“The essence of strategy is choosing what not to do”.
― Michael E. Porter, Harvard Professor and Thought Leader in Strategy

“Just say no.”  A simple trademark of a leader with a great strategy and an iron will.  It is so easy to get caught up in the latest trends or the “hot” new products (as evidenced by the latest surge of banks entering the SBA lending arena).

Don’t get me wrong, I am all for being opportunistic and flexible when the right value-add product or service comes along.  However, my question is, “does it fit?”  If you are executing a clear strategy that is forging market leadership or a clear competitive advantage, jumping behind the latest fad can be nothing more than a distraction.  Bank resources are precious; re-directing your valuable resources on a course that is not in line with your bank’s primary value proposition can result in unintended consequences and a less than desired outcome.

So back to saying no.  A great strategy is fundamentally a course of action that drives your bank’s ability to be different and better than your competitors.  Such a course results in customer loyalty and creating sustainable shareholder value.   The better your strategy, the easier it is to say no.

I guess the question is how good is your strategy?  Take a simple test and respond to the following questions:

1. Do you know exactly who you serve?
2. Do you meet their needs better than your competitors?
3. Is your share of this target customer (or customers) growing at a rate greater than your competitors or beyond the rate of market expansion?
4. Is your bank’s business model scalable?
5. Are your performance metrics (ROAA, ROAE, Efficiency, Net Interest Margin, Fee Income, etc.) consistently in the top quartile of your peer group?

If you answered “yes” to these questions, I’m guessing you are a master of the art of saying “no”.  On the other hand, if your responses were negative or vague, you may find it more difficult to say “no” to popular or hot trends.

If you have the opportunity, study some great business models and their leaders.  Do Apple, Wal-Mart, Southwest Airlines, Intuit, American Express practice the art of saying no?  I submit they do.

My final thought or caution, is do not mistake the art of saying “no” with a lack of taking risks or discovering a breakthrough.  Great strategies provide the courage, confidence and flexibility to pursue bold opportunities.  If you don’t believe me, you can always just say no.

With this constant rant exclaiming that small banks don’t have the wherewithal to survive in a tough economy and increased regulatory oversight, I set out to see if this argument holds up.  My initial discovery: the claim is baseless.

Over the last couple of weeks, I have been talking with several of my clients that are operating like there is no economic pressure or additional regulatory burden.

Two of the banks I spoke with are both between $100M – $115M.  Both have ROAs that exceed 1% and both have enviable efficiency ratios.  Additionally, they both have impressive and sustainable non-interest income models.

Oh yeah, they have one more similarity. They are both focused on being better and being different.  But that’s where the similarities stop.

One is a rural bank, the other operates in a metropolitan market.

The rural bank has adopted a true community bank model.  They primarily serve local businesses and their employees and are building a very strong local brand and identity.  They are obsessed with becoming the largest independent bank serving their community.   And there numbers seem to be bearing it out. They have consistently had double digit growth through 2008 to 2011.  They track local competitors (big brands and locals) and just keep moving up the market share ladder.  How do they do it?

1. High local visibility within the community
2. High touch, relationship-driven bankers
3. Active and involved board of directors
4. Constantly engage and leverage a diverse group of local investors
5. Speed – fast local decisions
6. Obtaining primary bank relationship is a non-negotiable (low-cost deposits)
7. Pristine asset quality
8. Surgically attack competitors customers
9. Spend a little more for marketing or on people(But make it up on cost of funds.)
10. A CEO who understands how to create value

These guys view the current “austerity-minded” competitors as an opportunity.  They convey an optimistic vitality that is contagious (employees, customers, etc.).  They believe they are better and different and they are bent on having their market believe it.

The metropolitan bank has a different perspective.  They are product driven.  Though small, they have set a course to be a SBA leader.  It’s working.  Ask their CEO why they are so successful and he’ll tell you: “We keep it simple. We are focused. We know who our customer is and we deliver our product better than anyone else.”  He will also add, “We know what we’re not.  We don’t get sucked into products or services or other areas that we cannot master.”

Like the rural bank, they are growing at a healthy clip.  How do they do it?

1. Their people are the best at what they do
2. They run lean
3. Speed – they get the first look at every deal because they are quick
4. They constantly challenge their model and how to make it better
5. Pristine asset quality
6. The executive team is attached at the hip – they know their roles and are performance-driven
7. They are students of their craft – they invest in honing their skills

As they continue to grow they are evaluating opportunities that leverage their strengths.  I love their sense of clarity and focus.

No one can argue with the fact that the last couple of years have been tough.  But, the thought that community banks’ can’t compete or value had diminished is nonsense.  If you’re not doing it already, it’s time to focus on being different and being better.  When the economy turns (and it will) be poised to surge.

