Bankers: Here's What I Do

Content marketing gurus tell us not to put sales pitches in your content. But I would like readers to know what I do in case they want greater context to blog posts, or are generally curious people, as I am. So here goes... 

What The Kafafian Group does, by Jeff Marsico

We help financial institutions perform better. How?

We manage and moderate the strategic planning process. From strategy team retreat, to the operating plan, to financial projections. We build strategy components, such as capital plans and strategic alternatives analysis. Yes, financial institutions should regularly perform a strategic alternatives analysis so the Board and Senior Management know who can be bought and at what price, what others can pay for you, and the present value of your strategy. A focused strategy and a disciplined strategic planning process is critical in our changing industry.

We perform profit improvement projects that help financial institutions increase revenue, decrease costs, and allocate organizational resources consistent with your FI's strategy. Today, more than ever, we must focus our resources on the most profitable endeavors in order to build an enduring future. Sometimes senior management deems it preferable to have an outside firm perform this project because of our perspectives from multiple FIs and business models, and our ability to cut through organizational barriers.

We do general advisory work to FI senior management and Boards of Directors. This has included management studies, retainer advisory so senior managers have a go to resource outside of the FI to evaluate significant decisions, assisting the Board perform day-to-day management duties while the FI searches for a new CEO, valuations for private FIs, etc. 

We measure the financial performance of business units, branches, products, officers, and feed customer profitability systems. We do this on an outsourced basis so those FIs that don't have the resources to do it themselves can build an accountability culture at the business unit level. We review results and areas for improvement regularly with senior management. This service includes funds transfer pricing, cost allocations, equity allocations, and most of the other tasks associated with getting an FIs profitability reporting up and running. You might be surprised to read that credit unions also avail themselves of this service. They care about profits because it is their sole source of capital.

We do merger advisory. We are a niche player in whole bank, branch, fee-based business merger and acquisition work. Niche because we don't typically go from FI to FI, pitching deal ideas. We react to client senior management request for assistance, and work hard to achieve client objectives, and get deals done so long as they are additive to the client's long-term performance, as deals should be, right?

So there it is. Contact me if you would like our help. Thank you for reading.

~ Jeff

Flawless Execution: Plan, Brief, Execute, Debrief

How do we connect our strategy to our vision? Can bankers identify, in high definition detail, the bank they want to become to remain relevant to their constituencies, and translate this future bank vision into action?

Regular readers of Jeff For Banks know I recently read Flawless Execution by former Air Force pilot Jim "Murph" Murphy by my post about defining your High Definition Destination. Far be it from me to send multiple shout-outs to an Air Force guy. The Navy has more planes (GO NAVY!). But, as the book's title suggests, Murph has some interesting thoughts on execution that I think can help banks bring vision to the ground floor.

Murph outlines how pilots plan for missions in a model represented in the accompanying picture. Could this work for community financial institutions? Let's walk through an example.

Suppose the FIs vision, or "high definition destination" is to be the number one business bank in the counties served for businesses with less than $10 million in revenue. The strategy team identifies a few Strategic Objectives that are critical to achieving the vision. For example, one Strategic Objective could be to develop a robust, yet simple suite of products designed to make the business persons' lives easier.

In the Flawless Execution model, a team would be assembled with all functions critical to the execution of the Strategic Objective present... commercial and retail banking, IT, compliance, marketing, etc. A plan is developed with responsibilities and timing. The team completes the game plan, and disperses to execute, re-assembling for regular updates and inter-dependencies.

After the product suite is developed and launched, per the plan, the team comes back together for a debrief to dispassionately discuss surprises, hurdles, miscues, and successes. This debrief is critical to organizational learning, ensuring the next Strategic Objective is executed better than the last. Yet, in my experience, the debrief rarely happens. 

Part of the reason is the increasing lack of candor in banking, and our society as a whole. I dedicated a blog post to this subject over three years ago, and I haven't noticed much improvement. How do we construct a culture of continuous improvement if we do not recognize execution flaws and impediments through a candid, yet dispassionate and impersonal debrief process?

Fighter pilots debrief this way because flaws in plan execution could end up in tragedy. Get better or risk death tends to add greater urgency than get better or have your FI relegated to the dust heap of irrelevance. 

But, as the numbers bear out, FIs need to get better at execution or risk irrelevance.  

How do you execute and do you debrief?

~ Jeff

Preamble to a Bank Strategic Alternatives Analysis

Bloggers pepper me with insights on how to be a more successful blogger. One such insight is to create a compelling title. In this regard, this blog's title is an outright fail. Try to say it three times fast!

