Saturday, August 27, 2011

Does your strategy drive your structure? I doubt it.

A few weeks ago I taught Bank Organizational Structure at the North Carolina Bankers Association School of Banking. The School is divided into four classes: Freshman, Sophomore, etc. My course was to the Freshman class.

But the class was very diverse, ranging from junior level people to Senior Vice Presidents. This presents a challenge. Part of my task was to demonstrate “how it is” in organizational structure. This part of the class may not have been very interesting to the more seasoned bankers.

As part of the “how it is” discussion, I outlined org structures evolved to where we are today by:

1. Past experience of Board members and/or Management;

2. Legacy structure… the way it has always been;

3. Entitlement structure… making management positions and reporting lines to promote key managers; and

4. Regulatory requirements… maintaining certain Board and management committees, processes, and policies.

These key drivers resulted in most financial institutions being organized by product group, in my experience. For example, there would be a Senior Lender that has commercial, consumer, and residential loans reporting to them. This puts staff serving very diverse customer groups with different needs reporting to one executive, who is charged with serving only a portion of their need.

The second part of my topic revolved around the evolution of org structures. What if, I posited, a bank were to organize around customers instead of products? See my post a few months back relating to this topic and a Forrester Research study here. Shouldn’t the FIs strategy drive its structure? How would such a structure look? This was probably more interesting to the seasoned bankers, because it challenged how we are typically organized.

We did an exercise regarding a bank, called “Blue Collar Bank (BCB)”, that wanted to focus on working class families. How would such a bank be organized around the needs of its niche customer base, I asked the class?

The results were interesting. The two students that presented their org structure to the class separated support and line functions. This is not atypical to how we do it today. But neither student separated out lending from deposit gathering. Credit, as I recall, was separated out by one student but not the other.

It was interesting that the responsibility for serving all of the niche customers’ needs channeled up to one executive. There were specialties within that line of reporting, but there was no passing the ball across the organizational continuum, as is typical today. This passing of the ball leads to holes in customers being served. In countless strategy sessions FIs struggle with who is going to serve small businesses… the branches or the lenders?

For example: a long time ago I was a branch manager for a commercial bank. Any commercial loan referrals were passed across the org structure to the commercial lending line of business. One customer wanted to expand his car wash by one bay and was seeking financing. I phoned into the commercial department, where the loan officer told me to “not bother him with this sh**.” My guess is he was busy working million dollar deals and didn’t want to be bothered with a $50,000 one. Because I continue to hear this in FI strategy sessions, I don’t think this is unusual, even today.

But would such a reaction be unusual if the bank was organized by customer? After the class, a student from Newbridge Bancorp in Greensboro approached me to proudly hand me her bank’s quarterly financial report. It had the bank’s org structure (see photo below and link here). This bank is organized differently than most, and is more closely aligned around customers versus products.

Could aligning structure with strategy be the next step in changing the culture in community FIs? What do you think?

~ Jeff

Wednesday, August 24, 2011

Bank Shorts: Sales Culture Gone Wild

When I was a branch manager, I fondly recall competing with a friend and fellow branch manager for the quarterly sales title. My bank, First National Bank of Maryland, had a very transparent incentive compensation system. I could calculate my own and my team's quarterly bonuses to the penny. It was called RAISE... Recognizing Achievement In Sales Excellence.

The challenge was that it was a sales incentive system. So we sold. This may have motivated us to focus on the product de jour rather than customer needs. I think my friend and I were conscientious enough leaders to mitigate this risk. But it did cause us to focus on the types of customers likely to "buy" promoted products and not focus on the bank's strategy.

Enjoy the Bank Short below. If your incentive system revolves around sales versus profitability, then don't be surprised if this is going on in your branches.

Bank Shorts: Sales culture gone wild.
by: jeffmarsico

Saturday, August 13, 2011

Cars: A Lesson in Brand Identity

A few weeks ago I was driving the Pennsylvania Turnpike when I noticed a sweet ride. Deep black, with flecks of blue, tan leather interior, advanced looking dash, and a pretty, well-dressed lady in the passenger seat to boot. I thought to myself, "what a handsome and successful couple". The car, as emblazoned on the trunk, was a "Genesis"... the beginning... awesome name.

I looked up the car later in the week. It is made by Hyundai. I thought "maybe that couple isn't so successful after all". The lightbulb atop my head went off, sirens blaring, slightly embarrassed by my reaction, but I think I had a blog post! My opinion of this couple, a couple I have never met, was significantly influenced by the car they drove. I promised myself I would swim in deeper waters in the future.

Is my reaction unique? When I transitioned from banking to bank consulting in 1997, I drove up to my new office with great anticipation. I was anxious to get started. My car... a Mitsubishi Eclipse. On that day, my boss matter-of-factly informed me that I would have to get another vehicle. He drove a Volvo.

When I coached my daughter's club softball team, I was in charge of finances. Funny how this banking thing bleeds into your personal life. But one family was persistently late making their fee payments. I caucused with the other coaches to see if we should cut them some slack. Cutting slack meant the other families would have to pay a little more to support the family having difficulty. We decided against it when the father pulled up in a Cadillac Escalade.

I don't think cars influencing our opinions of others is unique to me.

This causes some people great difficulty, including me. I grew up in a blue collar family. The first family car I remember was the Dodge Dart Swinger. As I moved through my professional life, my family income has naturally gone up. But my upbringing does not permit me to spend $20,000 more on a car just so people can think well of me. Look at the cars of other consultants, you'll find the Volvo's, BMW's, and Infinity's. I drive a Dodge. But not the famed Dart Swinger!