Hunkering down waiting for better times without a strategic sense of purpose and a plan will cost you.  If your bank is knocking it out of the park – please share it with me.  Your stories and experiences are inspiration for the industry.

written by Bob Adkins

As required by banking regulators, community banks need to review and validate each step of their interest rate risk (IRR) measurement process for integrity and reasonableness.  The quality and reliability of the measurement system is largely dependent upon the quality of the data and various assumptions used in a bank’s IRR model.  All measurement systems require banks to gather and input position data, make assumptions about possible future interest rate environments and customer behavior, compute, and quantify risk exposure.

Having an independent third party IRR model review should not only give bank’s an indication of the quality of their model results used to make bank asset/liability decisions, but it should also provide information on the overall quality of the bank’s IRR management process.  Regardless of the type and level of complexity of a bank’s IRR measurement system, at a minimum all independent third party reviews of IRR models should cover the following areas:

1.       Source Data and Aggregation – Every measurement system, whether it is a gap report or a complex economic value simulation model, requires information on the composition of an institution’s current balance sheet.  This is the first step in the risk measurement process.  Many community banks take this process for granted, delegating this step to staff personnel, without taking into account recent changes in business strategies, the banks portfolios, systems, off-balance sheet positions and products. To be useful, the data and other information entered into the IRR model must be reliable, complete and accurate.  Also, inappropriate levels of data aggregation could cause inaccuracies in model results.  The third party independent review process should evaluate the sources, accuracy and aggregation of the bank’s data input.

2.       Interest Rate Scenarios and Assumptions – A bank’s interest rate risk exposure is largely a function of the sensitivity of its instruments to a given change in market interest rates and the magnitude and direction of the change. The assumptions and interest rate scenarios developed by a bank are usually shaped by these two variables.  The third party independent review process should evaluate the relevance, applicability and treatment of key bank assumptions.  At the minimum, the following should be included in the review: 1) treatment of non-maturity accounts, 2) loan prepayment assumptions, 3) treatment of options risk, 4) market value discount rates, and 5) key assumptions and scenarios that are built-into the model used by the bank.

3.       Model Output and Reporting - The third party independent review of a bank’s model output should identify whether the reports are clear, concise, timely, and informative in the context of assisting the board and senior management in decision making.  The evaluation should determine if results of the measurement system sufficiently highlights deviations from board-approved IRR exposure limits and policies.  The third party review process should evaluate the model output and reporting for the following: a) whether there has been a sufficiently broad range of potential rate scenarios included, b) the accuracy and integrity of the IRR measurement, c) the timeliness and frequency of reporting to management and the board, d) the compliance with operating policies and approved risk limits, and e) the performance and documentation of variance analysis.

4.       Staffing & expertise – The third party review process should evaluate whether a banks ALCO members possess the required skills and knowledge to effectively manage interest rate risk and whether the ALCO is adequately represented by the major areas of the bank (finance, loans, retail banking and the board).    In addition, an evaluation should be made whether the bank has sufficient and qualified staff to manage its IRR exposures.

Conclusion

IRR management is especially important given the current environment of historically low short-term interest rates, and the need to mitigate an institutions exposure to potential increases in interest rates.  For the past few of years, many community banks have focused on asset quality, earnings and capital.   This coupled with the low interest rate environment may have created disproportionate levels of short-term funding liabilities supporting long-term assets.

IRR management is not merely a process of quarterly reporting using an outsourced simulation model, or about quickly discussing issues in a quarterly ALCO meeting.  If used properly, understood and routinely monitored, IRR management serves as an effective tool for enhancing and protecting capital and earnings, and creating a more efficient operational environment.  I encourage banks to utilize the results of the periodic independent IRR model review process to identify weaknesses in their IRR management processes, procedures, internal controls, internal asset/liability expertise, information flow and the overall quality of the bank’s IRR management process.

For information on the IRR model review services offered by CB Resource, Inc., please Learn more here

“Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different.”– Michael Porter

Well, it is that time of year, time to develop or update your strategic plan.  With the community bank space continuing to be plagued with a sputtering economy, onerous regulations, and the usual cast of competitors, do you know which course of action best suits your bank?

Let’s start with some questions to establish the strength of your strategic plan:

1.       Does it state in simple terms how you create sustainable value for your shareholders, customers, and other stakeholders?

2.       Does it articulate how your bank is different or more specifically, better than your competition?

3.       Does it indicate if you compete based on Price, Innovation, and/or Quality Service?

4.       Does it define a course of action that drives answers to questions 1, 2, and 3?

If you answered no to more than one of the questions above; you do not have a strategic plan.

