Business Strategy for Banks and Credit Unions

Achieving Growth, Loyalty and Profitability Through

Concrete, Effective, and Executable Business Strategy

for

Community Banks and

Credit Unions

August 2013 Serge Milman, Principal Partner 415.294.1110 [email protected]

Optirate.com (blog) SFOconsultants.com (website)

415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com

Agenda

n State of the State

n Challenges Facing Community Banks and Credit Unions

n Why Strategy is Essential?

n What is a (true) Strategic Assessment?

n Wrap and Special Offer

2

415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com 3

Serge Milman is the principal consultant of SFO Consultants. Serge is a recognized leader in the areas of strategy development, innovation, and operational excellence. Serge has served clients in numerous industries & sectors, including banks, credit unions, insurance companies, brokerages, credit card companies, payment processors, airline companies, manufacturers, universities, and technology companies during his more than 20 year career. Serge was a former founder and CEO of Optirate – a service that aimed to enable Banks and Credit Unions acquire profitable customers. Previously, Serge was a vice president of Wells Fargo Bank, where he was responsible for innovation and operational efficiency of a nearly $2 billion business unit. Serge also held consulting positions with Mitchell Madison Group and McKinsey & Co, where he served clients in various industries in the areas of corporate finance, strategy and operational efficiency. In addition, Serge was a Sr. Director for Exigen Group, where he founded and grew an internal cross-‐‑functional consulting team that was tasked with generating revenue based on a consultative sales approach.

Serge contributes to Optirate.com, a blog of strategic and operational insights relevant to Community Banks and Credit Union. He received his MBA from the Stern School of Business at NYU, and earned an undergraduate degree in business and economics from the University of California at Santa Barbara (UCSB).


Community Banks Not Participating In Banking Industry’s Growth And Profitability Recovery

4

$141 $120

$11 $11

2012 Profits >$5b $1b -‐‑ $5b Community Banks

2012 Banking Industry Profitability ($b)

Community Banks earned less than 8% of the $141b profitability enjoyed by the industry

2012 Banking Population

$20

$673

$21 $1.8

2012 Profits >$5b $1b -‐‑ $5b Community Banks

2012 Banking Industry – Average Per Bank ($MM)

Community Banks

6,424 / 91%

>$5b 178 / 2%

$1b -‐‑ $5b 490 / 7%

Community Banks represent 91% of the Banking Industry with a total of ~6,400 institutions

An average Community Bank earned just $1.8MM (<10% of the industry average)


Competitive Pressure Continues To Skyrocket From Traditional Competitors And Non-‐‑Bank Entrants

5

Mega-‐‑Banks and Regionals

Moving strongly into Community Bank turf – small business banking

• Mind-‐‑Share • Product Pricing • Technology • Value Added Services

Non-‐‑Bank Entrants

Winning large swath of traditional Retail Banking Base

• Awareness / PR • Low Cost • Technology • User Experience

Community Banks and Credit Unions

Cut throat competition for best customers

• “Local” factor? • Perception of berer service?

Impact Leverage


Competition Beginning To Impact Community Banks

6

$1195 $1183 $1176

2010 2011 2012

Deposit Base (Banks with Assets < $1b)

1.37% 1.02% 0.76%

2010 2011 2012

Deposit Rates (Banks with Assets < $1b)

$922 $874 $853

2010 2011 2012

Loans (Banks with Assets < $1b)

3.79% 3.82% 3.72%

2010 2011 2012

NIM (Banks with Assets < $1b)

77% 74% 73%

2010 2011 2012

Loan / Deposit Ratio (Banks with Assets < $1b)

Source: FDIC SDI


Competitive Impact Not As Severe On Slightly Larger Banks

7

$778 $770

$785

2010 2011 2012

Deposit Base ($b) (Banks with Assets $1b -‐‑ 5b)

1.24% 0.90% 0.65%

2010 2011 2012

Deposit Rates (Banks with Assets $1b -‐‑ $5b)

$624 $599 $603

2010 2011 2012

Loans (Banks with Assets $1b -‐‑ $5b)

3.63%

3.84% 3.74%

2010 2011 2012

NIM (Banks with Assets $1b -‐‑ $5b)

