transforming your community bank − survival of the fittest · transforming your community bank...

Transforming Your Community Bank − Survival of the Fittest

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By Bob Stevenson Consultant, FIS Consulting Services

© 2013 Financial Managers Society, Inc. 1 www.fmsinc.org

Transforming Your Community Bank − Survival of the Fittest By Bob Stevenson, Consultant, FIS Consulting Services Overview Community banks face financial pressure from many fronts: increased regulatory cost, compression of interest margins and loss of fee income. Revenue and expense challenges are so severe that traditional responses to boost financial performance will not create the necessary long-term solutions. This paper describes how executives can create a new model for community banks − one that creates a revenue-focused culture driven by the ability to continuously improve business processes. You will learn how this new model allows progressive financial institutions to survive in these challenging times. State of the Industry According to the Office of the Comptroller of the Currency (OCC), the return on equity for all banks remains well below historical averages. Returns for 2011 were about half of the peak high in the last decade. Even as banks reduce provisions for loan losses, pressures from weak loan demand drive these lagging results. The first chart below shows the industry’s lackluster Return on Equity Trends based on OCC data. The second chart from Mercator Advisory Group indicates the industry’s overall drop in operating income annually in the last 10 years.

Return on Equity Trends for Banks

Source: OCC Integrated Banking Information System

Recessions

System

Assets lessthan $1 billion

‘75 ‘77 ‘79 ’81 ‘83 ‘85 ‘87 ‘89 ‘91 ‘93 ’95 ‘97 ‘99 ‘01 ‘03 ‘05 ‘07 ‘09 ‘11

-5

0

5

10

15

2020%

15

10

5

0

-5


Operating Income and Interest and Fees on Loans (in $Billions)

Sources: Federal Financial Institutions Examination Council Annual Reports, Federal Deposit Insurance Corporation, National Credit Union Association

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$128

$415

$236

$166

$410

$167

14,431 FIs

19,884 FIs

NetOperatingIncome

All OtherOperatingIncome

Interest and Fees on Loans

Total U.S. Institutions

The Drain of Banking Regulation When asked about their profitability challenges, community bank executives provided much discussion on the impact that compliance and regulatory pressure places on their institutions. In interviews FIS sponsored earlier this year with CEOs and CFOs at community banks, executives used strong language to describe the effect compliance expense was having on their organizations. Comments such as the following capture their sentiment: “You’ve got a situation going on right now with regulators where it’s counter-intuitive. It’s like a valve on a system that it is supposed to regulate. When it gets too hot, it lets steam out. When it gets too cold, it forces the system to run harder. But the regulatory environment in banking today is the opposite. When things should be picking up they are clamping down on it. And when things were getting out of hand, they should have clamped down harder.” “But the one thing I would like to throw out that you are probably hearing universally is the incredible regulatory burden. Dodd-Frank is the equivalent of a Japanese tsunami. It continues to wash in and carry debris.” “Government regulations have caused banks to leave some businesses like student loans, as small flat fees do not cover the cost of processing.” Importance of Technology and Social Media Mobile banking, along with the prevalence of social media, is causing bank marketers to rethink old business models on almost a weekly basis. Given the need to attract the youth market, additional investments need to be made in both channel and marketing technologies in order to keep community banks relevant. The trends in the growth of mobile payments and the pervasiveness of social media are highlighted in the following graphics.


$363$417

$479

$599

$749

$1,011

$1,365

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1 2 3 4 5 6 7

Series1

2011 2012 2013 2014 2015 2016 2017

Actual Forecast

Milli

ons o

f U.S.

