March 11, 2015
Performance
Measurement
Strategic
Management
Profit & Process
Improvement
Board & Management
Advisory Services
Financial
Advisory
Profitability and Strategy
1
Strategy: Why Do We Need It?
Vision
If one does not know to which port one is sailing,
no wind is favorable.
Seneca, Roman Philosopher
2
Strategy: Why Do You Need It?
Extinction
3
Strategy: Why Do You Need It?
The best business leaders I knew distinguished themselves,
in part, by a willingness to make choices that focused energy,
resources, and effort. The wishy-washy tried to cover their
bases by doing and pursuing a little bit of everything, clearly
fearful of committing to the wrong path. In the end, they
succeeded only in diluting already scarce resources and
scattering their focus to the point of inefficiency. Great
managers, on the other hand, made tough either-or choices
that directed effort and talent toward a limited number of
objectives.
Chris Lowney, former Jesuit and JP Morgan investment
banker, and author of “Heroic Leadership”
4
Strategy Development
Strategic Planning Pyramid
5
Strategy Development
Situation Analysis
He who knows the enemy and himself will never in
a hundred battles be at risk.
Sun Tzu in “The Art of War”
6
Strategy Development
Situation Analysis
• Purpose…
• Concerted effort to identify “what is”. Rigorous and honest self
assessment, analyzing industry direction, bank markets,
competitors, and emerging customer preferences.
• Internal Analysis:
–Strengths;
–Weaknesses
• External Analysis:
–Opportunities;
–Threats
7
Strategy Development
Situation Analysis
• Strength - Unsubstantiated
–Strength: Efficient lending operation that allows us to price
aggressively in the markets we serve.
–Basis: Corporate efficiency ratio of 55%, below that of our peer
group. Also, lenders and staff always appear busy.
• Strength - Better
–Strength: Efficient lending operation that allows us to price
aggressively in the markets we serve.
–Basis: Lending expense ratio has dropped five consecutive
quarters and is better than peer group.
8
Strategy Development
Vision
All great companies have a visionary leader at the
top who is always pointing to the kind of
organization they are going to be.
Ken Blanchard
9
Strategy Development
Vision
• Purpose…
• Mission is who we are
• Vision is who we would like to be
• Bad Vision:
–Strive for excellence in delivering state of-the-art solutions to
sophisticated worldwide markets.
• Good Vision:
–Be number one or number two in every market we serve.
10
Strategy Development
Universal Vision Crafter – Banking Edition
Our vision is to be the (fill in: superior, preeminent, cut above)
banking solution to (fill in: small business, middle market,
wealthy, working class, professional, not-for-profit, all of the
above) customers to help them achieve (fill in: financial
independence, their dreams, superior results) and help our
communities (fill in: thrive, grow, succeed) and our
employees (fill in: realize their potential, excel, be happy)
while (fill in: enhancing, achieving, striving for) shareholder
value.
11
Strategy Development
Strategic Objectives
• Strategic objectives form the essence of the plan
• Move the organization closer to its vision while focusing on
results that improve the organization’s competitive position
such as:
–Increasing market share;
–Building and supporting the brand;
–Gaining a sustainable competitive advantage; and/or
–Enhancing shareholder value
12
Strategy Development
Strategic Objectives
Strength:
Experienced
commercial lenders
Weakness:
Strategic Obj.:
Opportunity:
Small business
products/services
Triple small
business clients in
three years.
Small business
market growth
13
Strategy Development
Operating Plan
At some point, planning must degenerate into work.
Peter Drucker
14
Strategy Development
Operating Plan
If you have a bad strategy, no amount of good
execution will help.
Michael Mankins, Partner, Bain & Co.
