Wednesday, November 30, 2011

Book Report: HBR's 10 Must Reads on Strategy

A Written on the cover is a definitive statement made by an entity that has supreme confidence in itself: "If you read nothing else on strategy, read these definitive articles from Harvard Business Review." Wow. And while we're at it, if you read no other blogs on banks, read Jeff For Banks. As much as I would like to believe it's true, I would also have to believe that a higher authority is leading the Denver Broncos on their improbable run. You and I both know that's not true... ???
But if a compendium of essays on vision, strategy, and execution written by luminaries such as Michael Porter, Jim Collins, and Michael Mankins interests you, then this book is for you. I'm pretty much a strategy junkie, and this book gave me fix after fix, every time I powered up the Kindle.

What I liked about the book:

1. Covers, in good detail, disciplines such as strategy development, strategy execution, decision rights, balanced scorecards, and vision;
2. Many essays were in "how to" format, such as how to develop your strategic principle;

3. Summarized key points in Idea in Practice segments.

What I didn't like about the book:

1. Not much. But if I had to pick something, it would be that the essays were penned by academics and/or consultants. It is instructive to hear from practitioners too, although the book is chock full of real world examples of idea implementation.

Do I trust Harvard Business Review to select the appropriate compendium on strategy? Well, no. I'm sure they have their bias and it flows through not only to the essays selected, but also the authors, as many are associated in some way with HBR. But I can't argue with any of their selections, and I am better for having read the book. I think you will be too.

~ Jeff

Book Report note: I will occasionally read books that I believe are relevant to the banking industry. To help you determine if the book is a worthwhile read for your purposes, I will review them here. My mother said if I did not have something nice to say about someone, then don’t say it. In that vein, I will only review books that I perceive to be a “B” grade or better. Disclosure: I will typically have the reviewed book on my bookshelf on the right margin of this blog. If you click on any book on the shelf and buy it, I receive a small commission; typically not enough to buy a Starbucks skinny decaf latte with a sugar-free caramel shot, but perhaps enough to buy a small coffee at Wawa.

Wednesday, November 23, 2011

The Grand Mishandling of Strategic Projections

After nineteen years in financial services, I am finally witnessing the tide turn in bank and credit union strategic planning. What once was an annual budgeting exercise, is now beginning to take the more productive path of identifying and paving the way to the financial institution (FI) of the future. The one that makes clear either-or choices to ensure future relevance for their customers, employees, communities, and shareholders (if stock owned).

But the fate of strategic plan projections, for the most part, remains mired in the old-school budgeting process. When asking senior leaders what success would look like if they executed their plan well, the answer is all-too-frequently what leaders reasonably think they can achieve. In other words, success looks like next year's budget.

In February, I proposed that FIs evaluate strategic alternatives as a regular part of the strategic planning process. To use the present value of future earnings streams to determine if the strategy is actually adding value. Developing strategic projections so you have an extremely high likelihood of achieving them may not yield the answer you want. What if your Board expects senior management to increase the value of the FI by 10% per year, and you project a 5% increase in earnings because you feel comfortable you can succeed? You will erode the value of the franchise.

The Board may decide to turn the keys over to someone capable of increasing franchise value. See the chart below for the decrease in the present value of tangible book value per share versus the nominal increase in tangible book. If you were a Board member of this franchise, what would you do?

In my opinion, FI strategic plans should have three scenarios:

Scenario 1: Stretch. These projections should depict "what success should look like" in executing your strategy. I am not proposing creating projections that cannot be achieved, a risk that an investment banker told me often happens when FIs evaluate their strategic alternatives. If I were to handicap these projections, I would give senior leaders at least a 40% likelihood of achieving them. The more strategic leaders gain credibility with the Board and their shareholders (if publicly owned) at achieving stretch goals, the greater the likelihood the FI earns its independence. Creating overly optimistic or "hockey stick" projections only erodes credibility with your constituencies. "Stretch" are the projections that should be discounted to determine the present value of the strategy.

Scenario 2: Base. These projections take more the form of budgets. They are estimates of what senior leaders reasonably believe they can attain. As mentioned, present valuing these projections may not yield the answer you want. But in setting Board and regulator expectations, these projections are likely to be around 70% achievable.

