building your own best business model

Joseph H. Cady, CMCManaging Partner

(858) [email protected]

1

Building Your Own Best Business Model

2014 NDBA/SDBA National Convention

© CS Consulting Group LLC, All Rights Reserved. 2

Where We’ve Been

Roaring 20’s

Great Recession

“New Normal”


Prolonged “New Normal” Environment

Most banks: shifting customer needs; weak loan growth; low rates; increasing costs & regulations; strong competition; compressed margins; & reduced earnings

But 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 questions: What constitutes an effective BM in today’s environment? How do I get my bank there?


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

Can the best be emulated? Lessons for your bank

(Copy of study results are available upon request)


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


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%)

© CS Consulting Group LLC, All Rights Reserved.

Business Model Design – Framework for Optimization

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Compare BusinessModel (BM)

Architectures

ID current BMstructure in 5 keycategories

Compare againsttop performinginstitutions (usingexclusive CS data)& local peers

ID gaps to address

MonitorPerformanceImprovement

Identifyactionabletasks, toeffectchanges

Establishmonitoringprocess

Ensureinstitution isachievingdesiredchange

ImplementShifts to

Business Model

Tailor changesto your uniqueenvironment &new normalmarket needs(customers,regulatory,economy)

Find right BMformula &pathway foryour institution(LOBs,structural,processes,financial)

Implementnecessarychanges

IdentifyPossible Shifts,

to OptimizePerformance

ID possible BMstrategies &shifts

Considerstructure,alignment, &executionelements

Carefully weighpros & cons;prioritizechanges

StudyCompetitivePositioning

ID positioningvs. peers &marketconditions

Identifystakeholderrequirements

Compareviability vs.valuerequirements

Confirm longterm viability& minimumresultsacceptable

Business Model Architecture

CS Framework for Optimization

Copyright CS Consulting Group LLC


Step 1: Study Competitive Positioning Identify positioning vs. peers & market conditions

– Environmental assessment

– Current vs. expected future performance

Identify stakeholder requirements

Compare viability vs. value requirements

Confirm long term viability & minimum results acceptable

Go/no go decision

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Step 2: Compare Business Model Architectures

Identify your current BM structure in 5 key categories– Map it!

Compare against top performing institutions– See CS study data

– Local peers (similar size & LOB market)

Identify gaps to address– Running vs. changing vs. reimagining your bank

21


Map Your Current Business Model

22


Step 2: Compare Business Model Architectures

Identify your current BM structure in 5 key categories– Map it!

Compare against top performing institutions– See CS study data

– Local peers (similar size & LOB market)

Identify gaps to address– Running vs. changing vs. reimagining your bank

– Bank of the future: What do my customers want?

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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


Step 3: Identify Possible Shifts, to Optimize Performance

Identify possible business model strategies & shifts

Consider structure, alignment, & execution elements

Carefully weigh pros & cons; prioritize changes

Reconcile LOBs vs. customer requirements vs. core competencies

– Produce value?

– Avoid complacency

– Substitution risk?

Internal or outsourcing/partnering functions

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Step 4: Implement Shifts to Business Model

Tailor changes to your unique environment & new normal market needs (customers, regulatory, economy)

Find right BM formula & pathway for your institution– LOBs

– Structural

– Processes & systems

– Financial

Implement necessary changes– Map it!

27


Map Your Future Business Model

28


Example of a Top 1% Business Model

29


Step 5: Monitor Performance Improvement

Identify actionable tasks, to effect changes

Establish monitoring process

Ensure institution is achieving desired change

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Final Considerations

Not final word on business models

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

No magical solutions or reinvention or one BM fits all

Use 5 step process to build your own best business model

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

building your own best business model

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