Doll

arsPercentageof Total POS Retail Purchases

Source: Javelin Research

1.00%

0.80%

0.60%

0.40%

0.20%

0.00%

Mobile Phone Payments

0.01 0.01 0.01 0.02 0.02 0.03 0.03

Series1Mobile Phone Payments - % of total POS Purchase Volume

Source: Javelin Research

Note: 1) Based on response to the question: Ever used online social or professional networking sites like Friendster or LinkedIn? (n=1,756) SOURCE: Pew Internet & American Life Project; NetView & @Plan Data; Nielsen Q1 2010 Consumer Confidence Survey;

•55% of online US adults have 1+ social networking profiles

•21% publish or own a blog•Spend 3x more time on blogs and social

networks than on email

20102008

Social Media Use% All Internet Users

61

29

+110%

2005 2011

YouTube Growth% Active Internet Users

Users average 55 minutes on Facebook every day

-

20,000

40,000

60,000

80,000

Facebook GrowthMonthly Minutes Spent on Site Worldwide (Millions)

2004 2011

Source: Nielsen Net View

Social Media has Grown Rapidly

1 Consolidation in the Industry Regulatory cost and profitability pressure cause consolidation to remain a prominent force and expectation in the banking industry. The FDIC closures seem to have peaked within the last two years, but traditional M&A and consolidation remains rampant in the banking sector as evidenced in the following graphic.


The Problem with Piecemeal Responses Given this challenging environment, most financial institutions are responding in some form or fashion to both the financial and regulatory challenges they face. The problem is many respond with half-hearted measures that often produce mediocre financial results. Many examples exist of organizations trying to side-step their way to high performance. The tactics selected are not fully coordinated and management is not vested in the success of initiatives. Thus results lag expectations. Many banks solve problems on a patchwork basis, and are unable to or don't want to see the long-term ramifications of short-sighted actions. To compound the issue, most employees have little formal training in solving problems. They have few skills (if any) to analyze solutions. As a result, anything that alleviates their problem (or problems) even temporarily, is seen as being a solution, even when it's not. Long-term challenges faced by community banks are particularly complex as they may require adapting new solutions to meet new realities. They may require abandoning long-held strategies in favor of more modern ones and they may require in-depth analysis, compromise and patience − skills many employees simply do not possess. In other words, long-term problems require a great deal of effort and many executives are not willing to invest in the necessary effort to deal with them. Short-term solutions:

• Are usually simple to understand and implement • Rarely require much sacrifice • Provide temporary relief from unpleasantness and discomfort • Allow banks to just get by

In the past, banks pursued short-term revenue programs to increase fee income in areas such as overdrafts. On the expense side, bankers have mandated non-interest expense cuts by a certain percentage across the board to try to improve margins with short-term cost control. Both activities can create a short-term boost, but the pressures

1,048

650 613

84

2007 2008 2009 201

Number of bank mergers and acquisitions, 2007 − 2011

Source: Thomson Reuters and SNL

Transforming Your Community Bank

From the Top Down

Create Sense ofUrgency

Break the Silos

Communicate

Plans


banks face today are not as short-term as these solutions. Bankers need to forego short-term fixes for long-term challenges and take a different approach. How to Transform Your Community Bank In transforming their community bank, CEOs must focus on more than just cost reduction. Banks must ultimately grow revenues with new strategies that leverage new channels (mobile) and reach new customers (Gen X and Y). Insight gained with a demographic analysis of a bank’s overall market potential helps executives focus on new revenue potential, while not dwelling on what was achieved in the past. To transform a community bank from both the revenue growth and cost reduction perspectives, we recommend working with the following strategies: start from the top down, create a sense of urgency, break the silos between functional areas and communicate all new business plans throughout the institution. From the Top Down Any bank-wide initiative is doomed to failure without the support of the institution’s senior management. Changing the culture and model of the community bank requires commitment from executives to both communicate plans and then “walk the talk.” They must show employees how vested they are in changing the culture (and ultimately the financial performance) of their bank. Executives must take a genuine interest in communicating, demonstrating and rewarding company values. Simply preaching the importance of cultural change is not enough − executives must also lead by example. An executive’s vision, passion and commitment to both their employees and customers will become the guiding principle that is carried on from the top all the way down to the employee level. When a bank’s employees feel their organization cares about them, they’re more willing to undergo training in order to roll out new programs. It’s a known fact that the happier employees are with their jobs, the more they will go out of their way to serve customers. By leading by example and with passion, executives can ensure their vision will result in well-executed transformation initiatives. Create an Ongoing Sense of Urgency Given the traditionally conservative culture of banks, it can be difficult to create a true sense of urgency in community institutions. However, today’s circumstances demand it. Survival must not be taken for granted. Banks that survive will have shifted their focus from maintaining the status quo to driving substantive change.

