Do you have faith (or lack thereof) in the quality of the projection and sensitivity analyses you and your lenders have been doing?

Projections and sensitivity analyses that are done with the current, artificially low interest rate plugged in for an extended period of time are not “conservative.” Just think about making a mortgage decision with only the lowest possible variable rate factored in regarding affordability. NOT GOOD. We’ve seen this before in the 1980s, when interest rates climbed to 22% and more. We saw that again in the early 90s, and today, the conditions are set for an even more unstable interest rate environment. Interest rates affect everything . . . just like oil prices. There is a trickledown effect on borrowers, their customers and their suppliers. And while raising interest rates are good for consumer deposits/CDs, they can play havoc with even the best company’s ability to cover debt service and manage their business.

If you haven’t already, you should take steps to ensure that you have the training, procedures, and support to structure your loans and loan covenants properly to give appropriate “early warning signs.”

The last thing that any of us want to find ourselves in again is a bubble burst brought about by overly-optimistic projections.

Visit www.omega-performance.com for more information 

After years of optimizing financial models to extract relevant information from financial statements, anyone who uses financial statements is in for a big surprise. That’s because the look and feel of financial statements as we know them will change substantially when International Financial Reporting Standards (IFRS) come to Canada in January 2011. In addition, much of the underlying accounting will become more subjective and subject to more management discretion.

IFRS is a standardized set of accounting principles sweeping across the world. The globalized norms skyrocketed to prominence in 2005, when the European Union, Australia, and New Zealand adopted IFRS. When Canada adopts IFRS in 2011, these international standards will replace the nation’s current accounting rules, called Generally Accepted Accounting Principles (GAAP), for all publicly accountable enterprises. The United States is in the process of converting US GAAP to IFRS and is expected to adopt it several years after Canada, although the exact date has not yet been decided. Private companies will have a choice between reporting under IFRS and the new Accounting Standards for Private Enterprises (ASPE), commonly known as PE GAAP.

The proposed new format for financial statements represents the boldest accounting change financial professionals have witnessed in decades. Throughout all the accounting scandals of the last few years, the general structure of financial statements remained the same. An income statement calculates profit (or loss), and a balance sheet shows an organization’s assets, liabilities, and equity and splits them up into short-term and long-term sub-categories. 

Today, when bankers, risk managers, and credit analysts look at a balance sheet, they can quickly see that total assets equal liabilities plus equity. Many financial professionals use the balancing feature on the balance sheet as a checkpoint to ensure that the data they receive is accurate. Senior professionals check the work of junior staff. When bankers receive balance sheets from clients that are out of balance, the bankers send them back.

For everyone who derives comfort from the fact that balance sheets “balance,” that reassurance is about to disappear.

In a few years, instead of being split into the traditional categories of assets, liabilities, and equity, the new balance sheet will be structured in five categories – operating, financing, investing, taxes, and discontinued operations. Assets and liabilities will be scattered in each section, while equity will remain intact. Companies won’t be required to show a total for assets or liabilities on the new balance sheet as long as these totals are included somewhere in the financial statement notes. The same holds true for subtotals related to short-term or long-term assets and liabilities. Of course, the balance sheet still balances – but it isn’t as obvious.

In addition, the equity portion of the balance sheet will include non-controlling interest, which is currently located between the liability and equity sections of the statement. While relocating an item on the balance sheet may not seem like a major development, keep in mind that equity is the denominator in many common ratios employed by financial statement users, such as debt-equity ratios and return-on-equity (ROE) statistics. When the denominator of a fraction is increased, the impact is to reduce the overall result. Most companies will not take kindly to seeing their ROE decrease as result of new accounting policies. Similarly, bankers will not be happy to see a debt-equity ratio decrease simply because of accounting measures. In fact, many of the ratios used in debt covenants will need to be recalculated in order to enforce the same bank covenants used today.

Both the income statement and cash flow statement will be split into operating, financing, and investing categories and will be much more detailed than they are now. For some people, this will be a positive change since it means that all financial statements will have the same look and feel. For others, however, this change means the income statement will become more complicated.

A welcome change with IFRS is the new cash flow statement, which will show clearly and concisely the sources and uses of cash in the organization. Current cash flow statements are supposed to accomplish this, but non-accountants usually find them more confusing than helpful, because they don’t show cash flows directly. Instead, readers calculate cash flow by making a number of adjustments to net income. Without taking a few accounting courses, it’s very difficult to look at a cash flow statement and see how much cash is coming in from customers or going out to suppliers. The new format will solve this problem and should be much easier for financial professionals to understand.