I recently sat in front of a client board committee reviewing the bank's strategic alternatives (see a prior post on performing such analysis here). Before you think this bank is on the auction block, think again. This bank's board was delivering on its fiduciary duty to shareholders to maximize value.

Before getting into the details, I prefaced my analysis on where a strategic alternatives analysis fits in the overall scheme of executing strategy. Because, my readers, it occupies a far too important perch than you might think.

The following is my paraphrased preamble to the analysis:

"Strategic Alternatives Analysis is a critical component to strategy development and execution. For example, we see various planning tools as subsets to your overall strategic plan: Marketing and IT Plans, ERM/Risk Appetite, Capital Plan, Budget, and a Strategic Alternatives Analysis. All are linked.

'We espouse multiple projection scenarios when developing strategy. The first, we typically call the base scenario. The base represents the likely outcome of executing your strategy. In banking parlance, this is the basis for your budget. It is the starting point for the remaining scenarios. You should have a 50%-75% confidence level you can achieve the base scenario.

'The second is the stress scenario. Here you are trying to gauge what could go wrong based on relevant and defensible stressors, such as credit or interest rate shocks. This scenario is important to determining the risk-level of your strategy and the adequacy of your capital to withstand shocks. Your capital plan, of course, will have additional scenarios to identify the most attractive capital augmentation strategies should the stress case come to pass.

'The third projection scenario is the stretch. When developing strategy, it is critical to envision what success would look like upon successful execution. Rare is the case that achieving your vision would result in solely hitting your budget. You want to envision what success would look like in financial terms, too. Your management team should have a 30%-50% confidence level you can achieve stretch goals. Stretch projections should be your base for a Strategic Alternatives Analysis.

'Evaluating strategic alternatives goes beyond what you can pay for a target or what a buyer can pay for you. True, it is an important element of it. But the decision to buy should be based on your perceived inability to achieve stretch goals on your own. It is a lower risk strategy to achieve earnings and tangible book growth organically than through acquisition. But if your strategy does not deliver the shareholder value improvement you desire, then perhaps buying a competitor can bridge that gap. The strategic alternatives analysis shows the targets you have the greatest opportunity to buy.

'How do you know if you should sell? This analysis will show what buyers can likely pay. Normally, and in this case, the values are greater than where your bank currently trades. So, absent additional analysis or other considerations such as employees and customers, you should sell, right? Not so fast.

'Stretch projections should be discounted back to present day to determine the present value of successfully executing your strategy. If such an analysis delivers a present value in acceptable proximity to your take-out value, then your Board may conclude that it is best to remain independent and execute your plan. This keeps the keys to your shop in your hands, where you may have greater confidence than in somebody else's hands. Without developing stretch projections, how would you know if and when to sell? How would you know that there is a value gap and your management team must develop more aggressive strategies? You wouldn't. You would be guessing.

'This is the critical link to strategic planning and strategic alternatives analysis. It keeps the management team focused on delivering value to shareholders, keeps the Board focused on their fiduciary duties, and models successful execution of strategy, in financial terms. It is the very definition of your right to remain indepenedent, or is the basis to putting M&A as a critical component to your strategy."

Does your FI perform routine strategic alternatives analysis?

~ Jeff

Data Driven Strategy

You recently read an excellent book on strategy. Your financial institution faces challenges... economy is crawling at road-kill pace, customers struggling to remain current on loans, regulators breathing hot and heavy down your neck. You need to assemble the team, assess your situation, chart your course.

So you schedule a strategic planning retreat. Your strategy team wonders how they should prepare. Or will this be a brainstorming session?  Although so many decisions are made "from the gut", I put to you that your strategic direction should not be one of them. But so often I see strategic decision makers enter the fray with little more than their past experience and a truckload of anecdotes as their guide. This, to me, is like bringing a knife to a gunfight.

Here is the data I think every strategy team member should have when making strategic decisions:

1. Industry trends and statistics

2. Competitive trends, statistics, relevant data

3. Market trends and statistics

4. Customer analysis

5. Emerging customer preference analysis

6. Your FI performance data, trends, and analysis

7. Brand position analysis

So often strategic leaders assume their bank occupies a superior position based on nothing more than a customer comment heard during the past year. But does the FI truly have a superior position and if so, should the strength be exploited as a competitive advantage within the strategy? This requires discipline because there is a lot of data out there. I once proposed a banker education session titled "Big Data: Big Advantage or Big BS" (Note: I did not use the acronym BS). Cheeky subject line. It didn't get selected. But the point here is to use data that is reliable, relevant, and not BS.

