It's Strategic Planning Season Again

 


• Too many banks.  The industry is bound to continue reducing capacity, not only through FDIC assisted deals but also through natural consolidation (such as the First Niagara-Harleysville merger).  We have not reduced capacity in our business for years.  Instead, we continued to build branches.  Investor capital flocked to deposed CEOs in hopes of getting yet again 3X book after 5-7 years of ballooning the balance sheet with brokered CDs and shared national credits.  Those days are over, as we all know.  Discipline has returned to the markets, as well as hard times instead of go-go days.  The result is a welcome "ventilation of the system" which will yield many opportunities for surviving banks to prosper further by acquiring other banks, branches or branch systems, lifting out banker teams and snagging customers from their brethren.



• Changing customer views.  High rates used to be the main attraction to retail customers.  Today they are viewed with some suspicion, as they imply to many a bank that is having difficulty raising deposits.  Perhaps I'm giving too much credit to the market, but it is a fact that the megabanks have attracted more than their fare share of deposits since they have been unofficially declared "too big to fail."  So today, high rates might connote problems, not bargains.  At the same time, how do community banks combat this new market positioning that the largest banks have attained with the government blessing?  There are significant differentiation implications following this shift in market perception.  Big banks might still be perceived as the big bad banks, but they are safe...



• Balance sheet discipline.  Second quarter earnings clearly demonstrated to me that there is a bright line between those banks with balance sheet discipline and those who temporarily put it on hold to capture what they thought were irresistible opportunities.  Banks operating in the very same markets have markedly different asset quality, funding and capital profiles, depending upon their core strategy and the will to say "no" when an asset category exceeds their risk-based-capital limits.  Those banks that put limits on commitments vs. outstandings; who used fine categories vs. gross ones (e.g. office space vs. commercial real estate); who did not leverage the balance sheet using borrowings and wholesale funding sources beyond a small percentage; who included deposits as a major category in their Relationship Managers' incentive compensation more than two years ago; and who had little tolerance for credit exceptions; those banks have done better than others regardless to the market.  The point is, community banks reflect the communities in which they operate, and, as such, when the market tanks, so does the bank (Michigan is a good example...).  At the same time, internal discipline is the differentiator for those who turn around the earliest and who suffer the least.  Refining and intensifying this discipline is an important element to today's strategic planning, one that should not be forgotten as the economy turns around and times get better.



• Differentiation from the mega-banks.  We should all recognize that what's important to us is not necessarily relevant to the big banks. This is not just a scale statement.  It is a market positioning and value proposition statement.  Cross selling is far more important to community banks than to their largest brethren, for example.  It goes well beyond business tactics, though.  Credit woes plague so many of us, but the larger banks can handle them better because their balance sheets are far more diversified across industries, geographies and also businesses (beyond commercial banking).  Similarly, when consumers change their behaviors to reduce NSF incurring activities, we all suffer, but community banks suffer more, since they do not have as many sources of fee income as do the largest banks.  Understanding the differences and managing them are both risk reduction tools as well as differentiation opportunities.



• Equity markets are open for business again.  This is true not only for capital raises, both public and private. While this is a momentous development that will facilitate consolidation and bank growth, it also presents other opportunities.  This is a great tie for public banks to clean house, develop a story and start executing on it.  Analysts will listen.  This isn't the time to figure out how to "make the quarter." Not that there is ever a good time for that, but the temptation is strong at times.  Right now the difference in stock performance across the entire SuperCommunity Bank spectrum is generally small, and often not directly related to performance.  Analysts expect the worst and indeed have their expectations met in most cases.  However, they are also looking for stories, for banks which might be seizing opportunities even as the storm rages on, and who can fit those opportunities within their strategic story and identity.  Showing the likelihood of future earnings is a great plus in every environment, and especially today.  Ironically, today's stock prices are based more than ever on tomorrow's financial results.