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Webinar presented on August 7, 2013 on WhyBusiness Strategy is Essential for Community Banks and Credit Unions. Recording of the webinar can be accessed http://bankblog.optirate.com/business-strategy-essential/
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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).
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
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)
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
Challenges With Cost Management
12
Operational Efficiency requires
Focus on Customer Needs
Slaying The “Sacred Cows”
Channel Rationalization
Staff Rationalization Sourcing
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com 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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com 14
But I don’t need no stinking strategy…
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com 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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com 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/
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com 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”
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com 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)
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com 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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com 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/
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com 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)
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com 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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
Tactics
Tactics
Tactics
Tactics
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
Strategic Assessment Begins With Explicit Definition of Business Strategy (WHAT & WHY)
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
Strategic Assessment Begins With Explicit Definition of Business Strategy (WHAT & WHY)
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
Strategic Assessment Begins With Explicit Definition of Business Strategy (WHAT & WHY)
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
Strategic Assessment Begins With Explicit Definition of Business Strategy (WHAT & WHY)
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
Strategic Assessment Begins With Explicit Definition of Business Strategy (WHAT & WHY)
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
Strategic Assessment Begins With Explicit Definition of Business Strategy (WHAT & WHY)
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
Strategic Assessment Begins With Explicit Definition of Business Strategy (WHAT & WHY)
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
Strategic Assessment Begins With Explicit Definition of Business Strategy (WHAT & WHY)
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
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
415.294.1110 | [email protected] | SFOconsultants.com | Optirate.com
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 [email protected]
Optirate.com (blog) SFOconsultants.com (website)
Special Offer: 60 Minute Consultation At No-‐‑Charge