To create this sense of urgency, banks must purposely place all employees in positions where they must perform. Clear job descriptions and related expectations create urgency. A common mistake bankers make when trying to achieve a goal is to plunge ahead without establishing a high enough sense of urgency in themselves and others. Thus communicating urgency is one of the hallmarks of personal and professional


leadership. In an ideal world, behavior shouldn't depend on deadlines and job descriptions. But these tools are needed to create a new model of bank. All transformation efforts should have clear deadlines and due dates because:

• Deadlines represent commitment • Deadlines enforce accountability • Deadlines create a sense of urgency

A clearly understood deadline that is shared, agreed upon, and committed to is the silver bullet of proactive behavior. There is nothing like a good old fashioned message of “it's got to be done by this deadline” that gets people off the pot and into the game. Break the Silos With clear deadlines established, employees must often work in cross-functional teams in order to complete transformational tasks. These teams must transcend traditional bank boundaries. Managers must empower individuals to make recommendations and changes for the greater good of the institution as a whole. Facilitated planning sessions (mentioned later in this paper) will go a long way toward breaking down departmental barriers. Unfortunately, breaking down silos is not easy. But it has to be done if a bank wants to survive in today's digital age. Actions that used to work really well may not work anymore. In today's new economy, banks have to shake up some things and try something new. Carol Kinsey Gorman, an executive coach and author on the subject of breaking down silos, recommends the following activities to help organization break the barriers between functional departments. Reward collaboration Many companies talk about collaboration, but do not reward achievement driven by collaborative groups. Focus on innovation Innovation is triggered by a cross-pollination of ideas, such as when the "right people" happen to meet at the right time and discover, in the course of conversation, that each has information needed by the other. Communicate transparently In any organization, the way information is handled determines whether it becomes an obstacle to or an enabler of collaboration. Encourage networks Employees with multiple networks throughout the organization facilitate collaboration.


Create alignment To help combat the silo mentality, departments and teams need to know how they support or influence other areas of the organization. Mix it up Encourage teams from different areas of an organization to work together. Find opportunities for managers and other employees in the organization to collaborate in cross-functional teams. Focus on the customer Refocus the organization by sharing marketplace information and customer feedback. Get personal Collaborative relationships thrive in an environment of personal trust. Communicate Plans Often and through Different Channels Beyond breaking down silos, effective communication also drives the transformation effort. In almost every study, communication-related issues are the most frequent problems a bank transformation team experiences. The change manager or program manager spends almost 90 percent of their time communicating. For a significant change, a formal Communications Management Plan should be developed that goes beyond status reports. The Communications Management Plan includes the following processes: • Identify stakeholders • Plan communications • Distribute information • Manage stakeholder expectations • Report performance An effective Communication Management Plan will lead to effective control of stakeholder expectations. The transformation may impact nearly all staff, so developing an effective communication strategy becomes very important. Initially there will be many unknowns regarding the change and its potential impact. Some of this may be taken very personally. Therefore, it is important to have a human resource management plan to communicate what will and will not be in scope relative to the management process for changes in roles and responsibilities. It is important to communicate the effort required and by whom. It is important to communicate the objectives. It is important to anticipate what impact the change will have on various areas. Hard-earned experience shows that a series of carefully designed communications, specifically used to address the needs of each audience, has a significant positive impact on the outcome of the transformational change effort. It is critical to assign a communications manager for a transformational effort to analyze the communication