Great strategies are a combination of art and science.  Think about great companies and their strategies:

• WalMart: “Save Money.  Live Better.” They dominate the retail space driven by low cost, with an emphasis on improving the quality of life of their customers.  Every decision they make is connected to those two value propositions.  Their strategic plan defines how they accomplish those drivers, be it technology, product selection, physical plant, staffing, capital investments, to mention a few.  No ambiguity.   Where they choose to compete, they are dominant by executing their strategy.

• Apple, Inc.: Mission – “Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork, and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple reinvented the mobile phone with its revolutionary iPhone and App Store, and has recently introduced its magical iPad which is defining the future of mobile media and computing devices.” (Selected words are underlined for this article) Apple is an innovator.  They create value for their customers by providing the ultimate electronic experience.  Their competitors are trying to copy them.  It has been suggested that Steve Jobs has created more value for his shareholders than any other leader in history.

• Four Seasons Hotel: Mission – “We have chosen to specialise within the hospitality industry by offering only experiences of exceptional quality. Our objective is to be recognised as the company that manages the finest hotels, resorts and residence clubs wherever we locate. (The use of “s” in specialise and recognised are direct spelling from the Company – a Canadian firm). We create properties of enduring value using superior design and finishes, and support them with a deeply instilled ethic of personal service. Doing so allows Four Seasons to satisfy the needs and tastes of our discriminating customers, and to maintain our position as the world’s premier luxury hospitality company.” (Selected words are underlined for this article) Four Seasons’ is a leader in quality service.  They strive to create unique experiences for their customers.  Their business strategy and decisions cannot stray from that purpose.  BTW – the hotel was taken private led by Bill Gates and Saudi Prince Alwaleed Bin Talal in 2007, the transaction was worth close to $4 billion.

I don’t think great companies develop and enhance their strategies by getting together and discussing how they can grow or cut costs by 10%.  They do not confuse strategy development with a budgeting process.  Don’t get me wrong, financial forecasting is a critical component of strategic planning; but remember that peak performance is the outcome of a clearly defined course of action, not a well compiled budget.

There are many common themes that each of these great companies share, however, from a strategic planning standpoint certain factors stand out that establish the basis of their strategies.  When assessing their strategic “missions”, one can’t miss the clarity of their:

1.       Competitive Strategies: How they choose to compete (price, innovation, or quality service)

2.       Value Propositions: How they create value (what they do)

3.       Target Markets: Where they choose to compete (target markets, customers and/or industries)

So does your strategic plan clearly define your competitive strategy, value proposition and target markets?

A word of caution, being the best at something does not insure success.  Many of you may remember Lotus Spreadsheets.  Arguably, at one time the best spreadsheet solution on the market; Excel ran a distant second.  However, it is interesting that Lotus Spreadsheets were rendered irrelevant by their target market. They simply fell asleep at the switch.  While they were building the best spreadsheet, Bill Gates and Microsoft were redefining customers’ needs.  Microsoft proved that customers were more interested in user-friendly integrated solutions (Office), rather than solutions offered by products like, i.e. Lotus Spreadsheets, Word Perfect and Harvard Graphics.  The important point here is: understand your customer’s needs vs. what you think you are best at.  You can be the best and go out of business.

Below, I have listed some general guidelines to help you refine your strategic planning process.  Yes, strategy is a process, not an event! Develop your strategic plan with a proven, clearly defined system.

1.       Environmental Scan – External

• Economy: evaluate the favorable or unfavorable characteristics of the national, state and local economy.
• Industry: evaluate the favorable or unfavorable conditions within the industry.
• Regulatory: evaluate the favorable or unfavorable conditions set by Regulators.
• Capital Markets: evaluate the availability and cost of capital should it be required to support your strategy.

2.       Environmental Scan – Internal

• Past Performance: determine if your past performance enables or inhibits your alternatives going forward.
• Peer analysis: Assess your performance vs. peers – is there an opportunity to leverage your performance or mitigate weaknesses?
• SWOT: Conduct a thorough SWOT (Strengths, Weaknesses, Opportunities, & Threats) analysis session – ensure that when assessing strengths, you can define how  they contribute to your competitive advantage.
• Product Analysis: evaluate the current condition of your product and service offerings – tie-it back to your SWOT analysis.