Scenario 3: Stress. These projections serve to identify the things that can go wrong, and their impact on your FIs balance sheet and capital ratios. FIs tend to do this within their ALCO process regarding swings in interest rates. But interest rate risk is only one form of risk that can pose significant challenges. By modeling the most likely stressors, senior leaders can develop contingencies in advance to improve their balance sheet and profitability.

In my experience, FIs tend to use scenario 2. Why? In my opinion it is because they want to manage expectations, and it is how it has always been done via budgets. Another reason may be the uncertainty in projecting out several years. Banking, unlike many other industries, has significant macro issues that are beyond bankers' control which impact their balance sheets and income statements. Because of these uncertainties, we shy away from what our financials will look like in the future.

But if, through strategic planning, we set our sights on the bank we want to become, we should model what that would like like in our financial statements. Not doing so dilutes our credibility and accountability to our Board, our shareholders, and ourselves.

How does your FI use strategic projections?

~ Jeff

Note: The above chart represents the actual tangible book value per share of a Northeast FI from 2005-2010. If the Board of this FI expected a 10% annual return, they were sorely disappointed.

Sunday, November 20, 2011

Jeff For Banks 10 Thankful Things

I should be thankful every day. But I'm not. That internal negativity sometimes wins the day. I blame my internal wiring. Thanks to all of my ancestors for my genetic code. See! I AM thankful.

But if I get better at improving myself, a never ending project mind you, here is where I have some pretty serious thankfulness:

1. I am thankful for my family. And occasionally, I think they are thankful for me. But this may be day-to-day.

2. I am thankful for my coworkers. I enjoy your friendship and working with you.... most of the time.

3. I am thankful for the banking industry. Most colleagues are cordial, humble, smart, and fun to be around. For the ones that don't fit this description, you know who you are.

4. I am thankful for regulators. They keep requiring bankers to hire consultants.

5. I am thankful I am not a turkey.

6. I am thankful somebody at our Thanksgiving Dinner understands the difference between a turnip and a rutabaga.

7. I am thankful for my LinkedIn connections, Facebook friends, and Twitter followers. Even that guy that keeps trying to make me an Internet millionaire. I know in his own way, he really cares about me.

8. I am thankful I don't know what ROFL means. In this regard, ignorance is bliss.

9. I am thankful that I've never seen Jersey Shore, and...

10. I am thankful for my blog readers. Although after reading my 10 Thankful Things you may not be thankful for me.

What are you thankful for?

Have a great Thanksgiving everyone!

~ Jeff

Wednesday, November 16, 2011

The coming consolidation wave... for bank consultants.

Last year Millward Consulting merged with my firm. The combination gave Millward greater resources to serve clients, and my firm senior-level expertise to develop our talent, deepen our services, and expand our geography. At the time, I didn't think much about a trend developing in bank consulting.

A couple of months ago two other community bank consulting firms merged, Danielson Associates and Ambassador Financial Group. When I asked Dave Danielson about the combination, he expressed interest in having a mix of transactional business and recurring revenue business. The merger served to accomplish that.

Most recently, Stern Agee expanded its services to financial institutions by making the bold move of buying a bank. The reason: use the bank charter as a platform to offer correspondent banking services to clients. This gives Stern Agee the recurring revenue business Danielson mentioned as important to his combination.

Community bank consulting is highly fragmented, ranging from the larger firms to the one-person shops. Consultants are typically highly specialized, such as asset-liability management, and geographically focused. Indeed, when I attended the North Carolina Bankers' convention for the first time, I hardly knew the other consultants that attended. Last week I attended the New York Bankers' convention and knew most of them.

But the number of banks continues to decline, albeit slower than most investment bankers had hoped and predicted. For community bank consulting firms, this means expanding services or geography, or both, in order to thrive. My firm is doing both.

A logical means to accomplish expansion is through merging with other firms. This makes perfect sense, for the reasons mentioned regarding my firm's combination with Millward. Larger, more robust consulting firms can provide a greater depth of experiences for the benefit of clients.