15
Strategy Development
Operating Plan
Strategic Objective
SAMPLE GOAL
Triple Small Business Clients Current year originate:
in 3 Years
C&I loans:
SBA Loans:
$90 million
$50 million
Triple Small Business Clients Current year originate:
in 3 Years
C&I loans:
SBA Loans:
$90 million
$50 million
Triple Small Business Clients Current year originate:
in 3 Years
C&I loans:
SBA Loans:
$90 million
$50 million
Triple Small Business Clients Current year originate:
in 3 Years
C&I loans:
SBA Loans:
$90 million
$50 million
Triple Small Business Clients Current year originate:
in 3 Years
C&I loans:
SBA Loans:
$90 million
$50 million
Triple Small Business Clients Current year originate:
in 3 Years
C&I loans:
SBA Loans:
$90 million
$50 million
SAMPLE TASK
Redefine the role of loan officers as
relationship driven loan originatiors
Management
Responsible
End Date
Doe
[DATE]
Develop plan for small business roll-out Deer
which allows time for product
development
[DATE]
Evaluate expansion of SBA platform and Deer
achieving preferred lender status.
[DATE]
Streamline approval and setup processes Deer
for small business loans without
sacrificing credit quality
[DATE]
Develop ability to accept online small
business loan applications and deposits
[DATE]
Buck
Designate one or two existing lenders to Doe
focus on small business/middle market
loans
16
[DATE]
Strategy Development
Financial Projections
• Should represent “stretch”, not budgets
• Can be developed first, and the operating plan is developed to
“hit the targets”, or…
• Can be developed after operating plan, incorporating impact
from initiatives
• Board sets higher level financial targets (ROE, EPS growth,
etc.)
• Operating plan and financials developed to meet/exceed
targets
17
Strategy Development
Financial Projections – Strategy Gap
The strategy value gap analysis asks: what is the value gap, on a per share and percentage basis, of your current strategy relative
to the value that could be created through a strategic alternative? There are two general approaches to measure this gap:
Naïve Approach (per share)
Quantifies Magnitude of Difference (now)
IRR Approach (per share)
Incorporates Investment Time Horizon (how long)
Value per share of strategic alternative
$15.00
Value per share of strategic alternative
$15.00
Value per share of strategic plan
$13.00
Value per share of strategic plan
$13.00
Value gap per share
Value gap (% of strategic plan)
$2.00
Value gap per share
15.38%
Time horizon for holding investment (at 11%
discount rate)
Compared to Board expectation of +/-5% relative to value
created by strategic plan
Required EPS growth rate (annual)
$2.00
5 years
9.28%
Compared to Board expectation of 7% growth rate in
earnings per share (incremental need is 2.2% per year for 5
years)
18
Strategy Development
Six Project Phases
• Enthusiasm
• Disillusionment
• Panic
• Search for the Guilty
• Punishment of the Innocent
• Praise and Honors for the Non-Participants
19
Strategy Development
Six Project Phases - Assessment
• Assessment Phase
–Board/management interviews
–Validation of vision / envisioning
–Review past plans and execution
–Accomplishments
–Yet to be done
–Strategic bets
–Overall position in bank’s markets
–Organization structure issues, employees
–Products and services
–Strategic alternatives (do nothing, buy, sell, team and/or tech
acquisition)
20
Strategy Development
Six Project Phases - Analytics
• Analytics Phase
–Industry overview
–Market analysis
–Competitive analysis – peer groups
–Bank financial condition/performance
–Bank profitability