needs of the stakeholder audiences and manage the entire Communication Management Plan from start to finish. Getting Started To jump start the process of building a new model of community bank, two simple actions are required: gain bank-wide consensus with facilitated planning sessions and demonstrate senior management commitment. Gaining Consensus with Facilitated Sessions − A Collaborative Approach to Gain Employee Buy-in To gain the buy-in of employees (but not too many employees initially) a collaborative methodology to solicit opinions and generate ideas on the implementation of the transformative change is necessary. This methodology should be efficient and democratic enough to ensure all employees have a voice in the plan development. The methodology should also have enough structure to guide various action teams toward forward movement, not letting them get hung up on details that are not critical to the project’s success. This collaborative approach will keep group or committee members focused on the task at hand and should extend beyond the initial planning. A group collaborative methodology will be useful throughout the entire life span of the transformation initiative. Show Management Commitment Senior management must show their support and involvement in the transformation effort from the initial communication announcement until the final celebratory dinner. Financial institution executives must all “sing from the same hymnal” when communicating to employees. Formal presentations should be prepared centrally and internal memos crafted carefully. Most importantly, executives must lead by their actions. They should be active steering committee participants. They should champion the new ways of business that surface during a transformative change. Senior management needs to demonstrate its support of the initiative and the employees working to make the initiative a success. Sustaining the High Performing, Model Community Bank

3 Strategies to Sustain On-going Transformation

Create SaleOrientation


Once the initiative to transform your community bank is underway, the real challenge management faces is sustaining the newly created model. Old ways of thinking must not creep back into the bank. Three strategies are of paramount importance for banks to execute on an ongoing basis: create a sales and revenue growth orientation, establish ongoing business process improvement methodology and create a change management system to implement new change. Cultural Change: Sales Orientation In a Nov. 13 American Banker article, Great Southern Bank announced that it would exit its side line fee income businesses of insurance and travel agencies and focus on core banking, as the following quote highlights: “Several failed-bank deals have taken Great Southern to $4 billion of assets and on the cusp of being a player in the Midwest. The Springfield, Mo., company announced late last week that it would sharpen its focus on banking by selling its insurance and travel agencies to specialists in those sectors.” Other banks have found it difficult to diversify their way to solid, new revenue streams. Most banks today are taking the approach of Great Southern and focusing on gathering deposits and making loans. The banks that will succeed with this traditional model must establish a superior sales culture. The culture helps turn banks into selling platforms with employees all aware of their goals and the bank’s performance. And sales training, thoughtful incentive plans and performance measures are the keys to creating this culture of sales. Sales Training Sales training alone will not create a sales culture, but will be a critical component of building your new culture and driving desired new behaviors. Selecting the right sales training for your organization can result from careful examination of your goals and an honest appraisal of your staff’s current strengths and weaknesses. Sales training delivered in isolation of your bank’s transformation and long-term objectives will fail to deliver the desired results. But training customized to your bank’s goals will more likely generate long-term results. The sales instructor should be an experienced sales professional, not just a good instructor. Any sales training vendor employed by the financial institution should have a core competency in banking. The sales training should map to the products and services being sold by the trainees, and the curriculum should be customized for lenders versus tellers, etc. Be sure to also include in-the-field sales coaching. Training merely introduces new skills, while practicing skills in the field, and receiving “in the moment” coaching, will actively internalize the required new skills. And in-the-field training will help sustain the sales culture your bank will work so hard to achieve.

http://www.americanbanker.com/issues/177_218/great-southern-to-sell-travel-insurance-units-1054255-1.html