80% 78% 77%

2010 2011 2012

Loan / Deposit Ratio (Banks with Assets $1b -‐‑ $5b)

Source: FDIC SDI


Weak Franchise Value Plague Community Banks

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Ø Anemic Growth Ø Weak Profitability (fueled in part by

unsustainable cost structure)

Ø Heightened Regulatory Pressure Ø Changing Consumer Preferences

Ø  Escalating Competitive Pressure

þ  New Capital available at a steep discount

þ  Lirle or no interest from acquirers

þ  70% -‐‑ 90% P/B


Overcoming Challenges Requires Proactive Action

9

Revenues

Profits

Growth of Existing Business Growth of Existing Business q  Wallet Share q  Lending q  Fee Income

Growth from New Business Growth from New Business q  New Geog Markets q  New Products / Services q  Fee Income q  Acquisitions

Cost Management Cost Management q  Channel Rationalization q  Staff Rationalization q  Sourcing


Challenges in Growing Existing Business

10

Wallet Share q  20% customers = 240% Profits q  Most Banks don’t know which

customers are their “20%” q  Avg 10% -‐‑ 20% wallet share q  2 Products / customer q  Products & services offered on

a “spray & pray” approach q  Segmentation q  Needs Assessment

Lending “60% of Community Bankers expect to grow through C&I lending in 2013”

– Desperately Seeking Loan Growth, BankDirector.com

Yields T&Cs Competition

Limited Asset Growth with continued pressure on NIM

Fee Income q  Retail checking fee income (account fees, OD, interchange

fees) likely to evaporate q  Free offers from Community Banks (and Credit Unions) q  Prepaid (goBank, BlueBird) q  Schwab, Fidelity, etc. q  Simple, Moven, Discover

q  Few other meaningful Fee Income streams


Challenges in Achieving Growth From New Businesses

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New Geographic Market Entry q  Requires extensive planning q  Expensive in cost, management and

staff time commitment q  Most new locations fail to generate

expected revenue q  Most new locations are unprofitable q  Few retail customers want / need

branches; business customers best serviced at their location

New Product & Service q  Requires deep understanding of

customers’ needs q  “Me too” strategies likely to lead to

further commoditization and inability to generate profit

q  Products & Services must increase loyalty (wallet share) and profitability

q  Expand into “non-‐‑traditional” Retail Bank Services

New Fee Income q  Product Development charged with

creation of differentiated and value-‐‑add products

q  “Me-‐‑too” products may result in customer acceptance but not profitability or increased loyalty

q  Cross-‐‑sell programs essential to generate customer acceptance

Acquisitions q  Requires access to capital q  Target assessment and due diligence

require specialized (and costly) skills q  Recognizing synergies requires

focused execution with laser-‐‑like focus on metrics


Challenges With Cost Management

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Operational Efficiency requires

Focus on Customer Needs

Slaying The “Sacred Cows”

Channel Rationalization

Staff Rationalization Sourcing


Strategy is a

coherent set of choices about

where-‐‑to-‐‑play (WTP) and how-‐‑to-‐‑win (HTW)

and,

if that WTP & HTW is significantly different than the current one,

a credible path for gering from the present to the targeted state. -‐‑ Roger Martin, Dean of the Rotman School of Management

and author of Playing to Win: How Strategy Really Works


But I don’t need no stinking strategy…


But my Bank … is the most respected , has the highest rating in the community… much higher than the larger Banks

Then performance should reflect ✖  20%+ annual revenue growth rate ✖  15% -‐‑ 20%+ ROE ✖  2x Book Value


6.90%

2.51%

1.52% 1.29% 1.05% 0.87% 0.77% 0.72% 0.59%

Branch Operating Costs, % Deposits

But my Bank can just… open a branch to generate incremental growth and profitability

Source: Optirate, Will the Bank Branch Ever Return to Profitability, hrp://bankblog.optirate.com/bank-‐‑branch-‐‑profitability/


Yes, but ?  Will the “high-‐‑tide” come? ?  When? ?  Will the Bank be around to

enjoy it?

Are you willing to bet your Bank on the ‘hope’ strategy?