3.       Environmental Scan – Target Markets

• Market Share: evaluate your current position within your current markets and probable opportunities in target markets – who are the leaders?  Why?  How big is the market and is it growing, flat, or getting smaller?
• Target Customers: Can you clearly define who your target customers are?  How you serve them?  Why you are better?  What are their specific requirements that you do or can provide better than anyone else?  Can you serve a specific segment better than anyone else?
• Competitive Analysis: Who are your primary and secondary competitors?  What are their strengths?  What are their weaknesses?  Can weaknesses be exploited?

4.       Strategy Formulation

• Competitive Advantage:  Based on your analysis – can you identify a means to compete that is unique to you?  Are you competing on price, innovation, or quality service?
• Creating Value 1: Answer the question; how do you create value for your existing and target customers?  Is your current model working?  Is there a clear path to differentiation?
• Creating Value 2: How do you create value for your shareholders?  How do you perform vs. key value indicators?
• Mission and Vision: Can you describe a clear purpose?  How you serve your customers?  How you create value?  Why are you better?  Define a long term outlook that is worth fighting for.
• Strategic Alternatives:  Model scenarios that highlight growth (earnings, product type, customers, etc.).  Consider organic, merger, or a hybrid approach.  What do you look like in three to five years?
• Prioritization: Prioritize your strategic alternatives and narrow it down to a clear course of action that can be clearly defined and planned against.

5.       Measurement, Goals and Actions

• Scorecard:  Identify and measure your performance against the vital few measures that will reflect success.  These measures can include: ROAA, ROAE, Asset Growth, Loan Growth, Efficiency, Net Interest Margin, Non-Performing Assets, Product Growth, Customer Segment Growth, Market Share, etc.
• Goals: List a minimal number of goals that will support the achievement of your mission and vision.  Strategic goals should only reflect achievement in areas that create a sustainable competitive advantage.  These can be IT-based, product development-based, physical facilities, people, training, etc.  If the goal can’t be measured – throw it out.
• Action Plan:  Define objectives, and tactics that will achieve your goals.  Assign an “owner” and set clear due dates.  Remember; less is more.  If you overload your actions its likely you won’t get to any of them completed.

6.       Management

• Live it: Instill an operating culture that understands where you are going and each person’s role in contributing to the mission.
• Plan Follow Up:   Treat your strategic plan as if it were your operating budget.  Ensure you are on track.  Variances occur, follow up and course correct when necessary.
• The Board: Integrate strategic execution into the Board agenda.
• Inspect what you expect.

Nobody said strategic planning was easy.  But the benefits are huge if you “do it correctly.”  In the end, strategy is all about dominating where you compete.

Choose your battlefield and systematically work to win the war.

Like WalMart, Apple, and Four Seasons, when a company strives to master their strategy – it is a beautiful thing.

“Willingness to change is a strength, even if it means plunging part of the company into total confusion for a while”.  – Jack Welch

Have you found yourself butting up against the same competitor(s), with the same products, and the same target markets?  All too often, we try to go toe-to-toe with these competitors with the intent to come out on top.  For some, the desired outcome is satisfying; goals met, plan achieved.  For most, achievement generally falls short of expectations.

For those with less than satisfying results, the challenges usually fall into the same categories.  The competitors are beating you on price, or their sales force is better, they may have a stronger brand, better technology, better product or service offerings, bigger marketing budget or all of the above.

Whatever the issues are, the bottom line is that you are being beat on the street.

It is times like these that strategic planning plays a key role.  When was the last time you listed your top three competitors, analyzed their strengths and weaknesses and assessed how you stack up?

A key to dominating your competitors is “Changing the Rules of Engagement”.  There are some very compelling examples of changing the rules of engagement:

• NCNB-NationsBank-BofA: When Hugh McColl became CEO of NCNB (North Carolina National Bank) in 1983 he deployed a methodical, military approach to transforming the small regional bank, via incremental acquisitions and mergers, into NationsBank and ultimately Bank of America.  He successfully engineered over 200 acquisitions of thrifts and banks over a 17 year period.  The “Rules of Engagement” shift came with transforming from a regional bank to a global financial services company by mastering merger and acquisition techniques.  He chose not to compete toe-to-toe organically, but instead to develop a best-practice approach to acquiring and integrating multiple banks.
• Southwest Airlines:    During the 70s when Southwest entered the transportation industry, the competitive landscape was pretty well set.  That did not stop Herb Kelleher and the Southwest team from redefining airline competition.  They initiated their strategy as a regional carrier with an eye on serving the national market.  Their rule changes were pretty clear, they went to a “single” class passenger structure, they only flew 737s, hired non-union employees, and followed a low cost operating model.  They revolutionized their industry by changing the “Rules of Engagement”.  With the exception of Jet Blue, and after many attempts, no other competing airlines have been able to de-throne Southwest’s dominate role as the leading low-cost industry leader.
• Apple: Apple came to market going toe-to-toe with every computer manufacturer.  They had a unique operating system and PC user experience.  As time went on competitive pressures took a toll on the organization.  Apple changed the rules of engagement by bringing back Steve Jobs and shifting from being PC focused to a technology user experience focused organization.  The results have been dramatic.  Do they still make PCs?  Yes!  Have they altered the playing field for their primary competitors?  No question!  What began with a “Changing the Rules of Engagement” has resulted in becoming the most valuable company in the world (it fluctuates between Exxon and Apple).

