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Posts Tagged ‘Strategy’

At the end of last year we emphasized how strategic planning is critical for the survival of banks in the future, no matter how hazy the road to the future may be currently. Let’s drill down a little further.

Thinking strategically requires creative leadership—the ability to develop, sell and cultivate an idea from inception through implementation. Executives who want to lead their institutions as they build strategic plans must add varied skills to their management repertoire, especially skills as teachers and leaders.

Dynamic change is part of any good strategic plan

Strategic planning is a job that never ends. Because the environment and competition often prompt base assumptions to change, strategies need to be revisited at least every 12 to 18 months. Even if major tenets remain constant, strategic plans still should be reassessed periodically. Questions that bankers should ask themselves touch on internal attitudes as well as the outside world:man-with-questions-200x200

  • What have we done successfully?
  • How has the competition reacted?
  • What is different in our environment?
  • Should we continue on our current path or make changes?
  • Are any failures due to poor strategy or poor execution?

Obstacles to Success

The road from strategic planning to success may not be completely smooth. But, if executives are alert to common roadblocks, they can steer around them with as few serious detours as possible. For strategic planning to succeed, a CEO must view the process as an ongoing commitment and not an exercise to satisfy regulators. Strategic planning is a process, not a sheaf of paper.

Poor communication between an institution’s management and its board can present problems. If these two groups do not have a shared vision and are pulling in different directions, strategic planning has little chance of success. The secret is to engage both groups in the earliest planning sessions. Elitism also represents another common obstacle. In an elitist planning mode, a CEO and one or two top people may complete a strategic plan without involving any of the individuals who will actually execute it. This approach is fraught with peril. First, the planners fail to get input from people who often know far more than they do about operations, customer attitudes or competing products. Second, if middle-level managers do not play a role in developing strategy, they have little personal investment in its outcome.

A putting-out-the-fire management style can create other difficulties. In this case, the institution’s CEO and board may eagerly invest time in developing a strategy, but quickly lose interest when it comes to monitoring progress and overseeing implementation. As soon as the first crisis comes along, interest is diverted and planning is forgotten. A management team does not have to go through many planning-to-oblivion cycles before it loses complete faith in the process.

Strategic planning does not and cannot forecast the future. We have already acknowledged that while the road to the future is hazy, there is hope down the road. Planning cannot predict the exact time a quake might hit your institution, or the size and duration of the tremor. Accept the fact that you will make wrong decisions as well as right ones.

While strategic planning is not infallible, it will help you learn your institution’s strengths and weaknesses and how your resources can be marshaled to survive and thrive. Strategic planning strips change of its power to frighten and immobilize management. It offers executives the power and the skills to harness the energy of change as an engine of creativity.

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Last month we discussed the alarmingly similar events and reactions that occurred in the periods of 1988-1992 and 2008-2012.  Yes, strategic planning is perhaps needed more today than at any time since the 1980’s; however, the challenges are daunting, and the road ahead has gotten hazier each day.

foggy road ahead

The road has gotten hazier

The good news is that for the banks and bankers who stick it out and survive over the next five years, the future does look bright because the very pressures bankers feel today will eventually and inevitably squeeze out lower performing banks enabling a return to rational pricing.   It is going to take some time for this to occur, but the path appears set.

A wise banker said recently, “there is a long way to go, and the journey has just begun.”  Well, just how long is that journey and just what is the future?  The regulators have given us a peak into their minds.  Here is some of their thinking:

  • The core deposit franchise will need to be nurtured and managed
  • An efficient, lean operation will be critical
  • Capital management will be essential
  • Sound strategies will be critical
  • Good financial skills and in-market knowledge will be required of Boards
  • Credit and Operational risks will be equally challenging

There are a litany of challenges and issues that will need attention for the future.  But, any way you slice it, making money in a prolonged low-interest rate environment, providing a decent return to your shareholders, dealing with over reactive regulations and returning to good old-fashioned fundamentals are the underpinnings of success in the future.

Strategic planning is not a panacea, but it is critical to survival.  As we stated before, good planning establishes objectives to achieve desired future results.  Though it cannot forecast the future, strategic planning does attempt to look at future possibilities so decision makers can rationally choose between courses of action that involve risk.  Strategic managers are proactive managers.  They tackle questions of structure and focus so they are prepared long before seismic activity is sensed.

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Change?  No change is necessary.

