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War Games

January 27th, 2012 |

In late fall of 2009, the president and chief executive officer of Hancock Holding Co. in Gulfport, Mississippi, got a call from the Federal Deposit Insurance Corp. in Washington, D.C. The agency was looking for someone to buy a dying bank. Potential buyers had four days to bid. 

That bank just happened to be on Hancock’s wish list of potential acquisitions, a result of a board strategic planning session in the spring of that year. Hancock President and Chief Executive Officer Carl Chaney had even visited the struggling bank and talked to management, but couldn’t get comfortable with the quality of the loans on the bank’s books.

Hancock ended up the only bidder for the thrift with $1.8 billion in assets, which was called Peoples First Community Bank in Panama City, Florida, and might not have bid at all if Hancock hadn’t already kicked the tires.

Not having a lot options, the FDIC agreed to Hancock’s offer and the agency agreed to take 80 percent of the failed bank’s losses up to $385 million, and then 95 percent after that, resulting in a purchase gain for Hancock of $20.7 million after taxes.

The FDIC closed the bank the week before Christmas, on a Friday. Hancock reopened the ATMs the next day and the offices that Monday.

“I can tell you absolutely we would not have been able to do that transaction without strategic planning,” Chaney says.

Today, bank boards are scrambling to come up with their own strategic plans in an environment of slow loan growth and squeezed profit margins. The strategic direction of an institution is the board’s responsibility, and more and more boards are realizing they need to become much more active and engaged in the process than they were in years past. If bank boards want to acquire, they need to decide how they’re going to do it well ahead of that phone call from the FDIC or a desperate CEO.  In some cases, past sources of income like commercial real estate loans have simply dried up. The battle ahead for mere survival is forcing a heightened attention to strategic planning for many community banks especially, and their boards can’t afford to rubber stamp management’s plan.

 “In the past, (outside) directors were part of very vague conversations,’’ says Michelle Rae Gula, president and owner of m. rae associates inc. in Walnutport, Pennsylvania, which does strategic planning for community banks. “Management would do most of the work and provide the reports, with the board saying yes or no.”

Then the financial crisis came about, and you saw “directors put over the coals for what they should have known and been involved in,’’ she says.  A frequent complaint in FDIC lawsuits against failed bank officers and directors is that they didn’t exercise due care in their jobs.

Regulators are demanding boards become more actively engaged, but there’s no manual or guidance about how strategic planning should be done, Gula says.

She has worked with board members criticized by regulators who now want the strategic planning meeting minutes to take note of their engagement, questions and comments. A strategic plan and the minutes from the sessions may be reviewed by regulators during an exam.

Most of the interest in strategic planning, however, is coming from board members, rather than regulators.

“There is more of a sense of urgency in terms of restoring or enhancing profitability,’’ says Jim McAlpin, an attorney with Bryan Cave LLP in Atlanta, who has participated in some strategic planning sessions.  In the past, when profits came easy, “there wasn’t as much thought and debate on the part of board members as there is now,’’ he says.

He says the board should set the goals in consultation with management, rather than the other way around. He said he recently attended a board meeting where management presented profit goals for the year and the full board said: No, do better than that.

Geri Forehand, national director of strategic services for Sheshunoff Consulting + Solutions in Austin, Texas, says he is seeing independent board members getting engaged earlier in the strategic planning process when previously they didn’t get involved until management was practically done formulating a plan.

 “If you look at the profitability before 2007, most banks were doing extremely well and boards were not too involved,’’ he says. “There is not a question in my mind that boards are becoming more active in the planning process.”

McAlpin thinks the board should meet once a year for strategic planning.

“There is nothing more important the board does than picking the CEO and setting the direction the bank will take,’’ he says, “as opposed to waking up three years down the road and saying ‘how did that happen?’”

Some key questions for boards to ask about strategy include: If the focus of the bank is to reduce non-performing assets, why is that? If we are trying to grow deposits, why is that? What is the value of the bank and who are the potential acquirers? If the bank isn’t in a position to sell, how can it get there? If the bank wants to acquire competitors, does it have the capital it needs to do so? If not, how will it get there? Those are all strategic planning questions.

“You can’t leave it completely to bank management,” McAlpin says. “I think it’s really important for every member of a board of directors to be able to articulate in concrete and simple sentences what the direction of the bank is. If your board can’t do that, you’re not engaging in enough strategic planning.”

Gula says she starts strategic planning by interviewing in confidence all board members and C-suite executives about what they think needs to be on the agenda. She wants to focus the strategic planning meeting on the most important topics that everyone agrees on. She also provides materials ahead of time so board members who might not be ingrained in basic banking terms (e.g. what’s a CAMELS rating?) won’t take up valuable time getting classroom instruction.

However, outside directors who don’t have a lot of experience in banking do bring something to the table. If the strategic option under consideration is to buy another bank, they may have years of experience in business where they know the potential pitfalls and problems from an acquisition, or they may have knowledge of their communities to sense how a deal will be perceived, Gula says.

Not everyone agrees on who should take the lead in setting a bank’s strategy. Gula says the board and management play an equal role in setting the agenda and steering the strategic direction of the bank.

McAlpin thinks strategic planning is really the domain of the board, with management offering its input. He urges boards to set their own goals, profit-focused or otherwise, while getting feedback from management.

“If those goals are unrealistic, you need to know,’’ he says.