–Trend analysis
–Brand position
–Customer base analysis
21
Strategy Development
Six Project Phases: Analytics – Sample Demographic Data
1 Total Population (actual)
2 0-14 Age Group (%)
3 15-34 Age Group (%)
4 35-54 Age Group (%)
5 55-69 Age Group (%)
6 70+ Age Group (%)
7 Median Age (actual)
8
9
10
11
12
13
Total Households (actual)
< $25K Households (%)
$25-49K Households (%)
$50-99K Households (%)
$100-$199K Households (%)
$200K+ Households (%)
14 Average Household Income ($)
15 Median Household Income ($)
16 Per Capita Income ($)
17 Total Owner Occupied Housing Units (actual)
18 Renter Occupied Housing Units (actual)
19 Vacant Occupied Housing Units (actual)
Base
2010
235,406
16.98
26.42
27.92
17.54
11.14
40.40
Current
2013
240,244
16.53
26.40
26.57
18.81
11.68
41.00
93,943
NA
NA
NA
NA
NA
96,025
17.66
23.00
34.94
20.98
3.42
99,544
14.08
17.84
38.26
25.94
3.87
2.22
NA
NA
NA
NA
NA
3.66
(17.34)
(19.61)
13.54
28.21
17.31
NA
NA
NA
76,713
59,721
31,659
88,596
75,286
36,530
NA
NA
NA
15.49
26.06
15.39
67,606
26,337
6,045
67,333
28,692
6,269
70,636
28,908
6,405
(0.40)
8.94
3.71
4.91
0.75
2.17
22
Projected
% Change
% Change
2018
2010 - 2013 2013 - 2018
247,983
2.06
3.22
16.38
(0.66)
2.27
25.33
1.99
(0.97)
25.36
(2.87)
(1.49)
20.02
9.43
9.85
12.91
7.08
14.08
41.90
1.49
2.20
Strategy Development
Six Project Phases: Analytics – Sample Deposit Market Share
Branch
Prior
Rank Rank Institution
1
1
PNC Financial Services Group, Inc. (PA)
2
3
M&T Bank Corporation (NY)
3
2
Orrstown Financial Services, Inc. (PA)
4
6
Metro Bancorp, Inc. (PA)
5
5
Integrity Bancshares, Inc. (PA)
6
4
Banco Santander SA
7
7
Royal Bank of Scotland Group Plc
8
12
Your Bank
9
8
Wells Fargo & Company (CA)
10
10
Susquehanna Bancshares, Inc. (PA)
11
9
Fulton Financial Corporation (PA)
12
11
Centric Financial Corporation (PA)
13
14
Mid Penn Bancorp, Inc. (PA)
14
13
ACNB Corporation (PA)
15
15
Riverview Financial Corporation (PA)
16
16
F.N.B. Corporation (PA)
17
17
Woodforest Financial Group, Inc. (TX)
Total For Institutions In Market
Type
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
Bank HC
17
23
Count
14
18
9
8
2
8
5
8
3
6
5
2
2
1
1
1
3
96
Deposits
in Market
($000)
1,269,250
1,085,369
637,685
608,616
376,860
275,092
269,021
215,412
206,842
192,666
141,581
128,587
98,974
49,324
28,566
16,835
2,082
5,602,762
At June 30
Average
Deposits
per Branch
($000)
90,661
60,298
70,854
76,077
188,430
34,387
53,804
26,927
68,947
32,111
28,316
64,294
49,487
49,324
28,566
16,835
694
58,362
Market
Share
Percent of
Parent
Deposits
(%)
(%)
22.65
19.37
11.38
10.86
6.73
4.91
4.80
3.84
3.69
3.44
2.53
2.30
1.77
0.88
0.51
0.30
0.04
0.61
1.21
61.49
27.92
58.92
0.50
0.26
24.41
0.02
1.51
1.14
45.58
16.22
5.94
7.30
0.15
0.06
Strategy Development
Six Project Phases
For the quarter ended
Net
Interest
Margin
(%)
Company Name
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
ACNB Corp.
CBT Financial Corp.
Centric Bank
F.N.B. Corp.
Fulton Financial Corp.
Huntingdon Savings Bank
Integrity Bank
Juniata Valley Financial Corp.
Kish Bancorp, Inc.
First National Bank of Mercersburg
Metro Bancorp, Inc.
Mid Penn Bancorp, Inc.
Mifflin County Savings Bank
Northwest Bancshares, Inc.
Community State Bank of Orbisonia
Orrstown Financial Services, Inc.
Riverview Bank
Susquehanna Bancshares, Inc.
19
20
21
22
23 Your Bank
25th Percentile
75th Percentile
Average
Median
Yield on
Earning
Assets
(%)
Non-Int.
Cost of Int.
Non-Int.
Income/
Yield on Yield on Cost of Bearing Cost of Income/ Operating
Loans
Sec.
Funds
Deps
Borr. Avg. Assets Revenue
(%)
(%)
(%)
(%)
(%)
(%)
(%)
Non-Int.