That is what some bankers thought when their institutions began to suffer the first shocks of a quake that started rattling the financial industry in the mid-1980s.  These bankers figured that if they just hunkered down and minded their own business the tremors would subside.

Bank Strategic Planning

Bank Failures Since 1979, Source: SNL Financial and FDIC
Number of Failed Banks in 2012 is annualized based on 23 failures as of 5/1/12

Instead, many banks – and bankers – vanished.  From 1988 to 1992, the U.S. banking industry witnessed more bank failures than ever before, especially in any comparable five year period.

The reasons were complex.  Massive change hammered the industry.  New banking laws and regulations altered how financial institutions could do business and increased base-line costs.  For banks that were already on shaky financial footing, new capital requirements dictated cutbacks and/or injections of hard-to-find investment dollars.  The debut of interstate banking intensified price-cutting campaigns to win market share, and margins began to shrink.

Sound familiar?  It’s de ja vu all over again!  “Same events, different time.”  The earthquakes returned in 2008, and the financial world began to come undone once again.

For survivors of repeated quakes, reality has arrived.  If we hope to retain our jobs and help our institutions withstand external pressures, we had better prepare for life in an earthquake zone.  Strategic Planning is needed today more than any time since the 1980’s.  Through strategic efforts, banks can intelligently re-engineer their institutions to gain the resilience and strength needed to absorb shocks – and even expand – in our unstable economy.

Strategic Planning is extremely challenging in this environment, since it requires looking at the future and making assumptions.  Today, about the only given is that more massive change lies ahead.  Yet, an outline is emerging of the future that banks will face.  Over the next four or five months, we will comment on dealing with specific trends.

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The plan is never finished.  Strategic Planning is a process that never ends.  Banks should revisit their strategies every 12 to 18 months.  Bankers should ask these questions to reassess internal attitudes and the outside world:

  • What have we done successfully?
  • How has the competition reacted?
  • What is different in our environment?
  • Should we continue on current path or make changes?
  • Are any failures due to poor strategies or poor execution?

For strategic planning to succeed, management and the Board must view the process as an ongoing commitment—not an exercise to satisfy regulators.

Management and Board must reach consensus.  Poor communication between a bank’s management and its board can present hurdles.  If these two groups do not have a shared vision, strategic planning has little chance to succeed.  Therefore, it is crucial to engage both groups in the planning sessions.

Many voices must speak.  A CEO and one or two people may complete a strategic plan without involving any of those who execute it.  The plan will be impractical, and managers will have no personal investment in its success.  Banks should search for ways to let employees share in the rewards and risks inherent in the development of strategic plans.  This may mean rewarding performance using bonuses or incentives, stock plans and other alternatives to pure salary.

Strategic Planning

Strategic Planning Cannot Predict the Future

Follow-through is essential.  A frenetic management style can create difficulties.  The CEO and board may eagerly develop a strategy, but lose interest when it comes to monitoring progress and overseeing implementation.  As soon as the first crisis comes along, they forget about the planning.

Power to harness change creatively.  Strategic planning cannot predict the future.  You cannot predict exactly when a quake might hit your institution—or its size and duration.  With strategic planning, you can make wrong decisions as well as right ones.  But strategic planning will help you learn your institution’s strengths and weaknesses and discover how your resources can be marshaled to help your bank survive and thrive.  Strategic planning strips change of its power to frighten and immobilize bankers.  It offers executives the power to harness change creatively.

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Some Federal officials and others from sectors that are removed from day-to-day commerce want to blame risk takers, represented by Wall Street investment bankers, for high unemployment and frozen financial markets, and certainly risk exploded during the decade leading up to 2008.  While Wall Street firms need to bear their share of the responsibility for participating in risk-run-wild, there is plenty of blame to go around, including government policies before and since the liquidity and credit crisis hit in late 2008.

It is important now to fully diagnose the reasons for our recent economic woes and pass regulation that helps identify the size and nature of systemic risk in the future.  It needs to start with governmental policies, federal, state and local, that interfere with the normal market-driven risk and reward mechanisms that have controlled free enterprise from its inception.  Risk rating agencies need to be truly independent in the future.  Corporations must do a much better job of assessing the risks they create or support in the marketplace.  In addition, American consumers need to be better educated in economics and free enterprise so that they can detect risk in offers that are too good to be true.

