Saturday, April 24, 2010

"Without vision, the people perish."

Is it not politically correct to quote the Bible? There, I did it anyway. The title of this post was lifted from the Book of Proverbs. Bankers must not be Bible readers. Clearly, most banks’ vision is to be “just another bank”. Right?

Vision clarifies the kind of bank you want to be. It is a future, hoped-for state. I am not stating something esoteric, you can read it on Wikipedia (see link). Yet when vision is brought up to most bankers, they roll their eyes and look at me like I have two heads. Marsico must be from the Marketing Department!

Today my 11 year old had a soccer game 90 miles away from home. To determine how to get there, my wife looked up the address of the field, we plugged it into our GPS, and set out to get there. But we in banking have different ideas. We don’t determine our destination. Instead, we get in the car, drive, and hope we happen upon a soccer field where, coincidentally, the rest of the team stumbles upon. We don’t identify our destination, yet we set about a strategy to get somewhere.

Where, I’m not sure. My guess is to the holy grail of banking, the “General Bank”. Don’t laugh, there once was a bank named General Bank in Los Angeles. At least they were honest. Should your bank’s name be General Bank?

Erika Anderson, the founding partner of Proteus International, a personal and business strategy firm, identified strategy steps in her book, Being Strategic, as follows:

Define the challenge; then

Clarify what is;

Envision the hoped-for future;

Face what’s in the way; and

Determine the path.

Bankers embrace all facets of the above in most strategic planning sessions I have attended or facilitated, except for that pesky “envision” part. But if we skip this step that Erika has so aptly identified, how in the world do we face what is in the way or determine the path. Determine the path to what? These steps are interdependent and if we are to evolve the community banking industry to be more relevant to customers and communities, we have to develop a long-term vision for our bank.

One method to create a vision was done by Xerox in 2000, under then-new CEO Anne Mulcahy. She assembled her senior management team and asked them to write a press release describing how various constituencies (i.e. customers, employees, shareholders) talked about the company, and date it five years forward. From this exercise, Xerox mapped their way from a death spiral to a return to relevancy.

One thing to avoid in clarifying your vision is a satisfy-all-constituency statement. Your vision statement should not only identify your future, hoped-for state, but bring clarity to decisions made every day by your employees. Stating you want to be the “best of class” community bank without specifically identifying what that means is, well, meaningless. I suppose this is why eyes roll when I discuss vision. Just because it has been done badly in the past, doesn’t mean we shouldn’t do it. A strategic plan should be your GPS. Your GPS is worthless without telling it where you want to go. Your vision is the address. Are you navigating without a destination?

- Jeff

Saturday, April 17, 2010

You call yourself a brand manager?

The Pennsylvania Turnpike’s Valley Forge rest stop is a common waypoint for me on my travels. This week, I stopped and bought a 12oz cup of coffee from the Starbucks kiosk… cost: $1.69. Curious, I moved 10 feet to my right and asked the helpful Burger King clerk the price of a 12oz cup of coffee… $1.15. I paid 32% more so my cup would say Starbucks on it. I must be a victim of a saturation ad campaign. Oh wait, I can’t recall ever seeing a Starbucks ad.

We make premium pricing decisions every day (see chart). For reasons that may be different by customer, we place a monetary value on a good or service that is greater than a similar replacement good or service. We do so even when it is difficult to justify paying the higher price, such as my coffee example. Sure, we rationalize by saying it tastes better, or some other reason. This reminds me when my daughter performed a soda taste test at the local swimming pool, pitting Coke, Pepsi, RC, and a generic brand against each other. The winner: generic brand. Without the labels, top-selling brands are difficult to pick out.

So why can’t we achieve premium pricing in community banking? Why do our lenders price aggressively to “get the deal done” or branch managers rely on rate promotions to grow deposits? A response I often receive is that money is a commodity, and one bank’s greenbacks are the same as another’s. But isn’t a cup of coffee also a commodity? And what about “superior customer service” or “access to decision makers” I keep hearing about in community bank strategy sessions?