In short, if you want to maximize your bank’s shareholder value, take a moment and critically examine your competitive landscape.  Consider the following:

1.       Who are my primary competitors?

2.       What are their key strengths (products, services, brand, etc.)?

3.       What are their weaknesses (lacking certain products, turn-over, quality of service, fee structure, etc.)

4.       Define an operating model that you believe would have a competitive advantage in your target markets (product emphasis, service emphasis, alternative products, market segmentation, etc.).

5.       Assess what it would take to move from where you are today to the new operating model.

6.       Fully assess your risks in undertaking this change.

7.       If feasible, develop a comprehensive plan to transition from your current state to the future state.

8.       Execute your plan with buy-in and support from your Board and organization.

Will it work?  It’s up to you.

Can changing the “Rules of Engagement” work?  Just ask Hugh McColl, Southwest, or Apple.  Better yet, gather your Board and team and do your own assessment – couldn’t hurt.

written by Bob Adkins

Over the past three years the banking industry has been in a crisis mode.  Most community banks have been impacted by numerous negative factors, including:  increased non-earning asset levels, increased regulations, tougher and often inconsistent regulatory oversight, decreasing capital levels, low-to-no loan production, federal, governmental budget problems, etc.  Bankers have struggled in dealing with the daily battles of surviving, maintaining shareholder confidence and meeting regulatory demands.

We have just ended the 2^nd quarter and within a few days we will have a snapshot of how the overall industry faired from April to June.  Regardless of the results, we must now focus on the last 6 months of 2011 and our strategic plans and priorities for 2012 and beyond.

o  What will be your banks strategic focus going forward?

o  Do you plan to grow organically or through acquisitions/mergers?

o  How will you deal with your current balance sheet exposures?

o  How will the interest rate environment affect your strategies?

• For banks that have been restricted on the level of interest rates that can be paid on deposits, as rates rise in the future, how will you address your continuing need to grow deposits?

o   Will you increase staff in 2012 due to increased regulatory burdens, or will you increase staff due to anticipated growth?

These are the types of questions that all community bank boards and their senior management teams should be asking as you develop your strategic plans for 2012 and beyond.

Even though the financial crisis has adversely affected banks of all sizes, it may have created new opportunities for community banks to reclaim ground lost to larger banks in recent years.  Here are some of the bright spots that helps create opportunities for growth:

• There are fewer bank competitors in the market today.
• Over the past few years many banks experienced growth in deposit volumes from new customer acquisition and increased deposits from existing customers.
• There may be more community banks looking to merge or sell.
• There is pent-up demand for loans and bank services from small business customers.
• Technological advances continue to level the playing field for all community banks.
• In today’s environment community banks that are survivors have stronger capital and risk management practices.
• Etc.

How can your bank capitalize on many of these opportunities that have arisen from the financial crisis?

“The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand.”  – Sun Tzu, Art of War

All too often when we embark down the strategic planning process, we quickly arrive at where we want to go and how we want to get there.  Then, once we begin to implement the plan we discover that market forces or other environmental conditions impede or derail our execution.

The fatal flaw in executing many strategic plans is the shortfall that occurs from a lack of or insufficient situational analysis. Did we ask the right questions, gather the right data, and integrate our findings to ensure a high probability of success?  Gathering and analyzing quantitative and qualitative data is no small task.

The purpose of situational analysis (evaluating external and internal conditions) is to provide you the insight to determine:

1.       Whether you have the wind at your back and can anticipate rapid execution; or

2.       If market conditions will impede your intended objectives; or

3.       Those key decisions that will allow you to achieve your goals.

SITUATIONAL ANALYSIS

Situational analysis is all about asking key questions and analyzing relevant data.   Done well, it will assist you with determining the velocity of your strategic plan’s execution.  The situational analysis process will either validate or perhaps alter your strategic intent.

In developing your strategy, how much time and energy do you spend on questions and analysis?  Do you effectively evaluate the external and internal conditions that have an impact on your strategic plan?  Here is a brief set of questions and considerations that will assist you with developing your assumptions; they provide the foundation for successful plan execution.