But my Bank can just… wait for the “high-‐‑tide to lift all boats”


Yes, but ?  Most consumers don’t need

more than a set of basic services (DDA, Debit, Direct Deposit, Bill Pay) which generate non-‐‑operating losses

?  80% customers = 140% Profit Loss

But my Bank can just… sell more to existing customers (or sell more DDAs)


“60% of Community Bankers expect to grow through C&I lending in 2013”

– Desperately Seeking Loan Growth, BankDirector.com

Yields T&Cs Competition

Limited Asset Growth with continued pressure on NIM

But my Bank can just … write more C&I loans


But… ?  PFM lacks widespread awareness

and even weaker usage rates

?  Uncertain business case for revenue & profit growth

19%

8%

Awareness Use

PFM Penetration

But my Bank can just… Grow loyalty with PFM (or merchant funded discounts, etc.)

Source: Optirate, ComScore’s 2011 State of Online & Mobile Banking Raises Red Flags, hrp://bankblog.optirate.com/comscore-‐‑2011-‐‑online-‐‑mobile-‐‑banking-‐‑red-‐‑flags/


But… ?  Most lack clear

pathways to growth and ROE

?  Require expertise and investment that are not readily available

?  There are many good opportunities, but ?  which ones are the

right one for your bank? your customers?

?  in what order should they be deployed?

?  how best to extract value from each?

But my Bank can just… PFM Mobile P2P

Under-‐‑ banked

Un-‐‑ Banked

Merchant Funded Rewards

Free Checking Prepaid Reward

Checking

Wealth Management

Asset Based Lending

Investments Life Insurance

Financial Literacy

Treasury (SMB)

Payroll (SMB)

Merchant Services (SMB)

E-‐‑ Commerce (SMB)

Cash Flow Mngmt (SMB)

GenY

OD Transfer

ACH, Cash Concentr, Positive Pay (SMB)


76% 91%

100%

132%

173% 165%

84% 94%

118% 126%

<$250MM $250 -‐‑ 500MM

$500 -‐‑ 1b $1 -‐‑ 5b $5b -‐‑ 25b >$25b

McAdams, Wright, Ragen Mercer Capital

But my Bank can just… Sell itself to the highest bidder

Community Banks

-‐‑37%

0%

-‐‑14%

38%

<$250MM $250 -‐‑ 500MM $500 -‐‑ 1b $1 -‐‑ 5b

Volume of Acquisitions, 6mo 2013 % Increase from 2012 Source: CB Resource

146 / <44%> 152 / <20%> 141 / <15%>

183 / <30%>

35 / <5%> 63 / 354%

31 / 317%

117 / 121% 101 / <9%> 118 / 9%

79 / 16%

144 / <1%>

<$250MM $250 -‐‑ 500MM $500 -‐‑ 1b $1 -‐‑ 5b

Low, Avg and High P/B Acquisition Multiples YTD 2013 (% Increase from 2012) Source: CB Resource

Trading Multiples -‐‑ Price / Book Ratios Source: McAdams, Wright, Ragen, Q1 2013 and Mercer Capital Public Bank Peer Report, 4/9/2013


Tactics

Tactics

Tactics

Tactics

More Than Ever, Knowing ‘What To Do’ Requires A Comprehensive Strategy

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Strategy

Results

Business Strategy serves as the foundation guiding and enabling adjustments to ensure success

Results are a function of both a clearly spelled out strategy and strong execution and serve as the basis for ongoing review & improvement

Tactical execution must always support business goals which help to set priorities


Strategic Assessment Begins With Explicit Definition of Business Strategy (WHAT & WHY)

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Business Strategy

?  How does Value Proposition address the needs, wants and demands of our current and prospective customer base?

?  Is the Value Proposition compelling?

?  How does it differentiate us from the competition?

? What is our competitive advantage (how are we berer, faster, cheaper, how do we add more value, do we provide a unique offering as compared to the competition)?

?  How do our customers recognize our Brand? Why is this important to us?

?  How does this enhance the value of the organization?

Value Proposition

Voice of the Customer

Customer Profile

Products & Services

Channels

Geographies & Locales

Resources, Partners and Competency

Revenue & Cost Models

Sustainability



25

?  What are the needs & wants of our current and prospective customer base? Today? Tomorrow?

Business Strategy

Value Proposition


Customer Profile

Products & Services

Channels




Sustainability



26

?  What are the profiles of the current customer base?

?  Which customer profiles are more important to our organization?

?  Are we targeting the right customers given our Value Proposition?

Business Strategy

Value Proposition


Customer Profile

Products & Services

Channels




Sustainability



27

?  How do our products & services deliver on our Value Proposition? What are the gaps?

Business Strategy

Value Proposition


Customer Profile

Products & Services

Channels




Sustainability



28

?  What channels are we using for sales and support?

?  Are these the most efficient and effective channels?

?  What other channels are available and why have we determined not use them?

?  How do we align channels, products / services, customer profiles, VOC and pricing?

Business Strategy

Value Proposition


Customer Profile

Products & Services

Channels




Sustainability



29

?  What geographies and locales are important to us and why?

?  Are we currently dominating in these geographies? If not, why not? How will we change this?

?  What are the compelling reasons for geographic focus?

?  Is our Value Proposition restricted to specific geographies? Should it be?

Business Strategy

Value Proposition


Customer Profile

Products & Services

Channels




Sustainability



30

?  What resources are required to deliver on our Value Proposition?

?  Do we own the necessary resources in sufficient quantities?

?  Have we leveraged the right capabilities so as to focus extending our differentiation in the market place?

?  Do we have sufficient capabilities and resources to deliver on customers’ expectations?

?  Should we address the gaps or should we choose to abstain from providing those products & services?

Business Strategy

Value Proposition


Customer Profile

Products & Services

Channels




Sustainability



31

?  What is revenue and cost implications for the various products / services, customer profiles, and channels?

?  Do we have the capability of participating in all of the current segments?

?  What other sectors should be investigated that further Value Proposition and customers’ needs?

Business Strategy

Value Proposition


Customer Profile

Products & Services

Channels




Sustainability



32

?  What factors / events have a likelihood to disrupt our Value Proposition, our differentiation, and impact our Revenue and Cost Models?

?  How do we anticipate such events and negate these impacts?

Business Strategy

Value Proposition


Customer Profile

Products & Services

Channels




Sustainability


Strategic Plan must then be distributed across the organization to ensure alignment, enhancement and required change-‐‑management (HOW, WHO & WHEN)

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Operationalization of strategic plan q  Technology assessment q  Customer segmentation, acquisition

& retention q  Relationship Management planning q  Product management q  Pricing plans and target revenue &

profitability q Marketing Channels & Messages q  Staff retention & incentive plans q  Channel rationalization q  Performance Tracking and

Improvement Planning

IT Strategy

Staffing Channel Management

Pricing / Credit

Product Development Corporate

Development

Marketing Strategy

•  LT Goals •  ST Business Objectives & Value Drivers •  Performance Metrics


Measurement and Continual Improvement Programs are Essential for a successful Business Strategy Implementation

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Business Strategy

IT Strategy

Staffing Channel Management

Pricing / Credit

Product Development Corporate

Development

Marketing Strategy

Ongoing Performance Measurement & Improvement •  Benchmark all operations to

a small number of essential business KPIs

•  Measure daily / weekly and share performance widely

•  Implement improvement program as necessary


Strategy and Tactical Planning timeframes vary, but can be completed in as likle as 10 weeks

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Wk1 Wk2 Wk3 Wk4 Wk5 Wk6 Wk7 Wk8 Wk9 Wk10

Business Strategy

Initial Data Gathering

Business Strategy Prep Meeting

Business Strategy Planning

Draft Plan

Plan Approval

Tactical Execution

Product Development Plan

Relationship Management Plan

IT Plan

Marketing Plan

Internal Operations Plan

Finalize Plan

Implementation

Q&A: Achieving Growth, Loyalty and Profitability Through Concrete, Effective, and Executable Business Strategy

for Community Banks and Credit Unions

August 2013 Serge Milman, Principal Partner 415.294.1110 [email protected]

Optirate.com (blog) SFOconsultants.com (website)

Special Offer: 60 Minute Consultation At No-‐‑Charge