The Best Business Models in Community Banking

Joseph H. Cady, CMCManaging Partner

(858) [email protected]

1

The Best Business Models in Community Banking

2014 NDBA/SDBA Annual Convention

© CS Consulting Group LLC, All Rights Reserved. 2

Where We’ve Been

Roaring 20’s

Great Recession

“New Normal”


Where We’re at Now

Weak loan growth; shifting customer needs

Reduced earning levels

Increasing costs

Increasing regulations

Intense competition


Where We’re Going

Compressed margins

Less profits & shareholder return

Higher capital requirements

Earnings unable to exceed cost of capital (60% now)

Fewer banks


How to Get Out of the New Normal Malaise?

Cost cutting

Shifting LOBs

Stealing business from others

Remaining relevant?

Other solutions? Magical formulas?

No good answers readily apparent!


Hold it! – There are exceptions

Some banks have & continue to do well!

How are they doing it? What about their business model?

Lessons for the rest of us?


The Top of Mind Issue for C-level & BODs Today

KPMG study: 90% of banks are re-evaluating their business models (BM)

Next question: What constitutes an effective BM in today’s environment?


What is a Business Model & Why is it Important?

Defined: How a bank creates, delivers & retains value

Importance: Determines the way and how much money you make

Components:– LOB segments & structure

– Customer acquisition methods

– Customer interactions

– Internal structure & performance

– Delivery channels


The Best Business Models: Unique Study Aims

Examine those top banks that have continued to succeed, despite tough climate & peers failing

ID effective BMs in today’s environment: commonalities & differences

Structure, alignment, or execution?

Can the best be emulated? Lessons for your bank


Studying the Best Banks

Business and/or retail/consumer banks

Three size categories– $50M – 999M (top 1%)

– $1B – 24B

– $25B+

Consistent ROAA performance over three distinct periods in past six years– 2006-2007 (good times winding down)

– 2008-2009 (Great Recession)

– 2010-2011 (“New Normal”)

Statistical & reputational leaders (studied 59 banks thus far)


High ROA, but Excluded….

Specialty commercial banks

– Trust*, credit card*, nat’l mortgage, investment, private

Economic/geographic biased areas– Excluded top 25 states w/ lowest unemployment rate

– Oil & ag states

Demographic biased communities (personal income levels)

<$50 million in assets (size bias, unique components outside norm)

Inconsistent profitability (2 or more years w/ losses, or extraordinary

gain year(s))


How the Top 1% of CBs Perform (mean assets = $196M)

Metric Top 50 CBs Mean$50-999M National

Mean

6 year ROAA (2006-

2011)2.17 .57

Efficiency Ratio (EOY

2011)50.25 73.58

ROAE (EOY 2011) 18.68 4.14

NIM (EOY 2011) 4.91 3.95

NPA/Total Assets (EOY 2011)

1.94 3.24

% of Core Deposits (EOY 2011)

92.56 90.78


Best of Breed Have Their Issues Too

Low LTD ratios – Not enough loans

NPAs

Regulatory demands

© CS Consulting Group LLC, All Rights Reserved.

Our Local “Best” (top 1%)

Sargent County Bank (Forman,

ND)

Assets = $110M (3 branch)

LOBs = Business & retail

6 year ROAA = 1.97

31.85 efficiency ratio; 4.60 NIM

SNL: ND most Top 100 banks <

$500 M

Farmers & Merchants St.

Bank (Plankinton, SD)

Assets = $85M (2 branch)

LOBs = Business & retail

6 year ROAA = 2.31 (3.13)

40.08 efficiency ratio; 4.69

NIM

14


Key Findings: One or Many Business Models?

Traditional community banking is alive & well! (80%)– Business & retail operations

– Serving local communities; rural & some urban; many 100+ years old

– Standard products & services

– Strong referral networks

Niche players in urban areas also prosper (20%)– Niches include CRE, mortgage, ag, & asset based lending

– Local, regional, & national focus


Lending LOB Breadth

80%

14%

6% 0%

Diversified

Niche Focus

Single Product/MonolinePrimarily ServiceOriented


For Niche Focused (20%) , Describe Type of Niche

70%

20%

10%

0

1020

30

4050

60

7080

90100

Speciality Product SpecialityIndustry

SpecialityCharacteristics of

Client

High Net Worth/Private Banking

50%


Primary Value Proposition (check up to two)

15%

23%

38%

92%

0 20 40 60 80 100

Product/ServiceInnovation

Pricing; Rates &Terms

Convenience

Relationship/Intimacy


Structure & Pursuit of Credits (adj. to pricing, LTV, underwriting)