Expense/
Avg. Assets
(%)
Efficiency
Ratio
(%)
ROAA
(%)
ROAE
(%)
3.44
3.58
3.17
3.66
3.47
2.66
3.61
3.55
3.13
4.03
3.63
4.08
3.34
3.48
4.10
2.98
3.93
3.75
3.83
4.30
3.94
4.01
3.96
4.20
4.35
4.25
3.98
4.42
3.88
4.80
4.26
4.31
5.35
3.40
4.53
4.35
4.41
5.05
5.08
4.51
4.37
5.18
4.72
5.36
4.82
4.77
4.73
5.35
5.02
5.05
5.51
4.72
4.99
4.70
2.36
2.06
1.84
2.29
2.46
NA
0.49
1.44
2.48
3.78
2.33
2.09
1.96
2.23
1.95
1.48
2.77
2.67
0.39
0.75
0.83
0.38
0.55
1.85
0.79
0.72
0.73
0.64
0.32
0.74
1.21
0.91
1.37
0.45
0.75
0.66
0.26
0.77
0.85
0.36
0.37
1.85
0.79
0.90
0.71
0.75
0.35
0.76
1.27
0.58
1.45
0.48
0.77
0.53
1.60
3.17
1.10
1.08
2.08
0.00
4.04
0.29
1.42
0.00
0.57
1.74
1.21
3.36
0.00
1.08
2.96
1.68
1.10
1.05
0.20
1.04
1.05
0.00
0.59
0.90
1.00
0.59
1.11
0.40
0.43
0.81
0.53
1.50
0.47
0.91
25.58
25.01
6.04
24.87
25.23
0.00
14.70
22.61
25.76
14.85
24.74
9.80
12.55
20.49
12.42
36.34
12.02
22.07
3.10
3.56
2.39
2.61
2.74
2.02
2.00
2.95
3.18
3.36
3.32
2.70
2.32
2.54
2.53
3.57
3.02
2.58
66.33
80.67
73.46
61.27
63.92
78.00
49.45
71.43
81.68
80.18
72.29
64.20
64.68
61.37
57.96
82.33
73.64
60.33
0.89
0.63
0.29
1.00
0.94
0.36
1.17
0.90
0.73
0.56
0.69
0.85
0.65
0.89
1.04
0.72
0.65
0.97
9.01
6.20
3.68
8.57
7.88
1.95
13.71
8.35
11.07
5.31
8.21
11.49
5.06
6.23
11.51
9.69
7.17
6.70
3.37
3.73
3.53
3.56
3.96
4.35
4.23
4.25
4.72
5.07
4.91
4.90
1.95
2.46
2.16
2.23
0.57
0.82
0.78
0.74
0.49
0.84
0.77
0.76
0.70
1.99
1.52
1.32
0.49
1.04
0.76
0.86
12.45
24.97
18.62
21.28
2.53
3.16
2.81
2.72
62.00
76.91
69.07
68.88
0.65
0.93
0.77
0.79
6.21
9.52
7.88
8.04
3.54
3.91
4.45
2.60
0.41
0.42
1.41
1.04
24.88
2.95
65.95
0.86
9.48
24
Strategy Development
Six Project Phases – Exercise/Homework
1. Break Into Small Groups
2. Each Group Member Present Their Bank’s Financial Strengths/Weaknesses
3. Group Selects One Member to Present to Class
25
Strategy Development
Six Project Phases – Strategy Team Retreat
• Strategy Team Retreat Phase
–Presentation / Discussion of Analytics
–Development of the Situation Analysis
–Affirmation of Vision / Envisioning
–Identification of the Bank’s Critical Issues for Success /
Strategic Objectives
–High Level Goal Setting (i.e. ROA of 1% by 2010, etc.)
–Throughout: Utilize information from Assessment Phase to
guide discussion
26
Strategy Development
Six Project Phases – Detail Plan Development
• Detail Development Phase
–Document and test results of retreat (realistic, in sync with
management?)