FDR is often quoted as saying in his first inaugural address, “The only thing we have to fear is fear itself.”  We need to remind ourselves of this wisdom in these times of frozen job markets and banks.  One of the primary tenets of capitalism is “no risk, no return.”  Fear of risk has things frozen.  It is time to take measured risks again, not the senseless risks we saw in the mortgage funding government policies or mortgage-backed securities that could never have produced a lasting return, but reasonable risks that produce reasonable, long-term returns.

Sharp Edges

Misguided Warning

One of our greatest risks at this point in the history of our great nation and its great economy is, as FDR put it, the “nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”  We risk becoming so risk averse that we will never move ahead.  Government needs to stop punishing and get out of the way of growth.  Banks need to make loans in support of reasonable new ventures.  The unemployable must learn new skills.  Corporations need to expand and hire people to grow their businesses.  The global market will make a comeback if we don’t let our fears of risk prevent it.

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All of the prognosticators (including us…see The Future Community Bank Model – Greater Diversity of Revenues and Reduced Risk) are talking about the need for community banks to diversify their product mix, rely less on concentrations of commercial real estate loans and develop new fee-based services.  The problem is that the current staff of most community banks has a set of knowledge, skills and abilities that do not apply in this new world community banking environment.

Commercial and Industrial Lending (aka C&I Lending) is a very different process than Real Estate lending.  Will the banks retrain real estate lenders or recruit C&I lenders from other banks?  Where can they find trained lenders?  Large banks have relatively few credit trained C&I lenders because these banks shifted years ago to a “hunter/gatherer” strategy that deployed many relationship developers (hunters), with limited credit training, who would bring the loan request to a few credit underwriters who made the deal work for the bank.  When this shift occurred, the large banks no longer developed the trained staff that community bank recruiters needed.

Banking gurus are also pushing the point that fee-based businesses need to be developed in the community banks to offset some of the continuing pressure on traditional net interest margins upon which community banks have historically depended.  There has been much written about understanding your local communities’ needs and the share of wallet your bank is getting.  This is how you determine what additional services are needed in your communities.  All true, but where do you get the talent to develop and then manage these new businesses?  Banks have not traditionally had strong sales teams, so once the new businesses are developed, will banks be able to build the businesses.

It has been estimated that half or more of the staff currently in most community banks will need to be replaced with people with new knowledge, skills and abilities needed in the new model of community banking.  In some cases, the change needs to begin at the top of the organization.  We hear from capital market players that investors often want a new team to deploy the new capital.  CEOs would be well advised to aggressively rethink their strategies for their banks and include strategies for attracting and retaining the new talent that will be needed in the new world of community banking.

For an assessment of your community bank’s strategic plan, click here:

Request an Assessment of You Plan

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We wonder about the future of community banking.  Times are tough right now in community banking, but we are thinking about the business model for the long-term future of community banks.  Does anybody care?  We think so.

It seems every time there is a major wave of consolidation in banking, there follows a wave of new local bank charter applications.  There is always a strong desire among local business owners, developers and city fathers to have a locally owned bank that understands the local market and its needs for financing.  When the dust settles on the current banking crisis, and the coming wave of consolidation begins to wane, it is predictable that there will be another wave of interest in starting new local banks.  The necessary capital should be available as long as a business model can be found that will produce a reasonable return on what is sure to be a higher capital requirement.  We will take up the question of how much capital is needed in a future blog.

So, if you were starting a new bank, what business model would you want to use?  One lesson we relearn every 15 or so years is that concentration of loans in any one industry or type of lending is always risky.  There is just not enough margin in many types of lending to warrant risking more than a relatively safe level of concentration.  Some community banks have found some success in the insurance business or the investment brokerage business.  One thing seems clear, diversity of assets and revenue sources will be a key part of the future model.

It has also become clear that most, not all but most, of the small banks that got into trouble after the 2008 credit and liquidity crunch had little to no local franchise.  A local franchise is a brand that your local community understands and sees as a valuable part of the community.  While money was cheap and plentiful during the nineties and the beginning of the current decade, many banks started and leveraged their capital with brokered and wholesale deposits instead of local consumer and business deposits.  The demand for loans, especially for funding local real estate projects was strong during those boom days and a small marginal spread could be made with that model.  As we know though, when the easy money dried up, that model of banking did too.

The new community banking model will require more capital and greater control of risk.  We may not know everything about a new model for community banking but we can be sure it will require a strategy of building a local franchise for deposit growth and loan diversity.  I would love to hear your thoughts, so please comment below.  Also, to discuss your bank’s future, call me at 919-644-6962 or complete a contact request at http://matthewsyoung.com/contact.htm.

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