operating environment. On the one hand we’re a profitability management solution. We refer to this component as relationship awareness. With profitability calculated at the account level, our clients are able to aggregate and then slice and dice and stack the data for time series analysis. This provides a view of a lenders entire portfolio value, the characteristics of new production, the risk profile and profitability. It also allows for a view into a regions performance, a product type performance, and all the risk and yield characteristics that go along with each of those views. Ultimately we’re able to show our clients a view of their portfolio and balance sheet performance and trends.

The pricing component of the solution allows our clients management team to communicate to RMs specific profitability targets and product parameters that are aligned with the needs of the organization. Where the conversation becomes a natural fit is number one, we have a view of the current dynamics of the balance sheet in terms of customer and portfolio profitability through relationship awareness. Number two, we can calibrate the pricing component of the solution and guide RMs toward a pricing approach that meets the goals of managing volume, risk, and return in respect to new production.

In essence you’re able to analyze and calibrate profitability targets and then connect that to RM behaviors and outcomes in terms of pricing, customer, and portfolio management.

Maria Abbe: That’s really interesting, so why now? Why is this a hot topic all of a sudden?

Rollie Tillman: I think banks for years have had incentive plans for incentivizing RMs. Many of these plans come in the form of stack ranking the top producers in terms of volume or maybe fees collected. Others might measure the greatest growth of new customers. However, many of these approaches can have outcomes that are disconnected from what is meaningful and the aggregate for the client, which is bottom line returns, balance of portfolio concentrations, and appropriate risk adjusted returns. Often times incentive plans can result in a dynamic where it’s like trying to put your finger in the holes of a dam in order to seal off leaks where leaks are unintended consequences. For example, a volume based plan may result in longer terms or lower yield, that’s not good, or maybe it results in selling stuff to customers that they didn’t really need in the first place. We’ve seen some of that recently in the press. Both of these offend our principle litmus test first do no harm.

I think what has become hot is the ability to use smarter systems in the bank that can connect the behaviors at the front of the bank with the analytics and strategy development at the back of the bank. Once a bank has this thread running through it from end to end, a natural next step is to leverage the data captured in order to form almost a feedback loop of sorts. It’s upon this foundation that makes sense to build performance management and reporting capabilities I think.

Maria Abbe: Yes I can see that. It does seem a little tricky though, so what types of metrics do you see our clients using with their lending teams?

Rollie Tillman: Our clients are typically using a risk adjusted net income or return percentage target based on that income as an overlay to volume goals of the lending teams. We have a core belief that in pricing new accounts and managing relationships you first have to do right by the customer. We’ve already talked about that. We believe a good start in that direction is to provide the customer options in terms of loan structure that meet their borrowing need. Providing those options it can be done in such a manner as to improve the risk adjusted return for the bank stakeholders. These are both positive outcomes, a win win if you will for our customers and our stakeholders. If my overall commercial real estate book has a return of 12% and my goal as CFO of the organization is to increase that to 13% by year end then I might need to set a return target of 17% for all new RM production.

The CFO may further say and now that I have the ability to analyze the total risk adjusted return of my CRE book and communicate an ROE target to my RMs, I can begin to leverage the data from within PrecisionLender to track and report against my organization’s progress toward the strategic goals. In essence, PrecisionLender enables a clear line of sight from the customer interaction with the RM, that’s the place where the dollars are exchanged and value is created or diminished, and link that event up to team, region, portfolio, and even bank performance, and then be able to evaluate the impact of the outcomes generated by our RM teams on the strategic goals and forecasts of the bank.

Maria Abbe: I know that one of the things we do tend to caution against is making the incentives too complicated. If you could pick, let’s say, one or two best metrics to incentivize relationship managers with what would those be?

Rollie Tillman: We observe many of our clients approaching this with two lenses focused on success. First might be a specific new loan production goal. For example, we need each RM to originate X million dollars in order to meet our expected balance sheet growth goals. Secondly and directly related are goals for risk adjusted net income associated with our established loan production goal. An RM might be expected to yield a 17% risk adjusted return on a new production. Banks really need both and they should be inextricable from one another. This creates focus for the RM to achieve growth but growth that reflects the rate, risk, structure, duration, all the ingredients that determine the risk adjusted net income for the transaction that is acceptable to management.

Management likely has pressures to grow the bank, you know make more loans. However, they need to be happy with what they end up with and confident it will contribute to longer term success.

Maria Abbe: Interesting, so it sounds like you’ve had a lot of conversations across the table on this topic, but I’m sure along the way you’ve heard some of the common struggles. Do you mind sharing with us what those might be?

Rollie Tillman: Sure, from a data management perspective it’s understanding the capabilities of the organization in respect to bringing this information into a reporting and analytics environment that will enable the design and management or performance tracking type activities. In my experience, the work continues as much after implementation as it does with the design phase. There needs to be constant review and analysis that the behaviors and results of the RMs remain aligned with the company’s strategic direction and the needs of the organization. Remember, from my comments earlier when we started this conversation, this is where you need good controls and checkpoints to evaluate the first do no harm principles.

Are your customers better off for having done business with you? Are your stakeholders able to connect the behavior and outcomes to be in alignment with strategic direction of the company, and are the behaviors of lenders shifting in undesirable directions, self-serving incentive gaming or perhaps in conflict with regulations and laws? Those are the critical pieces that are important to an ongoing performance measurement system.

Maria Abbe: It sounds like it’s a big culture change as well.

Rollie Tillman: It can be a big culture change. I think really good lenders are likely to be appreciative of these approaches and will continue to be top performers. Also I think an organization might be able to reap benefit by improving performance of the next decile or two in terms of performance of their sales force. Generally speaking I think people find satisfaction in knowing that what they are doing has a direct link to success of the organization.

Maria Abbe: Are there any good resources that you’re aware of where we can learn more about this?

Rollie Tillman: There are a couple authors who’ve written quite a bit on the topic of balance scorecard approach because it compliments sales aspects with those of quality and operational considerations which are important in a service oriented company. I think Robert Kaplan and Paul Niven have written numerous books on this topic and certainly can be found on Amazon.

Maria Abbe: Wonderful, well thank you Rollie for sharing that and for all of your insight. I know it’ll be helpful for many of our bankers out there. That will do it for us today. Thank you all for listening. You can always find more information about today’s episode at precisionlender.com/podcast. If you like what you’ve been hearing make sure to subscribe to the feed in iTunes, SoundCloud, or Stitcher and we would love to get ratings and feedback on any of those platforms as well. Thanks for listening. Until next time this has been Maria Abbe and Rollie Tillman, and this is the Purposeful Banker podcast.