0%

42%

58%

AggressiveModerateConservative


Typical Sales Orientation

83%

17%

Indiv. Products &Services; Sold One AtA TimeMultiple/BundledProducts & Services;Active Cross-sell


Internal Core Competencies (check all that apply)

7%13%

13%27%

27%33%

33%

33%

40%

53%

67%93%

0 20 40 60 80 100

Training/Development

Planning

LOB Differentiation

Reg. Compliance

Effective Technology

Int. Controls

Organiz. & Structure

Compensation

COF/Sources

Leadership

Staffing/Productivity

Cost Efficiency


Most Valuable BM Elements (forced ranking; 1-3)

1.73 1.82

2.45

1

1.2

1.4

1.6

1.8

2

2.2

2.4

2.6

2.8

3

Execution Structure/Architecture

Alignment


BM Changes with Recession & New Normal

9%

73%

18%

No ChangesSmall AdjusmentsMajor Revisions


Degree of Competition

15%

23%

46%

15%

0

10

20

30

40

50

60

70

80

90

100

IntenseStrongModerateLittle/None


Case Study: #1 Bank Nationally

Merchants Bank of Indiana (Indianapolis, IN)

Assets = $608M

LOBs = Primarily business bank w/ niche focuses (private, ag, & mortgage)

6 year ROAA = 4.51

BM/USP = Custom products; personal bankers; responsiveness; come to your office; experience; rapid growth/acquisitions; efficiency (35.80%)


Case Study: Role & Importance of Execution

#1 most valuable BM element (per Top 50 survey)

Key question: Can your ability to execute model exceptionally well, with seemingly disadvantaged architecture, result in top of peer performance?

Examples:– Bank of Hemet (- CRE monoline –national geographic presence = 2.31

ROAA + 45.97 efficiency ratio [$439M assets])

– USAA (- low end retail –highly limited delivery systems & convenience = above peer ROA [1.32 for 2011] + highest customer satisfaction)


Case Study: Role & Importance of Structure

Close #2 most valuable BM element (per Top 50 survey)

Key question: Can you replicate successful model architecture elsewhere, and achieve similar results?

Example:– 1st Business Bank, LA (patient LT investors; target healthy prospect

companies; deep advice/relationships; effective sales/training; emphasize core deposits). Since successfully replicated at:

• American Business Bank (consistent 6 year profitability)• 1st Enterprise Bank (.38 NPA; rapid growth)• Regents Bank (Bauer 5 star; 3% Texas ratio)


Case Study: Role & Importance of Alignment

Key question: Can you align certain BM components into a powerful combination; left separately they offer no particular advantage?

Examples:– US Bank (limited geo scope + focus on simpler & better, not bigger +

decentralized underwriting & advisory boards = considered among best of the biggest banks)

– Southwest Airlines (low fare/compete on price + low costs + frequency of service = consistent top performer)


Need for Structure, Alignment, &/or Execution?

Opposing question: Can you succeed with the wrong structure, poor alignment, or weak execution?

– Yes!• Bank of Hemet (“wrong” structure & alignment for the times)• Possibly get away with weaker execution? (tougher)

Not required to have all three or even two components in place, but you must be able to excel in at least one BM area to prosper


Case Study: Now that’s a Business Model!

Oakwood State Bank (Oakwood, TX)

Assets = $5M (smallest bank in US)

BM/USP = No computers; types deposit slips by hand; manual general ledger; no voicemail; 2 employees with average age of 78

Recent results = 2.37 ROA; 10.22 ROE; 64% efficiency ratio; 596 total loans


What’s Important for Being the Best

Customer closeness; going the extra mile (key performance driver)

Highly efficient & productive (key performance driver)

Best at your niche

Strong leadership; passion

Avoid intense competition

Control asset quality

Strong margins

Strong referral network


What’s Not So Important

Lowest loan rates & best terms (price leader) [Deloitte study]

Aggressive structure & pursuit of credits

Most convenient

M & A; external growth

Retail/consumer bank in urban areas

Custom products & services; multiple/bundled

Extensive staff training & development

Employee stock ownership

Frequent, significant shifts to business model


Final Considerations

Not final word on business models

Must tailor solutions (e.g., relationships or niche focus)

No magical solutions or reinvention

Instead: BM execution, structure, and/or alignment (need 1)

Easy work now done (cost cutting, LOB shifts)

Tough work now ahead: Being a more effective competitor

Benefits of being the best; and costs of being ordinary

Which path for your bank?


For More Information…

Joseph Cady

CS Consulting Group LLC

(858) 530-8250

[email protected]

www.CSConsultingGroup.com

The Best Business Models in Community Banking

Documents

Transcript of The Best Business Models in Community Banking