I believe that a critical component missing in community banking is a brand. Resist it if you must, but people pay more for a Marriott Hotel room because it’s Marriott and more for a Mercedes because it’s Mercedes. Those brands stand for something that people are willing to pay for. What does your brand stand for?

I am on the faculty on the ABA School of Bank Marketing Management (aside: I am tardy submitting my lesson plan). These students are tough when it comes to instructor critiques. So before I receive my traditionally poor performance reviews and be perceived as having sour grapes, let me be tough on them. Marketing in community banks has not been successful in positioning the function with a strategic focus, pays far too much time dabbling in retail, and has not descended from 10,000 feet to the ground level in building the bank brand. Although I’m sure there are some, I cannot think of one community bank where customers feel they have to bank there regardless of price variations, like they do when they talk about going to Starbucks.

Not to lay all of this at the feet of marketing. Many, if not most, community banks are run by former lenders. The commercial lending function does not often call on marketing for assistance. They think marketing runs the ad budget. And as one CEO told me, “we don’t get business customers from running a billboard campaign.”

Fair enough. But can you get customers to pay more for your money than the competitors? Are you positioned as a trusted advisor? Are your lenders knowledgeable enough to advise? Do business customers rave about you to their contemporaries? Are you the “go-to” bank for education on small business balance sheet management?

My ABASBMM students are pretty bright, and they talk a good strategic marketing game. But what’s the point if they go back to their banks and run the next spring home equity campaign? I get frustrated when my company performs a costing study at a bank focused on commercial customers and the marketing department expends 80% of their time in retail banking endeavors, or is subordinate to the head of retail (both true stories). If your marketing department fits a similar mold and is not aligned with your bank’s strategy, or your bank does not have a strategy, it’s time for a change. Force the issue! Don’t wait for the former commercial lending CEO to take the initiative. The success of your brand, your bank, and your future depends on it.

- Jeff

Sunday, April 11, 2010

Does banking have too many balance sheet managers?

When you are the CEO of a very large financial institution, managing the balance sheet of the bank probably occupies a very large amount of your time. You may be four to seven levels from customer contact personnel, except for possibly the very large customers.

But if you are the CEO of a community bank, thrift, or credit union, one would think to spend much more time with customers, brainstorming with your senior management team on how to get more customers, or making calls on customers. Based on my experiences with community bank executives, this is generally true: Smaller bank CEO’s spend more time with customers than larger ones.

I have found there are two types of managers within community banks: customer managers, and balance sheet managers. Customer managers typically rise to the top through customer-contact lines of business, such as commercial lending or trust. Balance sheet managers typically climb the corporate ladder through operational areas, such as finance or operations. A CEO, in my opinion, needs to have both skills. A community bank CEO should probably focus more on customer management, without ignoring balance sheet management (see illustration).

I am not so sure many share my opinion. When I participate in strategic planning sessions, we spend a lot of time discussing balance sheet management issues. We give lip service to the customer aspect, and then move on to such issues as, “we have $50 million in CDs coming due in the next three months and have to develop a strategy to replace that funding.” News flash: If you don’t create a long-term strategy on how to acquire or deepen relationships with customers that tend to bring deposits, you will remain in the less-than-virtuous cycle of creating the next rate promotion to keep and grow funding.

This attitude perpetuates itself in the personnel complement of the bank. I was recently in a strategic planning retreat where the CEO said that only five percent of his workforce has responsibilities for relationship management and business development. The other 95% were operations personnel and balance sheet managers. I understand that operations personnel occasionally take care of customers, but I would not characterize customer relationships as their primary responsibility. The quote below by management guru Ken Blanchard is truer in banking than, say, in Wal-Mart:

"Profit is the applause you get for taking care of your customers and creating a motivating environment for your people." – Ken Blanchard

Balance sheet management is very important to manage many types of risks inherent in banking. A good example is a client that hired a former construction foreman that eventually became their top producing lender. Not surprisingly, the bank became overweight in construction lending and is experiencing difficulties in today’s economy. So I am not suggesting ignoring balance sheet management. But your strategy has to identify the types of customers you want to serve better than competitors, and structure your bank, including your personnel, to pursue those customers passionately.