One bank that does get board members involved early is Minneapolis-based U.S. Bancorp, the parent company of U.S. Bank.

Patrick Stokes, the former chairman and CEO of Anheuser-Busch who is now the company’s lead independent director, says executives come up with a five-year plan and a budget, and the discussion ends up being around that plan and measurable goals. But the board discusses with management ahead of time what the agenda is going to be.  Last year, the board got together for its bi-annual offsite strategic planning session in October, for three days at a hotel in Arizona.

“The board was interested early on in January, April and June in discussing and understanding the agenda for the October meeting,’’ Stokes says.

CEO Richard Davis also met with the board ahead of time to discuss the agenda, Stokes says.

He wouldn’t give specifics on what came out of the October strategic planning meeting, other than to say the company was sticking to the areas of banking where it has expertise and “not going into extraordinary areas that the bank has not been in.”

This has been a theme for U.S. Bancorp for years, and really helped it thrive in the financial crisis while other banks retrenched. The company spun off the relatively small investment bank it owned, Piper Jaffray, in 2003, and decided to focus instead on what the bank did best, pretty much everything else but investment banking.

“That really came out of strategic planning,’’ says Stokes. “We didn’t get distracted thinking we needed to be international. We didn’t want to get into those special purpose investments (CDOs, etc.).”

The plain vanilla approach to banking enabled U.S. Bancorp, now with $330 billion in assets, to avoid some of the problems that crippled many of its large competitors. It was in a position to increase branches, employees, loans and steal market share from rivals while other banks lost ground. In the summer of 2011, it ranked number five among top banks and thrifts by deposit market share, up from 11 in the year 2000, according to SNL Financial, and this without buying a failed mega-bank such as Washington Mutual Inc. or Wachovia Corp.

Stokes says he can’t remember a board meeting going by without a discussion of progress in meeting strategic goals. 

Reviewing plans regularly is key to making them work, say consultants who guide the process. There are some banks that do a strategic plan and then don’t look at it again until a year later, Forehand says. Instead, Forehand thinks banks need to review their strategic plans at least quarterly.

“You’re not going to have the kind of success that you want if you don’t look at it again for another year,” he says. “You can’t hold management accountable (for it) in the interim.”

It’s okay if you have to redo the strategic plan because the market has changed. Revisiting your strategic plan will make you realize it’s time for a change, consultants say.

The strategic plan and the accompanying tactical plan all come together in one document, not more than 20 or 30 pages long, says Gula. Once the institution decides on its goals, it can set tactical and measurable achievement plans.

“You don’t want to add a lot of verbiage,’’ she says. “You want people to read it, grasp it and continually refer back to it.  If every board member can’t say what the top three focuses are of the institution, than you haven’t done your job.”

Hancock Holding in Mississippi has clearly made growing bigger a priority. Strategic planning has been discussion about how to achieve that goal.

 Its largest purchase so far has been the June 2011 acquisition of a much bigger rival, New Orleans-based Whitney Holding Company, which added $17.7 billion in assets to give it $19.4 billion in assets total by the end of the third quarter.

The deal wouldn’t have happened without strategic planning, because the board was ready to buy Whitney when an opportunity arose to move quickly in late 2010, having identified the bank as a potential target earlier that summer, says Hancock CEO Carl Chaney.

“My grandfather always said, ‘good deals never come on payday,’ and that’s true,’’ Chaney says. “If we have a major acquisition opportunity, I don’t want to be scrambling with my board and trying to bring them up to speed real quick. One, it’s not fair to them. If I were an outside director, I wouldn’t want to run and jump in those things without a thoughtful process.”

The strategy sessions that led to the Whitney acquisition took place in June of that year. The board met at a director’s Biloxi waterfront home starting at 7:30 a.m., breaking for only a 30-minute boxed lunch and wrapping up in the afternoon of that same day. Blackberrys were shut off, not set to vibrate. The board was focused.

The discussion ranged from challenges and risks to potential opportunities. Should the bank enter a new line of business? Should it look at failed banks? How about a traditional acquisition?

If the board wanted to buy, who would it buy? A map was brought out and the board identified markets where it wanted to be and the group drilled down which banks were in those markets. Then, which of them made sense in terms of a cultural fit and balance sheet mix?

Whitney made it to the list of potential acquisitions. But who knew if it would sell? The bank was much bigger than Hancock. It had been around since 1883.

One night months later, Chaney sent an email and called Whitney’s CEO and left a message. The CEO agreed to a meeting. Within a couple of weeks, Hancock had made an offer and Whitney accepted.

The company expects to get $134 million in annual cost savings from the acquisition, after spending about $125 million in pre-tax merger costs. Hancock doubled its profits in the third quarter to $30.4 million, including merger-related costs.

Strategic planning also got the bank ready with the capital it would need to make such acquisitions. In 2009, it went out with a stock offering for $150 million and received such an enthusiastic response that it was oversubscribed by four times and needed to cut back to a net of $167 million. 

To that end, strategic planning was critical to Hancock’s success. Boards that are active and engaged set the standard for other boards to follow.  They also revisit their plans continually throughout the year to see what progress they are making. Doing that could ensure the bank thrives even in the face of calamity, just like U.S. Bank and Hancock Bank did. 

nsnyder

Naomi Snyder is the managing editor for Bank Director, an information resource for directors and officers of financial companies. You can follow her on Twitter at twitter.com/naomisnyder or get connected on LinkedIn.