It's a Wonderful Life

This 1946 Christmas classic is a story about the impact one man made on his family, his business, and his community. It goes beyond the fate of the Bailey Building and Loan. It teaches us to take stock of our lives, to be helpful instead of hurtful, and be thankful for what we have instead of stressed over what we don't.

But It's a Wonderful Life is also a testament to the importance of community financial institutions (FIs). The classic scene of the run on the Bailey Building and Loan after the 1929 stock market crash depicts the basic principals of community banking, how FIs work, and how important character plays in bank lending and community development.

What you don't see here is the villainous Mr. Potter's diatribe on how the Bailey Building and Loan advanced loans to "riff-raff", and was unwilling to foreclose when the "rabble" ran into difficulty making payments. Instead, the Bailey's modified the terms to help borrowers make it through tough patches.

What you also don't see is the bank examiner showing up to review the bank's books. Note the examiner wasn't plowing through the loan portfolio and criticizing this underwriting anomaly or that. He was there to ensure what the bank reported in its footings was accurate. In the end, Uncle Billy Bailey loses $8,000 when depositing the funds in the correspondent bank; Mr. Potter's bank. It was the mismatch in footings that landed George Bailey in hot water with the examiners. It wasn't lax underwriting, or troubled debt restructurings.

When the Bedford Falls community pulls together to raise the missing $8,000, they toast George as the "richest man in town". The bank examiner actually contributed to the pot of money. My how times have changed.

It's a Wonderful Life portrays the significance a financial institution plays in elevating the socio-economic status of local residents. The working poor increase their wealth by owning cars so they can get to work, to go to college or technical school, and/or to achieve home ownership. The middle class can improve their wealth by upsizing their home, going to grad school, and/or starting a business. Many of these loans don't fit the one-size fits all underwriting criteria of government bureaucrats whose sole objective is to cover their butts should asset quality falter in an institution they examine. "Rabble" need not apply.

In this sense, regulators that examine our financial institutions are the modern day Mr. Potter. But in order to help businesses work through difficult economic times, to help families stay afloat during periods of unemployment, and to help communities re-adjust to remain economically vibrant during changing times, we need more Bailey Building and Loans, not less.

Is anybody listening?

~ Jeff

Note: Since this post, the NY Times wrote an article about a modern day Bailey Building & Loan: Bank of Cattaraugus. Cattaraugus, coincidentally, is in upstate NY, near Buffalo. Perhaps not too far from the fictional Bedford Falls. Although I salute the Bank for its success in helping local people, I do believe community FIs can achieve long-term success through the profit motive, which is consistent with operating in vibrant communities.

http://www.nytimes.com/2011/12/25/nyregion/the-bank-of-cattaraugus-new-york-states-smallest-bank-plays-an-outsize-role.html?_r=1&adxnnl=1&ref=nyregion&pagewanted=all&adxnnlx=1325347237-Q5F/vRUqZwymOgvBcu0zFg

The 17 Fundamental Traits of Organizational Effectiveness

I recently read Harvard Business Review's 10 Must Reads on Strategy and reviewed it in this blog. One of the "must reads" was The Secrets to Successful Strategy Execution by Gary Neilson, Karla Martin, and Elizabeth Powers from Booz & Co. I dedicated one blog post: naming it Common Sense to Successful Strategy Execution because I didn't think it was a secret. In this post I would like to write further on the subject, focusing on the 17 fundamental traits uncovered during Neilson, Martin, and Powers' research. 

The below table was drawn from research from more than 26,000 people in 31 companies. The Booz consultants distilled them in the following order of importance...

A note about the study: The Booz consultants tested organizational effectiveness by having participants fill out online diagnostic that contained 19 questions... 17 traits and two outcomes. The traits were ranked and indexed to a 100-point scale to determine their relative importance to organizational effectiveness.

