Business participants in any community might have an interest in the following opinion blog. Having spent 25 of my 46 year business career, post university & military, in the financial industry, I am more than qualified to have an opinion about what it takes to manage a profitable commercial bank. Most of my executive bank management experience came after failure as I was identifying the reasons for failure and preparing for the sale of the viable assets. Prior bank management experience was garnered in successful financial institutions observing the reasons for that success.
As stated above, my comments refer to commercial banks as opposed to the myriad of other “banks” that came into existence with the wholesale expansion of the industry in the 70s and 80s. Bank loans comprise the largest and most profitable percentage of a commercial bank’s earning assets. Federal and state regulators are empowered to make certain that a bank’s lending activities are legal, prudent and are being made within the bank’s stated loan policy. If bank lending management and regulators determine that the loan portfolio is not performing as underwritten, penalties are incurred that may affect earnings significantly until the problems are corrected.
The delicacy of bank management has a certain “ring” to it and that is intended. The higher the loan volume, the greater the earnings. But, if the entire lending process does not work as intended, those earnings are affected negatively and are either mitigated or even reversed. If the marketplace for lending is not defined accurately or the competition for that loan volume does not allow profitable pricing, loan volumes required to meet budgets cannot be attained. With an apparently unattainable loan volume requirement facing lending management, comes heightened pressure to make loans and meet loan volume budgets. Substandard loans are made unwittingly under that pressure. Alas, the market is neither fertile nor large enough to satisfy all of the lenders competing for loan volume in that market.
Defining a bank’s identity and its place in the market are meaningful. Determining its talent level and its ability to compete for business are essential. Knowing how to generate significant net profit and remain stable and viable for decades are mandatory. The process can be overpowering, yet the balance is delicate.