Combinations can also expand geographic reach. Community bankers (and credit union execs) typically don't hire consultants from an Internet search. They hire consultants because they know them first-hand, through mutual aquaintances that are familiar with their services, or by reading articles, commentary, and/or speeches by them. Consulting rain makers must travel to more distant locales, requiring more rain makers. As the number of community financial institutions continue to shrink, this will become more challenging for the very small consulting shops.

The challenges of combining firms, however, rest in the attitudes of the consultants and investment bankers of the firms themselves. Horizontally integrated firms are commonly designed for thriving lines of business to carry struggling ones until they get back on their feet. Ideally, the once struggling business lines are then in a position to carry others when they struggle. Makes sense.

Except thriving lines of business' full of type-A personalities typically don't WANT to carry struggling ones. They want all the fruits of their labor to accrue to themselves. This attitude permeated one of my past employers. The business model made sense on paper, but was difficult to apply. This challenge must be recognized, but need not stop a consolidation wave.

The decline of community FIs will result in continued consolidation among community FI consulting firms, in my opinion. Some small firms may seek greener pastures in other professions. But the relatively larger firms (large consulting firms for community FIs may be 10 employees or more) have an opportunity to expand services, expertise, and geography to better serve clients. This can be positive for the firms' and the FIs they serve.

What are your experiences with community FI consulting firms or your opinion on their consolidation?

~ Jeff

Sunday, November 06, 2011

Community Financial Institutions: Parking Lot for the Benjamins

The current market volatility has been with us for nearly three years. To resuscitate the economy, the Fed is doing everything possible to keep interest rates low through monetary policy. First dropping the Fed Funds rate to near zero, and most recently with Operation Twist designed to guide long-term rates even lower. The Euro Zone debt crisis and resulting lack of investment alternatives makes US Treasuries, as one economist put it, the "best house in a bad neighborhood".

This has kept investment options for community financial institutions at historic lows. Low loan demand further exasperates the challenge.

While investment options dwindle, FIs find themselves awash in cash. Market volatility and prolonged low bond yields is keeping investors on the sidelines. The sidelines, as it turns out, is in banks. This led to Bank of New York Mellon's decision in August to begin charging very large depositors fees for parking their money. There simply isn't any place for them to lay it off.

Community FIs are experiencing similar activity from their Main Street customers. From December 31, 2009 through June 30, 2011, deposits for all FDIC insured depositories increased 5.84%. But average deposits per money market account, according to my firm's peer database, increased 31% during that same period (see chart). Community FI customers are parking their money waiting for better, more certain times.

At first, senior managers of FIs felt good about the inflow. Loans from 2002 through 2007 generally grew faster than FIs' ability to fund them. This resulted in FIs turning to CD rate promotions, brokered CDs, and FHLB borrowings to bridge the funding gap. Deposit mixes became more expensive and less attractive.

But with loan demand at historic lows, FIs began running off their high-cost CDs and other so-called "hot money" to right-size their funding sources. This may have created a little hubris among senior managements, thinking it was the quality of their service and the value of their brand that attracted the core funding. But looking from a wider lens shows us it has been an industry phenomenon more than what any institution did on their own.

This is creating uncertainty with Treasurers across the landscape. What does the FI do with the money? How long will the money remain in the FI before migrating back to the market or the hottest CD promotion? With historically low re-investment rates, FIs are keeping the money highly liquid. FDIC insurance costs, on average, are 12 basis points on deposit balances. This, and the operating costs for maintaining the accounts, is resulting in some core deposit accounts actually being unprofitable... a highly unusual situation.

But this too shall pass. If FIs are pleased at their current mix of funding, perhaps they should take positive action to maintain it. Initiatives could include a disciplined onboarding program for new customers, and a timely calling program for existing ones. Your customers may certainly be parking their money at your FI, but they probably have money elsewhere too. If you demonstrate service beyond what they experience at their other FIs, perhaps you can win their loyalty, including their core deposit balances.

Alternatively, you could do nothing, stuff your vaults full of cash, and pray that customers stick with you. Hey, it's possible, just not probable.

What do you suggest FIs do to keep core deposit customers?

~ Jeff

Note: I will be part of a panel discussion at the Financial Managers Society (FMS) Philadelphia Chapter on Wednesday, November 9th to discuss liquidity, value, and profitability of core deposits.