What seems to be on the minds of readers around the nation? M&A and retaining/training personnel are among the topics. Who’s saying what?
In a previous commentary, STRATMOR’s Jeff Babcock discussed the strategic benefits of two Independents merging into a single entity. Below is the second installment that describes the challenges of making such a merger work.
“From STRATMOR’s perspective, the likely merger parties are both successful mortgage banks with similar track records of solid financial performance, growing production volume, proven management teams and excellent counterparty reputations. There are at least dozens, if not more, of independent mortgage banks that would meet the above performance criteria to qualify as prospective merger candidates. Conversely, we do not believe that it would make sense for two weak companies to combine to solve their respective operating or management deficiencies. In such cases, bigger is not likely to be better.
“So why have mergers not been a factor in the mortgage industry M&A space? Perhaps one reason is that mortgage banking executives have simply not considered a merger as a viable strategic option. But the more compelling answer is an absolute requirement to structure the combined organization for the greater good, thereby eliminating ego-driven and self-serving considerations… e.g., no sacred cows. And the entrepreneurial nature of the typical mortgage company ownership makes this a monumental challenge.
“STRATMOR’s experience confirms that mortgage company CEO/owners are highly independent operators with a risk-taking mentality and strongly held personal viewpoints about the viability of their own business model. Their management styles have evolved from hands-on involvement in all aspects of the mortgage origination value chain… more trial and error than formal ‘business school’ education. The result is a level of self-confidence and pride of ownership which can make collaboration with peers more difficult and compromise even more elusive.
“The feasibility analysis of a merger begins with a deep detailed assessment of the cultural compatibility between the two potential merging organizations. We are not suggesting that the cultures must be the same, but they have to be driven off compatible corporate values and management styles. The obvious risk of incompatible cultures is Loan Officer defections and the departure of key fulfillment staff.
“For a merger to be truly successful, there can be only one leader, one capital markets function, one Loan Origination System and typically, only one company name. Merging companies should resist the temptation to maintain two brands, thereby mitigating the marketing efficiencies of a single more powerful player. Of course, one lender must be merged into the other to bring across the state licensing and Federal agency approvals. A holding company with two branded origination platforms and two back offices is a possible compromise, but the inefficiencies would dilute the economic benefits.
“Even though the go-forward organization will be a much more powerful and competitive player, the merger process means that there will be perceived winners and losers across both organizations. So, the challenges of reconciling such ego-related issues probably explain why actual mergers are a rare occurrence.
“For this commentary, let’s assume that the ownership of two lenders are motivated and committed to working through the above organizational issues because the resulting strategic opportunity is so compelling. What are the fundamental tasks which must be undertaken to negotiate such a merger?
“The first step is to prepare parallel company valuations to determine the Enterprise Value of each lender. To assure objectivity, this task should be delegated to an independent experienced analyst with deep mortgage banking industry knowledge and M&A valuation skills. This valuation exercise should include a comparative assessment of each lender’s basic business model including production organization, product mix trends, quality and loyalty of the field sales force, staff productivity metrics, management effectiveness, financial performance, financial strength and industry reputation. The relative production franchise premium — the economic value over and above Balance Sheet Net Worth — will be key to determining the pro-rata ownership share of the merged mortgage bank. As a by-product, the valuation assessment will provide valuable insights on the functional integration discussed in the next paragraph.
“The second step is the most subjective and potentially most contentious: crafting the new organization chart with the selected managers assigned to the key leadership positions. If the two CEOs have not already identified the ‘anointed leader,’ then that decision must be made before proceeding with selecting the go-forward management team. While this assessment is best undertaken by the two owner/CEOs, the retention of an independent third party capable of rendering objective recommendations, may be the most expeditious process to help the owners make informed decisions regarding the key functional heads. Elimination of redundant functions is critical step in achieving the scale economies through consolidation cost savings, but it can be the most painful process in that some good and loyal people will lose their jobs.
“One of the possible complicating factors in creating the new organization might be geography wherein certain key managers would be required to relocate to the Home Office of the surviving entity. Although some functions can be managed at remote locations from the Headquarters, there are certain executive positions which should be located at the Home Office. For example, the Senior Production Executive, Chief Information Officer, Operations Manager and Head of Human Resources are examples of activities which require frequent interactions up and down the organization chart. Capital Markets and Compliance could be handled remotely at least for an interim period.
“The final step will largely determine the outcome of a contemplated merger: collaboration between both organizations to develop the transition/assimilation plan to integrate the two organizations into a single powerhouse competitor which has successfully captured the best of both companies. The attitude and spirit by which this integration is executed will establish the go-forward corporate culture.
“In many respects, a merger entails many of the same difficult personnel and organizational decisions as an acquisition. But for those owners who are not ready to sell their Company, a merger offers several attractive benefits and strategic positioning without giving up ownership.” Thank you, Jeff!
Easier & cheaper to retain versus bringing in someone new
In December Bob Masur wrote, “Why do so many people seem to think training is the best or (sometimes) the only solution to a performance problem? What about management’s responsibilities to set performance expectations, provide feedback, ensure needed tools and resources are available, and institute rewards and consequences?
“Training certainly has its place and value. It loses much value, however, if people don’t understand what’s expected of them, know how they’re performing against those expectations, have the tools and resources they need to do the job, and experience personal measures of success or failure. One man’s opinion that a number of factors influence performance even more than good training does.”
Jeff Babcock agreed on “management’s responsibilities to provide basic sales management: a missing commitment in most mortgage companies. (There is a) powerful strategic impact of effective sales management (‘effective’ being the operative word here) on raising Loan Officer productivity, but I’m sorry to report that only a few clients have made such a commitment.