Regarding how data influences strategic decisions, I once had a CEO tell me that when rates rise, his closest competitor will have to lead the market in deposit rates because of that bank's interest rate risk and liquidity positions. That is an important piece of strategic information he knew about the competition because he researched the competition. Positioning yourself for such an eventuality helps increase the liklihood you will successfully execute strategy.

As Sun Tzu said over 2,000 years ago in The Art of War, "he who knows the enemy and himself will never in a hundred battles be at risk".  How well do you know the competition, your customers, your markets, and yourself?

What other information should strategic decision makers bring to the strategic planning retreat?

~ Jeff

Will "Plain Vanilla" Kill Community Banking?

I was at a strategic planning retreat a few weeks back where a colleague lauded the concept of bankers getting back to plain vanilla community banking. I hear and read this often. Most recently Valley National Bancorp's highly respected CEO, Gerald Lipkin stated:

"The positive [fourth quarter] results are attributable to management's common sense and highly focused approach to traditional banking — gathering deposits and making relatively low-risk loans."

I will venture to say I hear and read similar comments so much that it should be considered "conventional wisdom". This line of thinking requires the person promoting it to believe that community financial institutions (FIs) somehow got away from this concept, and by doing so their profits plummeted during the financial collapse of 2008.

But if you read or watch interviews of CEOs of community FIs from 2008 forward, you will be bombarded with the message that they didn't engage in the things that led to the collapse. They mostly meant sub-prime residential mortgage lending. I would contend that this statement is true. Community FIs, in general, did not make loans to those with little wherewithal to repay them. So how did they get away from "plain vanilla" banking?

I don't think Community FIs departed from their business model at all during the crisis. Perhaps, one can argue, that because of the recession and the decline in credit quality FIs have been playing defense, and getting back to "plain vanilla" banking means beginning to play offense. But the notion that FIs got away from this model is, in my opinion, bunk. They have been using that model for decades.

Is the premise that doing "plain vanilla" banking acceptable? Valley National had an ROA in the fourth quarter of 1.08%. Pretty good by today's standards. So will continuing to operate "as is" work infinitum? I doubt it. Customer preferences are changing more rapidly than bankers are willing to change their business models, in my opinion. FIs are not like speed boats, where the driver can change course on a dime. It's more like the Titanic heading into an iceberg. You can't flip a switch on a "plain vanilla" bank model, and turn yourself into something different.

This requires bankers to look into the future to determine the course of customer preferences and where they can gain a competitive advantage. If banking changed at the pace of technology, we would be out of business. Take Apple, Inc., for example. Sometime in the mid to late 1990's, a clairvoyant leader at Apple thought that Mac sales would not drive this company forward. So they strategized. They determined where computing was going. They widened their strategic thinking to the world of multi-media and telecommunications. Where could they make a difference, be a first mover, corner a market? Below are tables indicating the significant change in revenue sources at Apple over the past eight years.

In 2010, Mac-related sales represented a paltry 20% of total sales. What if Apple stuck with "plain vanilla" desktop computing. They would probably be out of business. They made a strategic bets on iPods and music (now representing 18% of total revenue), iPhones (now representing 39% of total revenue), and the up and coming iPad (now representing 17% of total revenue).

Naysayers will point out that FIs are not tech companies, and it's a fair point. But what about Bank of New York Mellon. Below is their segment reporting from 2001 and 2010. They changed categories, but it is clear that this Bank moved away from traditional banking and determined that the best chance for success was in asset/wealth management and securities processing.

A similar argument could be made for the former Commerce Bank of Cherry Hill, New Jersey. Many scoffed at the business model of rapidly erecting high-cost/high-profile branches to pursue a targeted retail strategy. They point to Commerce's demise, having to sell to TD Bank to get out from under regulator scrutiny. But it wasn't the business model that failed, it was their executives. The business model flourished, taking market share in bucketloads from "plain vanilla" FIs.

The "plain vanilla" model still has legs. But how much longer can these FIs continue to do what they have always done? I frequently hear "customer service" touted as a point of differentiation, but fail to see how one bank's service is better than another. I also hear "relationships", but note that very large FIs build relationships too. And if a community FIs' relationships are so strong, how come customers will walk for minor rate variations?

In my opinion those that follow "plain vanilla" without making the strategic moves to remain relevant will march all the way to the cliff. Sure, those business owners are used to doing business a certain way and have predictable expectations from their FI. Those "seasoned" customers that hold a lot of the wealth and therefore the deposits also have predictable expectations. But what about the next generation business owner and depositor. Will they expect the same?

I doubt it. They all have iPhones and iPads. What will your strategic bet be?

~ Jeff

Photo of a company that stuck to a "plain vanilla" business model:
http://twitpic.com/3u05tx

Bank Strategy Tweetup: Here's how I think it would go...