Incentive Plans

Few topics in the banking business generate as much controversy as incentive compensation. Deciding how to compensate employees beyond their base pay, and for what, is a key aspect of running an effective community bank. Yet few executives integrate their plans with their profit and sales objectives. According to bank incentive compensation expert Margaret Kane, bankers should follow these three principles when designing a new, comprehensive incentive plan: 1. Start by identifying your strategic profit drivers. Too many plans fail simply because they don’t incent employees to perform activities that are profitable for the bank. “Unit-based” plans in particular often cause employees to push products that customers don’t need and won’t use. 2. Keep the plan simple. If your employees don’t understand how their activities will translate into higher variable compensation, you’re spending money needlessly. The best plans use just four or five components, such as deposit growth, loan growth, new household acquisition and unit sales. 3. Tie individual compensation to bank performance. Too many companies pay employees for their individual sales, regardless of whether those sales are truly profitable, or whether the bank is successful. Other banks only incent salespeople when the bank overall reaches its performance targets, regardless of individual achievement. Performance Measures The old saying that “you get what you measure” couldn’t be truer than with sales culture transformation efforts. Operational and sales reports should be adjusted to measure the impact of any changes as they become implemented. New analysis will need to be created if new processes require different key performance metrics. There are typically meaningful opportunities to improve overall results by adjusting both the reporting and incentive reward systems, including: • Production goal-setting to include not just metrics driven by the transformation initiative • Periodic reporting of, and management follow-up to, performance against the goals,

including coaching and other corrective actions to ensure focus on the desired results • Incentive rewards designed to ensure the collection of fees and achievement of margin

goals that are enabled by a transformational change effort


Cultural Change: Continuous Process Improvement Establishing a sales culture will not compensate for inefficient processes and low productivity. Even high-performing banks must continually challenge themselves to improve their operations and efficiencies. Constant introduction of new technologies challenges bankers to evaluate how their own bank can benefit from new applications. Our experience with bank technology and industry practices has found common themes in business processes that should be investigated in order to optimize performance: • Poorly deployed technology and/or inadequate use of available systems that support all

aspects of back-office processing and servicing, ranging from imaging and workflow management, to underwriting tools, to document preparation systems.

• Misaligned duties and responsibilities are found across an organization, most typically with experienced senior staff engaged in low-value-added tasks. This is particularly common in commercial lending.

• Underutilized staff deployed in markets with low business potential and/or portfolio assignments overload certain lenders while underutilizing the full capacity of the bank staff.

• Redundant checks and controls that do little or nothing to actually improve the quality control function, but instead slow processing.

Cultural Change: A Formal Change Management Process Accommodating ongoing change requires a disciplined approach to ensure the stage is set up front and the return is achieved at conclusion of each effort. Given the operational focus most managers maintain, managers often forget how difficult change can be. It is much more than just coming up with an idea one day and then doing something different the next day. A significant change may touch on virtually every process and procedure within a financial institution. One of the “laws” of organization change is that “People don’t resist change, they resist being changed.”1 The best way to bring people on board is to have them participate in the change process. Each potential stakeholder should be evaluated to develop an understanding of the specific roles and responsibilities required from their organizations, including identification of the roles for key personnel. An experienced facilitator, combined with subject matter experts, should lead the bankers through a discussion to evaluate a proposed change. Typically these sessions are designed to gain agreement on the following: • Scope • Measurable objectives • Constraints • Guiding principles • Roles and responsibilities • Initial identification of risks

1 The Team Handbook, Oriel Incorporated, 2003. Chapter 1 − 7


• Communication strategy • Who is authorized to make what types of decisions? • Executive roles in sponsorship • Control and monitoring process • Human resource strategy The smoothest improvement occurs when the right stakeholders are involved at the right time, doing the right thing. The changes the organization is going through are not “just a system change.” They impact how everyone works and cooperates. Change management is essential.

Summary Transformational change is often required in these tumultuous economic times, but it is never easy. By taking a proactive, comprehensive and sustainable approach, banks can change dramatically. And with significant change comes the solutions for dealing with excessive regulation, margin pressure and revenue shortfalls. For information about FIS Consulting, call 800.822.6758 or visit www.fisglobal.com.

Published by: Financial Managers Society, Inc.

100 W. Monroe, Suite 1700 Chicago, IL 60603

312-578-1300 [email protected] www.fmsinc.org

http://www.fisglobal.com/

mailto:[email protected]

http://www.fmsinc.org/

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