What an interesting time to be in the mortgage lending business. 2015 was a banner year for the mortgage industry with stories of lenders beating their own projections rampant industry-wide. And given today’s global economic pressure, volatile financial markets and the current low inflation rate, even as the Fed contemplates further rate hikes it’s likely interest rates will stay comfortably low for a while.
But rising compliance costs and increased competition coupled with concerns of regulatory scrutiny (and potential cash-depleting fines) has the industry in a state of flux. Some independent mortgage bankers are considering monetizing and selling their companies while others plan to capitalize on this volatility by expanding their businesses.
If growing your firm is your plan, it’s likely you are considering purchasing new branches as a way of quickly expanding your business.
Branch acquisition is not for every firm and certainly not for the faint of heart
But growing a mortgage lending business through branch acquisition is not for every firm and certainly not for the faint of heart – the right acquisition can bring more loan originations and increased profitability, the wrong one can quickly and irreparably drain cash reserves.
Evaluating an Acquisition is No Easy Task
If your firm is like most, chances are that evaluating new branches is a time-consuming,laborious and cumbersome process done by key members of the management team viaExcel templates. Typically, the pro forma is high level and – since you’re relying on past performance indicators or estimates provided by current staff (most times with little detail or background) – numbers often don’t line up with metrics and targets for your existing branches, making the metrics difficult, if not impossible, to overlay with your own operating metrics.
Furthermore, once the pro forma is in place you’re evaluating the new branch in isolation.There is no easy way to take that branch information, roll it into the enterprise and measure the ripple effect across your organization to assess whether the acquisition will benefit (or drain) financial and human resources. And, more often than not, you’re evaluating only one scenario – no best or worst case, no what ifs, and no ability to compare with and without scenarios.
Post-acquisition analysis can be problematic as well. It’s often difficult to compare actuals against the projections made during the initial evaluation, resulting in little or no insight intoROI or whether the branch is meeting payback targets 60, 90 or 120 days after acquisition.With no visibility into branch performance, you risk losing branch managers and staff you paid dearly to recruit, or may continue to fund branches that aren’t performing.
For firms adding multiple branches to grow their business, costs – and capital outlay – can add up very quickly, pressuring liquidity requirements and threatening profitability.
To Acquire or Not?
But in order to know whether acquiring a branch is the best use of your cash, management must have the ability to:
- Look at and run multiple scenarios based on information provided by branch staff, and evaluate those scenarios from multiple perspectives, overlaying your own operating assumptions to form best and worst cases. Worst case, is this something you would regret doing? Best case, is this of marginal value or a home run?
- Evaluate the corporate enterprise with and without the branch. Does the branch meet acquisition targets (payback period and ROI, for instance) and performance targets (net value add) set for corporate branches? Does the acquisition benefit the company as a whole or will it provide only incremental improvement?
- Review and evaluate corporate results with and without the branch…after acquisition. As soon as a branch becomes part of the company, actuals are likely being recorded to the general ledger, but given the constraints of the Excel template methodology, the process of taking those actuals, extracting them, and converting them back into the pro forma format is extremely time-consuming, and many firms simply don’t do it.
Mortgage banking firms need to be able to identify financial ripple effects across the entire enterprise
Finding Answers to the Questions that Matter Most
To effectively evaluate the impact of a new branch on the corporate enterprise, mortgage banking firms need to be able to identify the financial ripple effects across the entire enterprise, measure the cash impact and consider whether a commitment to the capital outlay is warranted…both before and after acquisition.
If your firm is contemplating expansion, it’s critical that your methodologies and applications incorporate these key capabilities to facilitate comprehensive evaluation and timely decision-making:
- Pre-acquisition multi-scenario planning and forecasting, with and without incorporation of the target branch
Target branch projections run with your own margin and operating expense metrics to assess whether corporate branch targets and goals will be met
- Side by side comparisons of with and without scenarios, and the ability to tweak assumptions and see updates flow through the organization
- Best and worst case scenarios run from multiple perspectives
- Pro forma evaluation data and expectations saved for quick and easy post-acquisition comparison to actuals
- Post-acquisition evaluation of actuals vs. projections, with and without the recently-acquired branch
- Evaluation of actual numbers in real time
- The ability to easily and quickly evaluate branch manager performance vs.projections
Branch acquisition is a smart growth strategy for many firms, especially in today’s marketplace of continued low interest rates. With the right tools, branch evaluation, acquisition, on boarding and assessment can be accomplished smoothly and with full visibility, allowing you to act on changing market dynamics quickly, both before acquisition and after.
Alight Mortgage Solutions provides answers to the questions that matter most, providing real-time scenario analysis under any market conditions. Continuously connect strategy, operations, and finance. And rely on a solution that was built for the mortgage banking industry from the ground up.
Original Article Page 12 – CMBA