The Best Business Models in
Community Banking
2014 NDBA/SDBA Annual Convention
Joseph H. Cady, CMC
Managing Partner
(858) 530-8250
www.csconsultinggroup.com
jcady@csconsultinggroup.com
1
Where We’ve Been
 Roaring
20’s
 Great
Recession
 “New
Normal”
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2
Where We’re at Now
 Weak
loan growth; shifting customer needs
 Reduced
earning levels
 Increasing
costs
 Increasing
regulations
 Intense
competition
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Where We’re Going
 Compressed
 Less
margins
profits & shareholder return
 Higher
capital requirements
 Earnings
 Fewer
unable to exceed cost of capital (60% now)
banks
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4
How to Get Out of the New Normal Malaise?
 Cost
cutting
 Shifting
LOBs
 Stealing
business from others
 Remaining
 Other
 No
relevant?
solutions? Magical formulas?
good answers readily apparent!
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5
Hold it! – There are exceptions
 Some
 How
banks have & continue to do well!
are they doing it? What about their business model?
 Lessons
for the rest of us?
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6
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?
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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
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8
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,
 Can
alignment, or execution?
the best be emulated? Lessons for your bank
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Studying the Best Banks
 Business
 Three
and/or retail/consumer banks
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)
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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
 <$50
biased communities (personal income levels)
million in assets (size bias, unique components outside norm)
 Inconsistent
profitability (2 or more years w/ losses, or extraordinary
gain year(s))
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How the Top 1% of CBs Perform (mean assets = $196M)
Top 50 CBs Mean
$50-999M National
Mean
6 year ROAA (20062011)
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
Metric
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12
Best of Breed Have Their Issues Too
 Low
LTD ratios – Not enough loans
 NPAs
 Regulatory
demands
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Our Local “Best” (top 1%)
 Sargent
County Bank
 Farmers
(Forman, ND)
& Merchants St.
Bank (Plankinton, SD)
 Assets
= $110M (3 branch)
 Assets
 LOBs
= Business & retail
 LOBs
6
= $85M (2 branch)
= Business & retail
year ROAA = 1.97
6
 31.85
year ROAA = 2.31 (3.13)
efficiency ratio; 4.60
 40.08
NIM
NIM
 SNL:
ND most Top 100
banks < $500 M
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efficiency ratio; 4.69
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
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Lending LOB Breadth
6%
0%
14%
Diversified
Niche Focus
Single Product/
Monoline
Primarily Service
Oriented
80%
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For Niche Focused (20%) , Describe Type of Niche
100
90
80
70
60
50
40
30
20
10
0
70%
50%
20%
10%
Speciality Product
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Speciality
Industry
Speciality
High Net Worth/
Characteristics of Private Banking
Client
17
Primary Value Proposition (check up to two)
Relationship/
Intimacy
92%
38%
Convenience
Pricing; Rates &
Terms
23%
Product/Service
Innovation
15%
0
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20
40
18
60
80
100
Structure & Pursuit of Credits (adj. to pricing, LTV, underwriting)
0%
42%
Aggressive
Moderate
Conservative
58%
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Typical Sales Orientation
17%
Indiv. Products &
Services; Sold One At
A Time
Multiple/Bundled
Products & Services;
Active Cross-sell
83%
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Internal Core Competencies
(check all that apply)
93%
Cost Efficiency
67%
Staffing/Productivity
53%
Leadership
40%
33%
COF/Sources
Compensation
33%
33%
27%
27%
Organiz. & Structure
Int. Controls
Effective Technology
Reg. Compliance
LOB Differentiation
13%
Planning
13%
7%
Training/Development
0
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20
40
21
60
80
100
Most Valuable BM Elements (forced ranking; 1-3)
3
2.8
2.45
2.6
2.4
2.2
2
1.82
1.73
1.8
1.6
1.4
1.2
1
Execution
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Structure/
Architecture
22
Alignment
BM Changes with Recession & New Normal
9%
18%
No Changes
Small Adjusments
Major Revisions
73%
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Degree of Competition
100
90
80
70
Intense
Strong
Moderate
Little/None
46%
60
50
23%
40
30
15%
15%
20
10
0
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Case Study: #1 Bank Nationally
 Merchants
 Assets
Bank of Indiana (Indianapolis, IN)
= $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%)
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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)
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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)
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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)
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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
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Case Study: Now that’s a Business Model!
 Oakwood
 Assets
State Bank (Oakwood, TX)
= $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
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What’s Important for Being the Best
 Customer
 Highly
 Best
closeness; going the extra mile (key performance driver)
efficient & productive (key performance driver)
at your niche
 Strong
 Avoid
leadership; passion
intense competition
 Control
asset quality
 Strong
margins
 Strong
referral network
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What’s Not So Important
 Lowest
loan rates & best terms (price leader) [Deloitte study]
 Aggressive
 Most
M
structure & pursuit of credits
convenient
& A; external growth
 Retail/consumer
 Custom
bank in urban areas
products & services; multiple/bundled
 Extensive
staff training & development
 Employee
stock ownership
 Frequent,
significant shifts to business model
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Final Considerations
 Not
final word on business models
 Must
 No
tailor solutions (e.g., relationships or niche focus)
magical solutions or reinvention
 Instead:
 Easy
BM execution, structure, and/or alignment (need 1)
work now done (cost cutting, LOB shifts)
 Tough
work now ahead: Being a more effective competitor
 Benefits
 Which
of being the best; and costs of being ordinary
path for your bank?
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For More Information…
Joseph Cady
CS Consulting Group LLC
(858) 530-8250
jcady@csconsultinggroup.com
www.CSConsultingGroup.com
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