External Analysis

Assessing the external environment in which you compete is essential when gauging the market forces that will support or challenge your plan.  In most cases, understanding these market forces will help you determine if you have favorable or unfavorable conditions to support your strategy.

Key areas to assess:

1.       Economic Trends Impact

2.       Industry Trends Impact

3.       Regulatory Trends Impact

4.       Capital Market Trends Impact

5.       Target Market & Customer Trends Impact

6.       Competitor Trends Impact

Economic Trends Impact

How many times have you set off in a certain direction only to have National, State, or Local economic conditions advance or deter your process? When evaluating economic conditions, ensure that you build assumptions that reflect “what if”, interest rates, employment/unemployment, trade, business trends, and other economic forces that provide a “lift” or “head-winds” when executing your strategy.  For example, in a growing and expanding economy, it’s fair to say that rising tides lifts all ships and that you are likely to have an accelerant in support of your strategy.  On the other hand, if the economy is contracting (like we have experienced over the last three years) and your plan calls for aggressive organic growth, you better be prepared to take food out of your competitor’s mouths, because the economic forces are working against you.

Industry Trends Impact

Are the industry trends supporting or impeding your strategy? In our current environment, one might argue that the large number of bank closures, banks dealing with troubled assets, or banks with insufficient capital, are constrained from competing with a healthy bank that embarks on an acquisition strategy or targets the  customers of troubled banks’.

Regulatory Trends Impact

Have you gauged how current regulatory trends impact your strategy? With the regulators changing the rules, increasing oversight, and in general making it more challenging to operate, can you determine if there is a strategic advantage for your bank under these conditions or is it creating forceful headwinds?

Capital Market Trends Impact

Do capital market trends support or impede your strategy? Capital Market Trends can be a bank’s best friend or nemesis depending on the bank’s condition.  Evaluating how the value of bank stocks or the cost of capital will support or impede your strategy is essential.  With stocks trading down one can argue that the prices of acquisitions are very favorable today.  However, if you require additional capital to execute your strategy, you may discover that the cost of capital may make your desired strategy less attractive.

Target Markets and New Customers

Does the trend in deposit size of a target market reflect an upward, flat or downward trend?  .  Are there a sufficient amount and type of customers that you are targeting to make the effort worthwhile? Deposits are still one of the best leading indicators to determine the attractiveness of any market.  Assessing market conditions and new customer trends can determine the ease or challenge when plotting a growth course.  Gathering and analyzing quantifiable data is key to building sound assumptions.

Competitor Trends Impact

Have you analyzed the strengths and weaknesses of your competitors?   Leveraging a competitor weakness or navigating away from strengths can accelerate and strengthen the success of your strategy.

Internal Analysis

Assessing your internal environment can guide you in determining the probability of success of your strategic plan.  Also, it can help you identify operational and personnel weaknesses that could impede the effective execution of your plan.

Key questions to consider:

1.       Financial Performance Trends Impact

2.       Outcomes of your SWOT Analysis

3.       Peer Analysis Trends Impact

4.       Products and Services Capabilities Impact

Financial Performance Trends Impact

Does your past performance lend strength to your strategy, or create doubts on your ability to execute?

Simply stated, your past performance is an excellent indicator of your future performance.  Unless you have significantly changed the composition of your team, or received a boost from the economy, your past performance is still the best indicator of your future outcomes.  Compare your desired strategy versus your historical performance.  Focus on key measures (i.e. ROAA, ROAE, Net-Interest Margin, Growth, NPAs, Non-Interest Income, Efficiency Ratio, etc.).

Outcomes of Your SWOT (Strengths, Weaknesses, Opportunities and Threats)

Does your SWOT exercise provide you with valuable data in defining your strategy? A SWOT exercise conducted properly is one of the strongest strategic planning tools available today.  If accurate, it provides a comprehensive analysis of your capabilities (i.e. resources, people, product and services, sales, marketing, financial, technology, etc.).  Once compiled, you can determine which strengths can be leveraged, which weaknesses must be overcome, which opportunities are most achievable, and which threats need to be mitigated.

Peer Analysis Trends

How do you stack-up against your peer group? Like financial performance, peer analysis is a great indicator of your ability to execute compared to your peers.  If you consistently perform in the top quartile of your peer group, one can assume that you are poised to be successful with an aggressive strategy.  However, if you are consistently in the lower quartile, you may be setting yourself up for failure with an overly aggressive strategy (again, if resources or team capabilities have improved, then your ability to execute is better).

