Friday, January 26, 2018

Guest Post: Managing to the Margin by Mike Higgins Jr.

It's that time of year when every CFO is trying to "predict" what is going to happen with rates as they construct their budgets for the new year. Rather than trying to predict rate changes in the budgeting process, consider a slightly different approach that manages to the margin.

In a nutshell, budget rates flat. Do allow assets and liabilities that are maturing to reprice at current offer rates, and budget growth at current offer rates too; just don't kick any rate hikes into the budget.

Here are the benefits of this approach:

1.  If budgeting rates flat, as described above, and margin is improving, then some of it could be due to repricing at current offer rates, but it also could be because of a strengthening product mix (i.e. higher mix of loans vs. investments and/or higher mix of low cost of funds vs. high cost of funds). Either way, it presents the truth about where you are at right now.

2.  If budgeting rates flat, and margin is declining, then it may signal a weakening in product mix, or simply a weak product mix to begin with, and that will lead to some very hard questions about the direction the bank is headed. It forces the bank to confront their financial reality and identify strategies and tactics to improve it. Banks that rely upon rate hikes to hit a number in their budget scare me. It's normally because they are covering up a weak or weakening product mix and that's akin to allowing a sickness to go on undetected.

3.  Lastly, budgeting rates flat makes things easier to explain to the board each month. If margin stays unchanged, then there is nothing to report. If margin changes, then you can simply explain why it happened, which is a lot easier than explaining why something did not happen. Remember, you report earnings to the board twelve times a year; you won't have to remind them in each meeting that your "prediction" about a rate hike was wrong.

On the flip-side, there is one benefit to including rate hikes in your budget; when they don't materialize as planned, and you miss your earnings target as a result, it gives you someone else to blame.

What are your thoughts on this topic?

Mike Higgins, Jr.

Mike Higgins, Jr. is managing partner in the firm of Mike Higgins & Associates (MHA). His consultants work with clients in the financial services industry. His primary areas of focus are performance management, performance-based compensation, board education and strategic financial planning. He can be reached at (913) 488-4506 or

Saturday, January 13, 2018

For Banks, What Is Top Quartile Performance?

What is top quartile financial performance? I am often asked this question, and top quartile performance appears as stretch goals in many strategic plans. And I say bravo! Nobody wants to be average.

Usually top quartile performance is compared to a bank's or thrift's pre-selected peer group. Executive compensation is often tied to it.

I won't belabor the point. A key benefit of being a blogger is that I can use research I perform for my own knowledge to benefit my readers. 

The below statistics are from all FDIC insured financial institutions either for the year-to-date ended or period ended September 30, 2017. This period end was largely driven by the significant number of financial institutions taking deferred tax asset write downs in the fourth quarter, which would have skewed ROAA/ROAE for the year ended 2017. I used Call Report data, so the calendar year is the fiscal year.

I also excluded extraneous performers by category, as noted in the footnotes of each table. For profitability numbers (ROAA, ROAE), I excluded Subchapter S financial institutions. Quite a large cohort at over 1,900. Sub S bankers can gross up those numbers to come up with their equivalents.

See where your financial institution ranks!

Saturday, January 06, 2018

BS: Focus On Execution First

Over 10 years ago Larry Bossidy, former CEO of Honeywell, and Ram Charan, an academic and consultant, wrote the book Execution, The Discipline of Getting Things Done. As a student of strategy, I read it quickly.

One thing kept gnawing at me, though, that still gnaws at me today. Get what done?

In November, Rosabeth Moss Kantor, a professor at Harvard Business School wrote an article in Harvard Business Review titled Smart Leaders Focus on Execution First and Strategy Second. The corollary being that stupid leaders focus on strategy first.

She ends the article with this bromide: "In short, encourage innovation, begin with execution, and name the strategy later." 

To which I say: bullshit!

In fact, if HBR bothered to search their own site, they would read a well thought out article called The Execution Trap. Perhaps the author, Roger Martin, a former University of Toronto professor and Dr. Kantor could battle it out in an educator's cage match. 

Let me tell you a true story of a recent soccer injury to my daughter. She was diagnosed by the team doctor with one condition, and the team trainers put together a program to reduce her pain during and after games. Their treatment did not work.

After the season, she went to our family practitioner. More tests. The result was a different diagnosis. She had been misdiagnosed by the team physician. No matter how well my daughter and the trainers executed on the treatment plan, they were treating the wrong ailment. 

Reminds me of Bain & Co.'s Michael Mankins quote:

"If you have a bad strategy, no amount of good execution will help."

When you get in your car in the morning to travel to a place where you do not know how to get there, what do you do? Punch in the address on your GPS, and build your route to that destination from your garage. Not so if you don't think the destination matters. So long as you execute turns, navigate traffic, and follow signs extremely well. No matter where you end up, it matters only if you drove there well. C'mon.

In more practical terms, if a bank's head of branches is building development plans for branch managers, they make choices. For example, should branch managers have small business banking in their curriculum, or retail wealth management? One would think that they would turn to their strategy to make the decision. If the bank's strategy is to be the top business bank in the markets where they have branches, the answer is clear. But without strategy, either can be correct, so long as the branch manager does well. 

There are areas of Dr. Kantor's article in which I agree with her. For example, "we found the perfect strategy" is a statement that has the credibility of "and they lived happily ever after". Chasing the perfect strategy is a fools game.

Chasing no strategy is the same, in my opinion. However, once a strategic direction is struck, the bank should build flexible processes to allow for alterations of course based on customer preferences, markets, and team capabilities. 

In fact, I agree with Dr. Kantor's four implementation imperatives:

1.  Question everything
2.  Inform everyone, then empower champions
3.  Keep relationships tight, and rules loose
4.  Modify quickly

All are execution imperatives. But without strategic direction, the zigging and zagging would waste resources to the point of ineffectiveness. 

Yes, Dr. Kantor, strategy matters.

~ Jeff

P.S. All this talk about execution reminds me of John McCay, former Tampa Bay Buccaneers coach. I couldn't find the YouTube video of his quote, but here is Rick Carlisle, former Dallas Mavericks head coach delivering it brilliantly.