I recently read a funny post by Don Cooper on how he thought the birth of Jesus would have went if Joseph was able to tweet about it (see the link below). This got me thinking how a bank strategy session would go if we conducted it via Twitter. Below is an abbreviated tweet stream of how I envisioned it going down.

@bankceo Welcome to our first ever strategy tweetup! Today we will set bank strategy in 140 characters or less.

@bankconsultant I hope this strategy tweetup thing doesn’t reduce our fee.

@banklender Every second I spend in this mind-numbing strategy tweetup I can’t be with customers, having a power lunch, or be on the links.

@bankmarketer This strategy tweetup thing is the best idea EVER!

@bankfinance REMINDER: Request an ROI on this tweetup thing from @bankmarketer

@bankconsultant Ok everyone… let’s role with this tweetup idea. What are this bank’s key strengths?

@banklender Lenders

@bankmarketer Our website

@bankceo Me

@bankfinance We have no strengths.

@bankconsultant Moving on… what are weaknesses that we must address?

@bankmarketer Branch people, because they can’t sell.

@bankceo Branch people, because we have the wrong people in the wrong seats.

@bankfinance Branch people, because our cost of funds is too high.

@banklender Branch people, because they’re not lenders.

@bankconsultant Alright, let’s talk vision. If we were to look out five years, what should the vision of this bank be? Where do we want to go?

@banklender [eyes rolling]

@bankmarketer To be the best bank we could possibly be by positioning ourselves to create value for customers… and world peace.

@bankceo To provide superior service to our customers: retail, business, not-for-profit, ethnic, non-ethnic, under-banked, over-banked, [exceeds 140 characters]

@bankfinance I never got the “vision thing”.

@bankconsultant Alright, @bankfinance insists we get specific on financial targets. Where do we see this bank’s ROA in 3 years?

@bankceo We have to be careful putting a number out there bcause we don’t want the Board to pull this doc in 3 yrs and hold us accountable.

@bankmarketer What’s an ROA?

@bankfinance 2%! [Thinks to self: Do we have to pay @bankconsultant for this?]

@banklender The ROA would be great if lending didn’t have to pull this bank like we were Budweiser Clydesdales hitched to a beer wagon.

@bankceo Thanks to all 4 joining our first strategy tweetup. It was very productive and we clearly have our marching orders for the future!

The above, of course, is a figment of my imagination. However, if you're bank actually had a strategy tweetup, please notify me and we will be happy to put your guest post on these pages!

Have a great holiday season everyone!

~ Jeff

The Birth of Jesus: As tweeted by Joseph
http://bit.ly/908Tkq

Book Report: Being Strategic by Erika Andersen

A The Elizabethtown Public Library should send me Christmas cards because I don't seem to be able to read a book in the allotted time. This generates late fees, manna from heaven for a public library. What it also does is force me to choose the books I read wisely because I don't read as many as others. In this context, Being Strategic by Erika Andersen is an odd choice.

There are a myriad of books written by consultants trying to get noticed and college professors trying to get published on the subject of strategic planning. This book was written by a consultant, which typically gives me pause. Odd since I'm a consultant.

But I'm sensing a very positive trend in banking based on conversations with bankers, the engagements we receive, and regulatory fiat. Senior executives are starting to look beyond the current crisis and the next budgeting season. They are starting to discuss competitive advantage and the bank they hope to become. Collectively, I sense we are becoming more strategic.

That is why Being Strategic is so timely. It doesn't simply provide a strategic planning model, it provides practical advice and exercises to help the reader incorporate strategic thinking into everyday decision making. With so many tactical challenges facing us, senior leaders in banking (general term for banks, thrifts, cu's) need to focus more than ever on the bank we want to become.

This book provides an excellent and simple method to transform your leadership team from a group of tacticians to tacticians with a purpose... To make daily progress moving your bank to a relevant future.

Here is what I like about the book:

1. Discusses the "vision thing" in common sense terms. Before you chart your course, decide your hoped-for future.

2. Provides many examples of the author's approach as it can be applied to the reader's day-to-day routine. Even the Welsh castle story clarified theory, although I would rethink the authentic Welsh names which were hard for my internal voice to pronounce.

3. Had a very helpful segment on facilitating a strategy session. Although this is what I do for a living, I could always do it better.

What I didn't like about this book:

1. It was written by a consultant. Partnering with a client would have highlighted the challenges of being strategic and brought more credibility to the book.

However, I don't want this to diminish the value of the book to a great degree. The author clearly has a great deal of experience in the subject matter. I think if all bank senior leaders adopted the approach in Being Strategic, we would be far better prepared for the challenges ahead.

- 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 Amazon.com 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.