There are also a substantial number of new financial notes under IFRS – in some cases, over 300 pages of notes. Today’s typical set of notes for a similar Canadian public company might be only 40 to 50 pages long. The new disclosures are required because IFRS makes many more accounting choices available to management, and it is important for users of financial statements to read through these notes to understand how the numbers are being calculated. This may not be welcome news to the majority of bankers, who don’t enjoy reading through today’s shorter notes.

If all of this weren’t confusing enough, IFRS won’t even be used by all organizations. In 2011, IFRS will become mandatory for publicly accountable companies in Canada. Private companies and not-for-profit organizations may continue to follow existing Canadian accounting standards, but they have the option of converting to IFRS. This means that two financial statement formats will be floating around, and users of financial statements must be just as comfortable with one accounting platform as they are with the other. Luckily, the Canadian marketplace will have a few years to adjust to the changes before the new financial statement format goes into effect.

The new format of the financial statements makes sense, giving a common look and feel to the various financial statements so that it is easier to make the connections between them. That being said, people are creatures of habit: after years of struggling to decipher financials in one format, most people will no doubt find it challenging to switch over to the new format. In fact, it almost means learning finance all over again.

Karine Benzacar (karine@knowledgeplus.ca) is Managing Director of Knowledge Plus Corp., which provides training and consulting services on IFRS and finance (www.knowledgeplus.org). Omega Performance is pleased to offer IFRS and PE GAAP courses developed specifically for bankers and other users of financial statements. 

Two trends I see in the financial services industry today include, on the retail side, a shift in servicing to online and other non-branch options, and on the commercial front, a focus on credit quality and the impact of each relationship on overall portfolio performance. Put these two observations together and we are having fewer quality encounters with our customers, and when we do, they are often not broad enough. The solution is to construct better planned conversations.

To make your planning more effective, first, be proactive. In a branch setting, hoping for an extra few minutes at the end of a product purchase to go a little further or push the bank’s “tag on” product of the day is both haphazard and disrespectful of the customer’s time. The same logic applies in an outside call situation. Instead, contact your customers proactively and set up a time to discuss their overall situation.

Second, bring the customer along. Let him or her know the purpose of your questions. A positioning statement like, “In order to get a better idea of how we can serve you, I would like to get your thoughts about your current financial situation and anticipated needs,” helps the other person know where you are going. The more your customers know, the more they will participate.

Third, be topical. Random questions create confusion and distrust. As you plan your conversations, think about a logical progression of questions. For example, in retail banking, a relationship review conversation could cover these areas:

• Current service satisfaction level
• Current money management, including day to day banking, savings, investments, and borrowing
• Anticipated life and lifestyle events, such as a need for a new car or the postponement of retirement
• Resulting financial needs, such as a car loan or restructuring of a 401k plan
• Role that the bank can play in these decisions

Similarly, in the commercial arena, you could cover these areas:

• Current success level of the business
• Challenges and opportunities over the next 6-18 months (both for the company and the industry)
• Resulting plans to meet these challenges and opportunities
• Financial implications of the company plans
• The role that the bank can play in implementing these specific plans

Many financial organizations tout the role of “trusted financial advisors.” To truly earn that title, we need to establish that trust through better planned, truly two-way conversations, and offer real advice versus merely selling what’s available today.

To learn more visit: http://www.omega-performance.com

Many organizations find themselves in a training dilemma. They realize the significant benefits of training but need to minimize the costs—both out of pocket and opportunity—associated with training. There is a need for risk management skills, sales skills, product knowledge, and services skills. So how can organizations provide the benefits of synchronous, skills-based learning without the expense of travel, lodging, and all of the costs that classroom training entails?

One successful solution that is gaining popularity is virtual instructor lead training, or VILT. In VILT, participants join these virtual classrooms right from their desktops or laptops through web- and audio-conferencing services. The “virtual” facilitator then guides participants through the session, pausing for breaks as appropriate and even breaking the larger group into smaller, separate work groups before bringing everyone back together again. If done correctly, these sessions can be as interactive and engaging as classroom sessions, enabling participants to talk, write, discuss and exchange ideas, and practice new skills.

