Optimizing Your Bank's Business Model for Success

1. Building Your Own Best Business Model 2014 NDBA/SDBA National Convention

2. Where We’ve Been • Roaring 20’s • Great Recession • “New Normal”

3. 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?

4. 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?

5. 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

6. 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)

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

8. 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

9. Lending LOB Breadth

10. For Niche Focused (20%) , Describe Type of Niche 50%

11. Primary Value Proposition (check up to two)

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

13. Typical Sales Orientation

14. Internal Core Competencies (check all that apply)

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

16. BM Changes with Recession & New Normal

17. Degree of Competition

18. 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%)

19. Business Model Design – Framework for Optimization

20. 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

21. 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

22. Map Your Current Business Model

23. 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?

24. 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

25. 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

26. 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

27. 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!

28. Map Your Future Business Model

29. Example of a Top 1% Business Model

30. Step 5: Monitor Performance Improvement Identify actionable tasks, to effect changes Establish monitoring process Ensure institution is achieving desired change

31. 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?

32. For More Information… Joseph Cady CS Consulting Group LLC (858) 530-8250 jcady@csconsultinggroup.com www.CSConsultingGroup.com