While doing so, you must recognize and hedge against risk. Perhaps look to customer segments that are counter-cyclical in terms of when they flounder in economic downturns. Or perhaps you can use participations, the investment portfolio, or some other means to hedge against exposure to one industry segment. Another strategy would be to get top-notch personnel that specialize in different industry groups. Whatever the strategy, I think you should consider that customer management should be front and center. Focusing on balance sheet management could be the proverbial tail wagging the dog.

- Jeff

Sunday, April 04, 2010

Community Bank History: Peoples National Bank, Hallstead, Pennsylvania

Community banks tout themselves as better than national and regional banks because of how close they are to their communities. Pundits, including myself, have been critical that our industry has moved away from this model in pursuit of growth to many communities, where they end up being another bank IN the community, rather than THE bank of the community.

But this opinion ignores the generations of history many banks across our great land have built. A case in point: the First National Bank of Hallstead… now Peoples National Bank (see photo).

When the bank opened in 1905, Hallstead was already a thriving community. It was a northbound terminus of the Delaware, Lackawanna and Western Railroad (DL&W) used to move coal northward that was being mined in Lackawanna and Luzerne Counties. Hallstead bustled with manufacturing, a lively tourist trade drawn by the natural beauty of the area on the banks of the Susquehanna River, and a full complement of small businesses to serve the needs of the town and surrounding rural communities. Prior to the bank’s founding, townspeople and businesses turned to the north, Binghamton, for their banking needs.

After six months in business, the bank posted profits of $750*. The town and the bank continued to grow. The bank showed deposits of $596,589 prior to the stock market crash of 1929 (approximately $10 million in today’s dollars). In 1933, as a result of the depression, deposits had fallen to $393,299 where they remained for most of the depression. The bank closed during the national bank holiday that was ordered by President Roosevelt in 1933. However, they proudly reopened after examiners audited the books and pronounced them safe and sound. Reportedly, the First National Bank of Hallstead was the first in the country allowed to open for business.

And so it went in Hallstead, growing gradually, as towns tended to do in rural Pennsylvania, with bank loans funded by local depositors supporting the growth. In 1965, the First National Bank of Hallstead merged with nearby Hop Bottom National Bank to form today’s Peoples National Bank.

One hundred years ago, much of the region the bank served was like the nation as a whole outside of metropolitan areas: rural, agrarian, with limited manufacturing. Over the course of the bank’s history, that has changed remarkably. Small farms gave way to manufacturing which, in turn, gave way to service industries.

During Peoples National Bank’s recent past, hallmark local businesses have either gone away or significantly downsized. But the communities the Bank serves continue to be resilient. Today, renewal may come in the form of what is under the ground, rather than above it, similar to the salad days of the anthracite coal industry. Much of the Marcellus Shale formation runs through the bank’s markets, and interest from those wishing to harvest the natural gas that lies beneath is creating pockets of newfound wealth.

Throughout the economic ups and downs that have befallen the national and local economies, Peoples National Bank and its predecessor banks the First National Bank of Hallstead and Hop Bottom National Bank have endured and helped their communities endure. In 2009, despite the most significant banking crisis since the Great Depression, Peoples National Bank's parent company sported a 1.07% return on average assets and a 12.62% return on average equity.

Their history, similar to the histories of hundreds, if not thousands, of community banks across our landscape, is our history. They helped our communities thrive, deal with tough times, and thrive again. They take deposits from us and our neighbors, and lend it to us and our neighbors. They were critical to the start of many businesses in our communities that now employ us. Banks like Peoples National Bank employ me and my firm, and I am proud to be part of this industry.

- Jeff

To my community banking (thrifts and credit unions too) brethren: Occasionally I would like to highlight the history of a community bank and how it made a difference in the evolution of the communties it serves. If you have stories similar to the above, please let me know. I think it is important as our industry goes through tremendous changes that pull us away from our communities and towards mass commoditization, to step back and recognize what made us unique in the first place.

*Many of the facts in this post came from Peoples National Bank 100 Year Anniversary booklet, published in 2005.

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. I have a tough enough time making investment decisions on my own.