Employing VILT in your own organization can ensure that your employees:

• Receive training in a highly interactive way that translates back on the job
• Learn from their co-workers and peers
• Keep their skills honed while keeping costs down
• Improve both knowledge and skills because of a diversity of online functions

Participating in VILT is as close to attending a class as possible, without having to be there in person.

Learn more at: www.omega-performance.com

When effective coaching is applied to the process of analysis and decision making in a credit request, there is much to be gained by everyone involved. Consistent, planned coaching increases the skill level of new lenders much faster than experience alone. Consistent coaching fosters consistent processes—which, in turn, are essential for quality. This is obviously important to the success of your department as well as your organization.

Successful credit coaches follow six steps to success:

1. Guide the initial orientation. The framework and direction that you give in the beginning of a lender’s career creates a point of view and business orientation that will influence performance from then on.
2. Provide lenders with the knowledge and skills needed to be successful. Providing the right training at the right time motivates performance. However, when people are sent to training for skills they clearly possess, they feel unmotivated and discounted. This is where an assessment can be very helpful to identify training gaps and needs.
3. Understand that knowledge and skills gained in training don’t always transfer to the job. For training to transfer, it must have value in the workplace and contribute directly to “real work.” That’s why it is so important for managers to reinforce new knowledge and skills by helping the lender see how these apply to their work.
4. Hold lenders accountable for applying knowledge and skills appropriately for an assigned responsibility. Do this through a series of coaching sessions for 6-9 months in order to confirm the work a lender is doing matches the quality standards expected. At the end of this time, you should have a mature lender whom you can trust to consistently make sound credit decisions.
5. Involve the lender in the orientation of new lenders when proficiency, judgment, and maturity signal readiness.
6. Provide ongoing coaching to reinforce and recognize skills and contributions.

The first four steps of this sequence lay the foundation for a successful career. The final two steps—5 and 6—recognize and motivate competent lenders and encourage them to continue their professional development. Any step that’s skipped creates a potentially recurring problem that you will have to manage in the future.

Learn More at: http://www.omega-performance.com/solutions/leadership-coaching.asp

Lately, we’ve been hearing that employee product knowledge levels—or lack thereof—is a real concern with many banks. When asked to assess the current level of their employees’ product knowledge in the saving/investing money and borrowing money categories, executives tell us the average score is below 50 percent.

What’s the impact of scores this low? It means:

1. Bankers are not able to answer customers’ questions
2. Bankers are giving incorrect answers to customers’ questions
3. Bankers do not ask questions and are missing opportunities

Bottom line—this all contributes to a negative customer experience, adds little value for the customer, and fails to deepen the customer relationship.

The best bankers are able to assess accurately each customer’s financial situation and provide the appropriate products to match the needs. This is especially true today as organizations are trying to capture more share of wallet.

So how can organizations prepare bankers to be knowledge experts on products and services? Organizations should employ product mastery techniques (and there are several highly effective ones) to build skills and equip bankers so they have second-nature recall of products and services. Bankers who are able to speak with ease and confidence about the different products and services in a very effective manner can provide a memorable customer experience for their customers—and uncover additional sales opportunities.

Learn More at: www.omega-performance.com

There may be a silver lining to the current recession—some forecasters say that we are poised for an increase in consumer lending over the next few quarters, and that the increase will come from customers who are better qualified than in the past. A new rationality is coming from both sides of the desk—consumers have learned as many valuable lessons about credit as their lenders have.

While many lenders have tightened their credit qualifications, and some have taken a breather from making consumer loans at all, consumers have also been reassessing their situations and thinking long and hard about whether taking on more credit is a good idea.

As a result, customers are nearly as cautious as lenders and they’ll be shopping for a lender they can trust. Will your organization be poised to earn that trust and take its share of these customers? That may depend on a combination of your marketing message and the skills of your front-line employees—the tellers who recognize needs and refer customers and the personal bankers who help customers find the right product to fit their needs.

What Omega sees now is the beginning of an increase in consumer confidence and revived interest in consumer loan originations. This revival is being led by lenders that have taken a fresh, consultative approach to their customers. Our clients tell us that the key is to build trust with potential borrowers who have become leery of banks. Instead of viewing every opportunity as a chance to make a commission, lenders who want to earn the customer’s trust need to use a fresh approach that treats each potential borrower as a partner in the loan.

This provides an opportunity to consult on the best approach to meeting borrowers’ needs, and includes keeping borrowers’ overall financial pictures, including future needs, in mind. The objective is to help customers meet both short-term and long-term goals through judicious plans that include borrowing, managing debt, making the most of cash flow, and investing for the future.

