by Edward A. Krei, Managing Director, The Baker Group

Assessing a financial institution’s long-term strategic plan goes far beyond developing investment and financial strategies. When we are engaged to facilitate the strategic planning session on behalf of our clients, we ask them to provide about 15 items to help prepare for the meeting. One of these items is the Board of Directors package or book of materials distributed to directors for their most recent meeting. (If this is a continuing engagement we will also ask for the board package from the same month three years earlier just to see what has changed.)

On a recent engagement, the client provided more than 20 pages of financial information—lots and lots of numbers detailing interest income, interest expense, overhead expense (three pages alone), and more. These reports reflected monthly balance sheet and income statement data, year-to-date performance, and comparisons versus budget. Tons of numbers!!

When we examine a board meeting package, we have two basic objectives. The first is to see if we easily identify the most important issues facing that financial institution today—three to maybe five “impact areas.” The second is to see if it appears the board is spending sufficient time on these impact areas and does so in an efficient and effective way.

What are these critical “impact areas,” and how can your bank benefit from focusing on improving in these areas? Here are a few examples:

	If you have added branches in recent years, how does management establish, quantify, and communicate the unique performance objectives for each new branch? Every branch and market is different. Expectations vary. Do you have a process of grading each branch in terms of the physical facility, location, market potential, operating performance, and staff performance? Do you have an effective marketing plan for each significant customer segment and each key market in your trade area? Do you have sufficient training addressing sales skills, product knowledge, and cross selling? Do your compensation plans support your growth and business objectives? Are any branches losing money or seriously underperforming? How do you report branch performance to your board?
	Is each of your major business units (e.g., insurance, investment center, trust, residential mortgage origination) profitable and performing up to expectation? If not, why not? And what is being done to bring performance to acceptable levels?
	If you’ve had turnover in lending staff or added lenders, have you refreshed or re-trained lenders on your loan policy guidelines, documentation standards, financial analysis requirements, and recent experience with credit and collateral exceptions? Do you perform trend analysis for the last eight quarters showing the trends of loans approved with policy exceptions or loans funded with known collateral exceptions? Have you re-doubled your efforts in loan review to look at loans of new lenders, new products, or new markets to determine whether you are taking higher levels of risk or if you have appropriately priced credit for each loan’s risk grade? What reports do you give to your board to assure them that you are looking at trends and data that give you early warnings about possible increases in credit risk?
	If you’ve added or changed a significant fee-income product or a service charge, such as the overdraft protection product that many institutions have initiated, instead of showing just the dollars of revenue, do you also report the trends of service charges as a percent of transaction deposits and the percent of service charges waived for each branch?
	Do you perform trend analysis and, when meaningful, present it in graphs instead of just giving the board a lot of numbers. Do you also use the trend analysis as a tool to help look forward and project financial performance in forecasts, budgets, or long-range plans?

Just because you did something one particular way 10 years ago doesn’t mean it’s the best way today. You must periodically challenge the way you measure and report your progress and your operating results. In short, as directors go through the materials at their next board meeting, encourage them to ask, “Why is this information important to my bank? Is the data presented in the most understandable, logical format that shows if the bank is getting better, holding its own, or deteriorating?”

I encourage you to schedule some time on a regular basis, to back away from the day-to-day transactional “stuff” to think long-term—and look at how you manage your organization from the eyes of an outsider.

It’s a great time to be a community banker. Well-managed financial institutions will undoubtedly find increasing opportunities in the ever-changing economic and competitive environment ahead.

Edward A. Krei is managing director of The Baker Group, which specializes in investment portfolio and asset/liability management and strategic planning for community-based financial institutions.

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