In the study, 61% of respondents in strong-execution organizations agree that field and line employees understand the bottom-line impact of their decisions. This figure plummets to 28% in weak-execution organizations. For community FIs, this is terrible news, as so many rely on top-level profit reporting to determine success or failure. Does the deposit operations manager know the implications on product costs for adding a software component? Doubtful. Does the lender understand the profit implications to his or her line of business by authorizing the waiving of a fee? Unlikely.

A similar analysis can be performed on your organization as a whole, focusing first on the top traits and working your way down, ensuring your FI moves toward affirmative responses to each trait. Once completed, FIs can then incorporate the 17 traits into executive performance reviews.

Imagine an FIs board of directors using the above table to evaluate the effectiveness of its CEO. Or a CEO to evaluate the effectiveness of his or her direct reports. Simply putting the 17 traits in a spreadsheet, and responding on a five-point scale of "strongly agree" to "strongly disagree" would certainly motivate the person evaluated to create a strong execution culture in his or her organization. For proponents of the 360 review process, subordinates can also respond, giving the Board or CEO insights beyond their own perceptions and bias.

This blog has dedicated countless posts to strategy. If an FI is to promote an execution culture, it begs the question "execute what"? It reminds me of legendary Tampa Bay Buccaneers coach John McKay's response when asked about his team's execution after a lackluster performance: "I'm all in favor of it." My point is, and I do have one, when evaluating the organization and its executives on execution, it should be executing long-term strategy. That implies the FI has a long-term strategy to chart the course to compete and succeed in a rapidly changing industry.

What are your thoughts on developing an execution culture?

~ Jeff

Note: I tried to make the table as large as I could. If you would like a larger version, e-mail me.

Power to the People

I asked the head of commercial lending how best to turn the tide in business loan growth. His response: people. I asked the head of branches how to elevate the results from low performing branches. Response: people. I asked the head of an insurance subsidiary how he intends to improve margins. Again, it's the people.

My firm moderated a brainstorming session with a client on improving profitability in certain areas. We came up with several credible ideas. But a senior executive spoke up and said something to the effect that the responses that revolved around people were so far ahead of the others, that if the bank got the people issues right then performance will surely improve.

I have opined that bankers come in two general categories: balance sheet managers and customer managers. Since that post over a year and a half ago, financial institutions continue their migration toward the customer aspect. A strategy heavily focused on balance sheet management does not do much to differentiate one FI from another, and therefore does little to improve franchise value.

But strategies that focus on customers require people that are better than the people at the FI across the street. From this perspective, our assets do go up and down the elevator every day. So what are we doing to have the right people in the right positions?

We first attacked this challenge over 10 years ago when we aggressively pursued lenders. The hot pursuit led to wage inflation. The challenge was that we wanted lenders that went after the total client relationship and were surprised when what we got were loans. They were deal people, selling loan transactions usually at attractive pricing and loose covenants. We found it difficult to get the old salts to change their perspective, to build a strong relationship, to achieve trusted advisor status with their clients. They simply wanted to do deals.

Perhaps we can learn from this experience. If FIs seek to supplement their staff with more customer managers, maybe we should focus on attracting motivated, less experienced, but more malleable talent. Or perhaps such talent exists within our franchise.

To succeed at such a strategy, the FI would need a performance measurement process that identifies top performers and hot prospects, develops a training program to teach them the skills to meet performance expectations, and to ingrain your FIs Way (manner in which your FI would ideally like to do business).

If you bring onboard new, yet under-developed talent, perhaps you implement a mentor program with more senior people that have bought into your Way and are performing well. Additionally, ensure your compensation system is consistent with your Way. If you compensate for loan volume, don't be surprised if you get the aforementioned aggressively priced loan transactions and few loyal relationships.

As you populate your employee base with higher quality people your FI will perform better. If you keep in place employees that are millstones around your neck, your FI will struggle to perform better. Your objective should be to maximize the former, and minimize the latter. That's the simplest business strategy ever, don't you think?

~ Jeff

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 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.

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.

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

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