“(If one has) a $1 billion mortgage company with an average loan balance of $230,000 and an average monthly sales productivity is 3.5 closed loans per originator, it will employ 104 loan originators. By increasing sales productivity by an average of one loan per month, production volume would increase by 29% to $1.29 billion. To accomplish the same volume increase by just adding originators, that lender would have to recruit 40 new Loan Officers (assuming the 35% average turnover) who close an average of 3.5 loans monthly during their first year at the company. While improving average sales productivity is not an easy initiative, recruiting and retaining 40 new Loan Officers is probably even harder.”
And Eric Levin, Head of Client Development and Co-Founder of Model Match, sent, “After nearly 20 years working with local, regional, and national leadership of mortgage companies of all shapes and sizes (small, mid, large, depository, non-depository, broker, etc.), I’ve learned from those on the street that our industry includes more companies that ‘wing it’ when it comes to their strategic growth than those who follow consistent, predictable, and evolving processes.
“We hear from companies all the time that say they are ready to invest in their growth, yet not only have no consistent messaging into who they are as an organization and how they create value for the loan officer and their referral partners, but don’t even have a clue how many empty desks they have across current cost centers. It takes work to dive into the numbers that relate to the success or failure of company and individual metrics but that work is way easier today than it was years ago with the development of technology solutions and available data. Our focus has been on supporting strategic growth with an emphasis on recruiting and retention (it’s part of the same formula/process) and although I have never personally written a loan, our team becomes experts by default as we get feedback from the street everyday relative to what is working and what isn’t operationally and otherwise.
“Jeff’s thoughts on sales management and LO productivity are spot on regarding the outcomes of increasing productivity but what is often missed is that this same ‘muscle’ directly relates to increased recruiting and RETENTION success. Our clients at Model Match, for the most part, have not only implemented sales management strategies to increase LO production but use similar strategies in their marketing, recruiting, on-boarding, acclimation, and retention processes as well…but they seem to be the outliers. The outcome(s) are not only increased LO volume but also DECREASED attrition.
“The companies that are the best at sales management processes are also typically the best at recruiting and retention in that they invest in the tools and time necessary to simply make it part of who they are. And to echo Bob Masur’s comments from the same newsletter, those processes have outcomes that include consequences. The difference is those consequences can exist as data points and metrics that make it easier to determine what needs to be improved upon…versus managing by emotion and feel.
“To tie together Jeff’s comments — like Crash said in Bull Durham, ‘You know what the difference between hitting .250 and .300 is? It’s 25 hits. Twenty-five hits in 500 at-bats is 50 points, OK? There’s six months in a season. That’s about 25 weeks. That means if you get just one extra flare a week, just one, a gork, a ground ball, a ground ball with eyes, you get a dying quail, just one more dying quail a week and you’re in Yankee Stadium.”
XINNIX’s Casey Cunningham wrote, “XINNIX just celebrated our 18th year anniversary and although our industry has changed and advanced in many ways, ‘old’ truths and less than ideal best practices remain with us. These ‘old’ truths are limiting lenders’ potential growth and profitability.
“Bob’s comments about management is 100% accurate. Leaders should set the vision and priorities for their organizations. With the majority of our industry’s sales managers also being tasked with personal production, it makes perfect sense that ‘training only,’ without continuous accountability, enablement, and rewards/consequences, becomes our default position. We believe the fusion of training, accountability and coaching, on a continuous basis, is the ideal solution managers must adopt to enhance sales performance and retention in our industry.
“The ‘hard skills’ essential to loan production excellence are quite different that the ‘soft skills’ essential to teaching, mentoring, coaching and equipping the multiple personality styles that make up our sales force. Unfortunately, our industry tasks the majority of our sales managers with personal production, training, recruiting, coaching and operations. Task saturation and lack of manager upskilling remains an ‘old truth’ our industry hasn’t adequately addressed. The lenders who create a true learning journey with measurable competencies will have recruits lined up. The professional development of your people has proven to be one of the greatest retention tools in the market!
“Jeff’s assessment is 100% accurate as well. We interact with hundreds of lenders every year, and we witness the undeniable evidence that recruiting and retention of sales talent is FAR more difficult, elusive and expensive, than elevating LO productivity by one unit per month. You are ‘preaching our religion,’ and the reason we exist. Increasing sales productivity by an average of one loan per month is a viable business objective, and we’ve helped countless companies and producers accomplish this very goal. When industry executives drive, ‘buy-in’ and prioritize the never-ending need for sales enablement, our ‘old school,’ expensive practice of recirculating mediocrity will be behind us. Imagine the future.”
A man was being tailgated by a stressed-out woman on a busy boulevard. Suddenly, the light turned yellow, just in front of him.
He did the right thing, stopping at the crosswalk, even though he could have beaten the red light by accelerating through the intersection.
The tailgating woman hit the roof, and the horn, screaming in frustration as she missed her chance to get through the intersection.
As she was still in mid-rant, she heard a tap on her window and looked up into the face of a very serious police officer. The officer ordered her to exit her car with her hands up. He took her to the police station where she was searched, fingerprinted, photographed, and placed in a holding cell.
After a couple of hours, a policeman approached the cell and opened the door. She was escorted back to the booking desk where the arresting officer was waiting with her personal effects.
He said, “I’m very sorry for this mistake. You see, I pulled up behind your car while you were blowing your horn, flipping off the guy in front of you, and cussing a blue streak at him. “I noticed the ‘Choose Life’ license plate holder, the ‘What Would Jesus Do’ bumper sticker, the ‘Follow Me to Sunday-School’ bumper sticker, and the chrome-plated Christian fish emblem on the trunk. Naturally, I assumed you had stolen the car.”
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Politics do Indeed Impact Interest Rates and Borrowers” If you have the inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
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