Products and Services Capabilities Impact

Are your current mix of products and services adequate to support your strategy? Your product and services analysis can provide guidance on which areas need to be improved in order for you to effectively compete and execute your strategy.  In fact, a big piece of your strategy may be to improve the variety or quality of your products or services.

Closing Thoughts

When all is said and done, operating at the highest level requires sound strategic skills and the ability to consistently execute a well thought out plan.

In today’s operating environment, the days of “ready-fire-aim” have long since passed.  I encourage you to take the time to ask the tough questions and validate your assumptions.  No one said strategic planning is easy, but when done well, your probability of success increases exponentially.

The law was passed nine months ago and yet not a single dollar has made its way to any bank.

It seemed so simple. The purpose was to encourage lending to small business and stimulate economic growth, by providing low cost capital to community banks and community development loan funds.  For small to mid-sized banks it had some compelling features, a $30B fund, provides low cost Tier 1 capital, available to banks under $10B, only available during 2011, and allows banks to control cost of the SBLF capital investment within defined parameters.

So far so good.  Additionally, the benefits were attractive and clear, capital cost as low as 1%, simple application process, access to capital for small banks and thrifts, no executive compensation restrictions, and it provided an attractive TARP exit.

And then we get to the criteria. Which include being a bank in good standing (1 – 3 CAMEL), funding up to 5% for banks under $1B (tied to Risk Weighted Assets), up to 3% for banks over $1B (tied to RWA), and TARP banks must retire outstanding TARP securities.  Again, this seemed simple enough.

All this was fine and good.  But here we are at the end of June, few approvals, rule changes and government agencies pointing the finger at each other for causing delays and problems.

It is not like this is overwhelming; the Treasury has received 869 applications for approximately $11.6 billion in funds (slightly over – one-third of the funds available).

Last week, Treasury Secretary Timothy Geithner was in front of the House Small Business Committee wining that the delay in funding is caused by the problems with the banks’ primary regulators.  Didn’t he and the Treasury anticipate that primary regulators might have something to say?  The rules that Congress set up require that a small business lending plan be submitted to the primary regulator at the time the Application is submitted to the Treasury.  Additionally, before this House Committee session, new rules were inserted to assess dividend paying regulations and exclude applications based on other operating policies.  What happened to the condition if you were a 3 or better CAMEL rated bank in good standing?

It appears once again our government makes an attempt to stimulate the economy, but fails to develop a process that ensures execution.  It is getting old.

Here are my suggestions to our government:

1. For those banks that readily meet the new standards, set a date certain, execute stock purchase agreements and make the SBLF investment.
2. For those banks that are rated three or better but fall short on qualifying under regulator defined dividend policies, establish a single waiver for these applicants, provide for cumulative non-cash dividends and make the SBLF investment as well.

Let’s see if our national and local government agencies and leaders can align their resources and demonstrate that they can work together in the best interests of their constituents. The sooner this happens, the sooner that the SBLF will achieve the purpose Congress intended, to help create jobs and promote economic growth in local communities across the nation.

We’re waiting.

written by Bob Adkins

On January 6, 2010 an Advisory on Interest Rate Risk Management was issued by the regulators (the FRB, FDIC, NCUA, OCC, OTS and the FFIEC).  The advisory served to remind institutions of the supervisory expectations regarding managing interest rate risk (IRR) exposures using processes and systems commensurate with each institutions earnings, capital level, complexity, business model, risk profile, and scope of operations.

IRR management is especially important given the current environment of historically low short-term interest rates, and the need to mitigate an institutions exposure to potential increases in interest rates.  For the past few of years, many community banks have focused on asset quality, earnings and capital.   This coupled with the low interest rate environment may have created disproportionate levels of short-term funding liabilities supporting long-term assets.  It is a good time for community banks to review the adequacy of their IRR processes.

Effective IRR management helps bank boards and management teams:

• Make and support key business strategic decisions
• Identify and measure risks
• Value exposures
• Conduct stress testing
• Assess the adequacy of capital
• Measure compliance with internal limits
• Meet financial and/or regulatory reporting requirements
• Support and issue public disclosures

A key ingredient of effective IRR management is utilizing an adequate risk monitoring and management systems.  Key components of this system include board & management oversight, effective policies and procedures, internal controls and a reliable IRR model.

However, IRR models by their very nature create model risk.  Model risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports. This can lead to losses, poor strategic decisions, or damage to a bank’s reputation.