I witness many friends and colleagues spend suitcases of cash on vehicles. Some are spending cash they do not have. No matter what math you use, it does not make financial sense to drive a "status" car. And yet many do. I think there is a strong lesson here for financial institutions.

There are countless resources for FIs to research how to appropriately position their brand. Maybe we are looking at this the wrong way. Perhaps we should build a brand that enhances the brand of our target customers?

For example, after a bank board of directors meeting a few years ago, a director approached me on a different topic regarding something his Merrill Lynch broker told him. This bank had a significant Trust Department, and one of their directors had his money at Merrill Lynch. It almost felt like he wanted me to know he was a Merrill client. In the eyes of the director, Merrill Lynch elevated HIS brand. Wonder what he thinks of them now!

Getting closer to home, listen to how friends and colleagues discuss coffee. Some go to the break room and pour a free cup. Others go to Starbucks, often saying "I need my Starbucks". Their Starbucks? Again, this could be a case of a company elevating the personal brand of their customers.

The proliferation of Starbucks outlets has made drinking their coffee less exclusive, and therefore lessens their ability to elevate customers' personal brands. CEO Howard Schultz readily admits they diminished their brand by opening too many stores. Fortunately for personal brand builders, they keep their price points high so schleps like me gravitate to Mickey D's.

If the question about brand changes from building the brand of the FI to building the brand of the FIs customers, what changes need to be made? If our target customers are small businesses, how do we position the FI in such a manner that the small business person is proud to proclaim that we are their bank? And if we position ourselves as customer brand builders, do we have the courage to focus on our target customers to the exclusion of other customers that are valuable to us, but not our strategic focus?

It would be writing the obvious to say that banking is at a crossroads. History and culture did not require us to position our FI for anything other than locational convenience and efficient transaction processing. Now, we must be unique, be focused, have purpose. Much like Harley Davidson, our customers should be fiercely loyal to us because we mean something to them. We build their personal brand.

I think my next car will be a muscle car. Beats going to the gym.

What are your thoughts of brand building focusing on customers instead of our institutions?

~ Jeff

Thursday, August 04, 2011

Back of the Envelope: Branch Acquisition Math Made Easy

On Sunday, July 31st, First Niagara Financial Group Inc. ($30.89 billion) agreed to buy 195 Northeast branches with approximately $15 billion in deposits from HSBC Holdings Plc for an approximate 6.67% deposit premium. During a conference call the next day, First Niagara President and CEO John Koelmel said the bank will divest 100 of the branches and will likely sell about two-thirds of the divested branches and close the others.

Aside from making the announcement on a Sunday, it is odd to strike a deal only to have to divest over half of the bounty. But the branch divestiture has some upstate New York financial institutions circling branches like hyenas around a wildebeest.

Branch purchases are on the mind of many CEOs these days as a means to accelerate growth to achieve the perceived scale necessary to absorb increasing, non value added costs such as compliance and systems security. Nobody knows how big they have to be, just bigger. Sort of like professional baseball players in the late 90's.

But it is not important enough to just be big. As noted in a prior post regarding how FIs failed to reduce expense and efficiency ratios as they grew (see link below), it is more important to be smart than big. Take this from one who invested some of my daughter's college money in Sovereign Bank, a bank that prayed at the altar of bigger is better, only to have me work harder to fund the money I lost. The lakehouse will have to wait.

Analyzing the impact of a branch purchase is not particularly complicated. I ran a hypothetical analysis on the back of an envelope for Schmidlap National Bank buying a $50 million in deposits branch from First Niagara (see photo).

Counter-intuitive for those not initiated in branch purchase is that the buyer actually receives funds.  For example, if Schmidlap buys $50 million in deposits for a $1 million premium and the value of the fixed assets of the branch (including real estate, tables, desks, everything except the signs) was $2 million, Schmidlap would get a check for $47 million at closing from First Niagara.

Except if you listen to some of my early adopter bank marketing or IT friends, First Niagara would more likely remit payment via a QR code on their smart phone.

Schmidlap would have to pay the interest expense on all $50 million of deposits. They would also have to amortize the premium paid over some period. In this hypothetical case, it amortizes straight line over 10 years. There are limited exceptions to having to amortize the entire premium. And First Niagara may very well be able to put some of their premium paid in goodwill. But when acquiring only one branch, such as what Schmidlap is doing, it is likely the whole premium will be amortized. This is a non-cash charge, but an expense nonetheless.

Since Schmidlap only receives $47 million in net proceeds, that is what they have to invest in either loans or the investment portfolio. Yields on bank qualified investments are so low these days, that for any branch purchase to be anything more than a single at best, the buyer would hope to deploy proceeds in loans. In Schmidlap's case, we assume that they can put the net proceeds to work at 3% and the deposits cost 1%.

When all is said and done, this branch purchase will only drop $385,000 to pre-tax profit. Readers may think that $385k is better than nothing. But this represents only 0.77% pre-tax return on assets. If Schmidlap has a better ratio at time of closing, than this transaction would bring their pre-tax ROA down.  If the bank allocated $4 million of capital (an 8% leverage ratio) to support the branch, that would yield a 9.63% pre-tax return on equity.

Not exactly a home run, would you agree? But Schmidlap would be bigger, just not better. Or am I looking at it wrong? Doesn't bigger equate to better? Barry Bonds thinks so.

~ Jeff

Does your bank achieve positive operating leverage? Post regarding expense & efficiency ratios: