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
Serge.Milman@SFOconsultants.com
Optirate.com (blog)
SFOconsultants.com (website)

415.294.1110 | info@SFOconsultants.com | 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

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
$922
$874
$853
2010
2011
2012
Loans
3.79%
3.82%
3.72%
2010
2011
2012
NIM
77%
74%
73%
2010
2011
2012
Loan / Deposit Ratio
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
3.63%
3.84%
3.74%
2010
2011
2012
NIM
80%
78%
77%
2010
2011
2012
Loan / Deposit Ratio
Source: FDIC SDI

Weak Franchise Value Plague Community Banks
8
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
R
e
v
e
n
u
e
s
P
r
o
f
i
t
s
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
11
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
12
Operational Eﬃciency requires
Focus on
Customer
Needs
Slaying The
“Sacred
Cows”
Channel
Rationalization
Staﬀ
Rationalization
Sourcing

13
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

14
But I don’t need
no stinking
strategy…

15
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

16
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/

17
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”

18
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)

19
“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

20
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/

21
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)

22
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

T
a
c
t
i
c
s
T
a
c
t
i
c
s
T
a
c
t
i
c
s
T
a
c
t
i
c
s
More Than Ever, Knowing ‘What To Do’ Requires A
Comprehensive Strategy
23
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)
24
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
Voice of the
Customer
Customer
Proﬁle
Products &
Services
Channels
Geographies &
Locales
Resources,
Partners and
Competency
Revenue &
Cost Models
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
Voice of the
Customer
Customer
Profile
Products &
Services
Channels
Geographies &
Locales
Resources,
Partners and
Competency
Revenue &
Cost Models
Sustainability

27
?  How do our
products &
services deliver
on our Value
Proposition?
What are the
gaps?
Business
Strategy
Value
Proposition
Voice of the
Customer
Customer
Proﬁle
Products &
Services
Channels
Geographies &
Locales
Resources,
Partners and
Competency
Revenue &
Cost Models
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
Voice of the
Customer
Customer
Profile
Products &
Services
Channels
Geographies &
Locales
Resources,
Partners and
Competency
Revenue &
Cost Models
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
Voice of the
Customer
Customer
Proﬁle
Products &
Services
Channels
Geographies &
Locales
Resources,
Partners and
Competency
Revenue &
Cost Models
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
Voice of the
Customer
Customer
Profile
Products &
Services
Channels
Geographies &
Locales
Resources,
Partners and
Competency
Revenue &
Cost Models
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
Voice of the
Customer
Customer
Proﬁle
Products &
Services
Channels
Geographies &
Locales
Resources,
Partners and
Competency
Revenue &
Cost Models
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
Voice of the
Customer
Customer
Proﬁle
Products &
Services
Channels
Geographies &
Locales
Resources,
Partners and
Competency
Revenue &
Cost Models
Sustainability

Strategic Plan must then be distributed across the
organization to ensure alignment, enhancement and
required change-‐‑management (HOW, WHO & WHEN)
33
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
34
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
35
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
Serge.Milman@SFOconsultants.com
Optirate.com (blog)
SFOconsultants.com (website)
Special Offer:
60 Minute Consultation At No-‐‑Charge

Business Strategy for Banks and Credit Unions

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