For many mid-tier lenders, the key to growth is still a vibrant, profitable network of branch offices. Recruiting good branch managers and their origination teams is a very competitive business and a number of companies have become very good at it, but keeping even the best branches operating profitably under a new corporate banner requires careful planning, motivation and monitoring. Fortunately, today’s modern mortgage banking accounting software can help reduce the burden, especially when combined with modern analytics and forecasting software.
The right tools can make all the difference, but only if you know what to do with them. In our discussions with mortgage bankers over the past year, we have found three primary reasons they are tapping into analytical software in their finance departments. First, they are working to scale their branch networks. Second, they are working down through each branch’s expenses — both loan related and otherwise — to better understand their impacts on the company’s bottom line. Finally, they are using analytics to project future results, both for existing branches and for any acquisition targets.
Ultimately, the right financial toolset will allow the mortgage lender’s chief financial officer to analyze a number of key metrics in order to track performance of the individual loan officer, the branch, the region and the entire company. We have found that the CFOs we are working with are using these tools in three specific areas: analyzing branch performance, projections for planning across a branch network and pro forma analysis prior to adding a new branch to the network. In this discussion, we will not speak to any specific tools that can be used for these purposes, but rather focus on what the tools should allow the company’s financial management to do.
What is fairly straightforward, and what every CFO will attempt to do, is to establish a break-even point for each branch and then monitor that branch with accounting software to know exactly when that point is reached during the course of the month. Nothing is more important than knowing whether your branches are actually contributing to your bottom line. The CFO should be able to look at the dashboard and know each branch’s actual break-even volume, compared side by side.
Branches will differ. Location, communities served, and personnel on staff will all impact a branch’s profitability. What the CFO needs to know is every branch’s volume target and earning level. Modern dashboards put this information within easy reach. This gives financial management the power to know how each branch is performing, at a high level, with only a glance.
For instance, if the CFO can see that one branch in the network has only achieved breakeven 5 times in the last 15 months and that when they did exceed expenses the highest return was only 12 basis points, the company knows where to spend resources to bring the network up to a higher level of production. A branch like the one in this example isn’t really contributing anything to the company and remediation is required, if the company plans to maintain it.
When a branch is not performing well, an analytical package can be employed to take accounting information from the general ledger and compare performance across branches. This will tell management why the branch is not performing. A good accounting package will allow the CFO to break down every expense associated with the branch and compare one branch’s performance to others in the network. This analysis must consider all of the branch’s expenses and not just those associated with loan production.
If the branch manager is given access to the software, decision making can be decentralized and individual managers will have the tools required to create more profitable operations. Even if the tools are centralized at the home office and used only by the CFO and the local accounting staff, good communication with the branch manager will make it possible to fix problems.
If each branch is required to submit a branch projection into the company’s overall financial plan, the analytical software used by financial management can monitor branch performance and compare it back to those projections, communicating the need for adjustments to the branch manager in order to keep the branch on track. In fact, we have found that this type of real time connection between the branch and the home office is a best practice.
This is important because too often the branch manager is working in a vacuum, without access to expense information from other branches that could impact the local operation. Using software to give branch managers a window into the corporate plan gives them benchmarking information they can use to better manage their own branch in terms of revenue, net income, direct loan cost and more.
At the same time, it gives the CFO’s office — or even regional management — the power to drill down into the plan to view specific expense estimates in order to ensure that each branch is making sound financial decisions.
Once the decision has been made to focus resources on the retail channel through a branch network, understanding how well each network in the branch is performing becomes critically important. Unfortunately, unless the lender is able to break out every expense associated with each branch — both related to loan production and general branch expenses, it can be difficult to know why a branch isn’t performing as well as its peers in the network.
Fixing the problems a branch has experienced in the past is important, but so is planning for future performance. Financial analytics are very useful in this regard as plans and projections can be established and then compared to actual performance. Past performance can be used to establish these initial projections, but branch management should have the power to set goals that stretch the organization.
Learning to depend upon software analytics tools to analyze branch performance and the individual branch’s impact on overall profitability is a discipline that must be learned by modern financial managers. This is not because they don’t want access to this information, but rather because the tools that give them access to it have only been available for the last few years. Before that, detailed financial analysis was only available to companies large enough to operate very large branch networks. Often, these companies were broken down into regions and did not do a good job of rolling detailed performance metrics up to corporate level for analysis.
Today, lenders have access to powerful analytical software. What’s more, we now have benchmarking data available that will allow any company to gauge its own performance against its peers. These tools have made it much easier to make decisions about new branch acquisition, and that’s the third reason we find financial managers embracing these tools.
Companies intent on building out their branch networks by acquisition have traditionally relied on projections built on Excel spreadsheets to analyze a potential acquisition and make the decision about whether to open it. There are challenges to this approach.
First, when you do it in Excel it will be at a different level than the way your actuals are reported. Moving forward, when you want to evaluate your performance and see if you made a good decision, it’s hard to get the actuals into the Excel projections in a way that makes it easy to see your ROI, payback period – to see how well you did. Secondly, it’s hard to roll that projection up into your corporate plan. It’s a different workbook, at a different level than your corporate plan.
The new branch forecasts should be structured exactly as those for your existing branches. That allows managers to plug in the new branch as if it was an existing branch, make some assumptions and create a new scenario or two to determine how the acquisition might perform as part of the network. A best practice is to take the projections as the prospective new branch manager presented it, but also create a scenario based on the same assumptions and expenses from comparable existing branches. In this latter scenario, it’s common to give the branch manager’s forecasted volume estimate a haircut of 30-50%. Then see how the new acquisition performs.
Today’s analytical software, when paired with the right mortgage accounting software, makes this type of analysis painless. It will quickly show whether a new branch acquisition will be dilutive or accretive to earnings. It also makes management of existing branches easier and delivers information required for decision making faster. If your current accounting software doesn’t allow you to leverage analytics in this way, find software that does.
About the author:
Carl Wooloff is Business Development Manager at Bestborn Business Solutions, the company behind Loan Vision, the mortgage industry’s fastest growing provider of accounting and financial management solutions. Carl can be reached at Carl.wooloff@bestborn.com.
This article can also be read in the January edition of the Scotsman Guide.