Model risk should be managed like other types of risk.  To this end, IRR models should be subjected to periodic reviews by independent parties.  Among other things, an independent review of a community bank’s IRR model should include a review of the:

• Size, nature, and complexity of the bank
• Model data input, processing and output
• Key assumptions
• Quality of management
• Expertise of staff
• Sufficient interest rate scenarios
• ALCO and Board reporting

Conclusion

IRR management is not merely a process of quarterly reporting using an outsourced simulation model, or about quickly discussing issues in a quarterly ALCO meeting.  If used properly, understood and routinely monitored, IRR management serves as an effective tool for enhancing and protecting capital and earnings, and creating a more efficient operational environment, especially during periods of changing interest rates.

I am sure that there is not a management team or board of directors that aren’t glad to put 2009 and 2010 behind them.  Having experienced a devastating economy, record bank closures, regulatory activism, and for many, assets degrading faster than earnings can cover, the past two years, for many, have been the worst of times.

The Consolidation Message

Now, having dealt with historical challenges, today community banks are dealing with a resounding message, “if you don’t have size, you cannot prosper.”  You hear this message in many forms and from many different sources, at conferences, or in most industry publications. The message is the same, “small to mid-size banks can’t be efficient”, “their stock is ill-liquid”, “the regulatory changes add additional costs and burdens”, “there is no market for their stock”, “their only option is to sell or merge” and….  In essence, the message is if you aren’t at least $500M in assets you are obsolete.  Industry consolidation is imminent.

The Messengers

Not surprisingly, in most cases, it’s the people that benefit the most from consolidation.  It is the banks, bankers, investment bankers, and private equity groups that seek to leverage small to mid-sized banks’ acquiescence.   These roll-up technicians will tell you they bring salvation.  Their story is a simple one: we have ample capital, talented management and boards, the size to effectively compete, and obviously we are the only option if you really care about your shareholders.

And who are their targets, most likely the over 5,000 banks that are $500M or less, many of which are in need capital to fund their growth.

So why not take something close to adjusted book value and let someone else deal with the challenges?  Will shareholders benefit? Perhaps.  Will customers be better off?  Maybe/maybe not.  Will bankers have career alternatives?  Probably not.  Will regulators be happy?  Some.

If you are one of these 5,000 banks what are your strategic alternatives?

Let’s review what we know.  What really drives community bank values?  Solid relationship-based low cost deposits, 1% + ROA, double digit ROE, quality assets, low efficiency ratios, and sustainable non-interest income.  Even in this economy there are numerous banks between $250M – $500M hitting these marks.  Additionally, most consolidators will agree it will be some time before stock values return, for them or for you.

For the banks that are capital impaired or encumbered with continuing asset quality problems, consolidation may be eminent.

However, for those banks that have maintained a well-capitalized status and a modest to strong earnings stream – consolidation is an option, not a mandate.

Are there reasons for community banks to resist consolidation fever?

The short answer, yes!  The reasons why the consolidators want to execute mergers now are also the same reasons why banks should hang in there and be around to fight another day.  Beyond buying low and selling high, consolidators are counting on future favorable market conditions to drive maximum value.  The economy will recover, albeit it may not be until mid-2012 in many markets, but recovery will occur.  Additionally, interest rates will rise and provide the much needed margin relief eventually.  NPAs and charge-off figures have already begun to trend in a favorable direction.  All conditions that provide the basis for creating sound operating returns in the future.

The message I’m hearing from many of my strategic planning clients and bank executives that I speak with every day has been consistent, “throughout 2011 we are going to hunker-down and live to fight another day”.  If this is your intent, don’t let anyone move you from your resolve.

What will it take to survive?

If you choose to survive and create value for your stakeholders, it is going to take more than just hunkering-down.   It’s going to require a strategic agility, not only with customers, but with regulators.  The beauty is you actually have the time to plan and prepare to compete.

Here’s a brief check list of actions boards and management teams should be working on in anticipation of a recovering economy (yesterday’s plan may not be enough to compete effectively over the coming years):

1. Focus: Create a laser sharp growth plan that drives value for your shareholders and customers
2. Scorecard: Identify your vital view metrics that measure your success (and live by them)
3. Resources: Align your information, capital, technology, and people to support your plan
4. Innovate: Adopt new forms of collaboration or business lines to advance your strategy
5. Reward systems: Link your reward systems directly to performance
6. Advocates: Bring all stakeholders together in support of your plan (shareholders, employees, customers, regulators, vendors, and community)
7. Commitment: A non-negotiable vow between your board and management serving the success of the ban

Remember, you will have to assess what is in the best interest of your shareholders, but one thing most can agree upon, in a recovering economy, the community bank model is as valuable to small businesses and communities as it has been in the past.

In the end, if you don’t want the two toughest years of your life go unrewarded, and  if you believe you have the resolve and capability to drive value, buck conventional wisdom, when consolidators come knocking, “Just Say No”.