Learn More at: http://www.omega-performance.com/solutions/credit-consumer.asp

It’s Monday morning . . . how many of you will be successful this week? Do you have a written plan from a previous coaching session on what you need to do and by when to meet your goals this week? In other words, do you have an Action Plan that will guide your focus on efforts in certain initiatives?

Sometimes we take action planning lightly. However, we cannot emphasize enough how important action planning is as a key component to an individual’s development. The reason action plans are so useful is because they outline what is needed to achieve business objectives. Results occur when the link between the organization’s vision and the concrete action plan is made.

With that said, the action planning process should be an integral part of coaching sessions and not an add-on. Without action plans, coaching sessions become nice chats. Keep in mind that we are not referring to performance improvement plans. You should use coaching with actions plans as an ongoing best practice with all of your employees. Remember that setting goals with employees is not the main achievement—it’s deciding how to achieve your goal by developing an action plan for every employee and then executing it.

In order to make action plans effective and integral to the process, outline activities and skills. This allows employees to focus on objectives and move forward. Then allow employees to self-discover in order to foster a collaborative session. Following these steps will take a plan from the nebulous to the concrete. It will also make employees accountable, which in turn improves performance.

Once coaching with effective action planning regularly occurs at every level, you can expect to see the following results:

• Focus on the right objectives
• Progress tracked
• Increase in the probability of employee success

And, most importantly, satisfied and motivated employees.

Visit http://www.omega-performance.com/solutions/leadership.asp to learn more!

Microlending came to the forefront of the world stage in 2006, when Muhammad Yunus shared the Nobel Peace Prize with the microlending organization he founded in Bangladesh, Grameen Bank. That company alone has lent money to more than 7.6 million people around the world.

Microlending may start small, but it is big business now: worldwide, it is among the fastest-growing lending segments. In the U.S. microlending has been alive and well since 1986, when then-governor Bill Clinton invited Mr. Yunus to introduce Arkansas banks to the concept; the result was the Southern Good Faith Fund, a division of Southern Bancorp designed to assist low-income residents in starting a business, going to college, or buying a house.

Not only is microlending a growing business, it’s a profitable one. For most microlenders, nonperforming loans amount to less than 1 percent of total loans. And according to research by Deutsche Bank, the global demand for microfinance loans is about $250 billion, or about 10 times the amount that has already been lent.

The microlenders that create the greatest economic success among their customers are generally those that create borrower/lender communities, in which borrowers meet weekly to discuss their businesses and make a small payment on their loans. In some communities, if one member cannot make a payment, the rest of the group must make up the difference—creating peer pressure to stay current. In the U.S., the Small Business Administration’s microloan program provides pre-loan training for budding new business ventures and offers the services of mentors—retired businesspeople who can help small enterprises succeed. Non-financial businesses are getting into the microlending business as well—eBay has a microlending site, MicroPlace.org, and Whole Foods Market’s Whole Planet Foundation collected more than $1 million in donations from shoppers to use in the microlending programs it supports. Kiva.org provides a method of connecting individual lenders and borrowers for loans as small as $25.

Microlending is yet another way that your organization can meet the needs of the huge unbanked and underbanked population. Are you microlending yet?

Learn more at: http://www.omega-performance.com/solutions/credit.asp

For most banks and credit unions, the cross-sell ratio still hovers at 2.4%. Combined with the fact that organizations have their best chance to cross-sell additional products and services within the first 90 days of acquiring a new customer, you can see how important onboarding is.

Onboarding is a way to reach out to new customers and members during the initial 90 days of their association with an organization. To be maximally effective in the onboarding process and to increase the cross-sell ratio, organizations must first implement onboarding as one of their key activities across ALL lines of business, Second, they must ensure that employees have the skills to make effective follow-up calls after the first meeting.

Employees must know how to follow up with customers or members. They must be able to transition from a service interaction by identifying additional needs for cross-sell opportunities. Then, they must demonstrate that they heard their customers or members by stating a purpose for the follow up and by focusing on those needs previously expressed. Based on that dialogue, customers or members can understand the benefits of a follow up meeting.

A well executed expansion and retention plan includes onboarding and cross-selling. The better the employee becomes with onboarding and cross-selling to customers and members, the more memorable the experience will be for the customers and the firmer the organization’s grasp will be on customer loyalty.

Learn More by Visiting: http://www.omega-performance.com/solutions/sales-service.asp