–Senior management to solicit input of next-level leaders
–Next level goal setting (i.e. “Grow professional practice
deposits to $2.5MM”)
–Identify initiatives to achieve goals
–Prepare financial projections
27
Strategy Development
Six Project Phases - Completion
• Completion Phase
–Bring it all together – draft Executive Summary
–Finalize plan and present to Board
–Incorporate any Board changes
–CEO develops accountability for operating plan execution
–Develop and implement monitoring plan
28
Strategy Development
Six Project Phases - Execution
• Execution Phase
–Develop plan to communicate to constituencies
–Incorporate strategy in all internal communications –
demonstrate leadership
–Incorporate strategy in external communications to
constituencies – demonstrate vision
–Maintain accountability. Hold strategy meetings without
conflicting agenda items. Identify tracking mechanisms
(profitability information?)
–Continually re-assess operating plan – make course
corrections
–Implement the monitoring plan – keep Board apprised
29
Bank Profitability as a Strategic Tool
Strategic Objective – Maintain Net Interest Margin in Top Quartile of Peer
Exhibit 1: Overall Financial Performance
Current
Quarter
CQ -1
CQ -2
CQ -3
CQ -4
(Percentage of Average Assets:)
Interest Income--FTE
Interest Expense
Net Interest Spread--FTE
Provision for Credit Loss
Noninterest Income
Noninterest Expense
ROA - Pretax
Tax Equivalent Adjustment
Income Taxes
ROA--After Tax
6.90 %
2.63 %
4.27 %
0.17 %
2.49 %
4.39 %
2.20 %
0.20 %
0.62 %
1.37 %
6.79 %
2.45 %
4.34 %
0.16 %
2.53 %
4.52 %
2.19 %
0.22 %
0.58 %
1.40 %
6.54 %
2.27 %
4.27 %
0.19 %
2.50 %
4.39 %
2.20 %
0.21 %
0.58 %
1.40 %
6.33 %
2.13 %
4.20 %
0.21 %
2.36 %
4.27 %
2.08 %
0.22 %
0.48 %
1.39 %
6.26 %
1.97 %
4.29 %
0.16 %
2.49 %
4.45 %
2.17 %
0.22 %
0.56 %
1.39 %
ROE--After Tax
13.65 %
13.61 %
13.72 %
13.72 %
13.68 %
Efficiency Ratio
Noninterest Income/Total Income
65.76 %
36.04 %
66.34 %
36.33 %
65.49 %
36.37 %
65.42 %
35.53 %
65.86 %
36.51 %
Loans/Deposits
Equity/Assets
96.06 %
10.07 %
96.11 %
10.28 %
93.96 %
10.20 %
94.81 %
10.15 %
95.84 %
10.16 %
Overall financial performance is very good, and in Top Quartile of Peer.
At this level, management sees no reason for tactical action.
30
Bank Profitability as a Strategic Tool
Strategic Objective – Maintain Net Interest Margin in Top Quartile of Peer
Exhibit 2: Testing the Spread Assumption
Current
Quarter
CQ -1
PRODUCTS--COST BASIS
Yield on Earning Assets--FTE
Rate Paid on Total Deposits and Borrowings
Spread - FTE
7.72 %
3.05 %
4.67 %
7.60 %
2.85 %
4.75 %
PRODUCTS--MARKET BASIS
FUNDS USING PRODUCTS
Yield on Earning Assets--FTE
Cost of Funds (FTP)
Asset Product Spread--FTE
7.72 %
4.66 %
3.06 %
FUND PROVIDING PRODUCTS
Credit for Funds (FTP)
Rate Paid on Total Deposits and Borrowings
Liability Product Spread
Maturity/Rate Mismatch
Change
CQ -2
CQ -3
CQ -4
0.12 %
0.20 %
(0.08)%
7.35 %
2.64 %
4.71 %
7.10 %
2.45 %
4.65 %
7.01 %
2.25 %
4.76 %
0.71 %
0.80 %
(0.09)%
7.60 %
4.45 %
3.15 %
0.12 %
0.21 %
(0.09)%
7.35 %
4.21 %
3.14 %
7.10 %
4.05 %
3.05 %
7.01 %
3.88 %
3.13 %
0.71 %
0.78 %
(0.07)%
5.06 %
3.05 %
2.01 %
4.93 %
2.85 %
2.08 %
0.13 %
0.20 %
(0.07)%
4.69 %
2.64 %
2.05 %
4.55 %
2.45 %
2.10 %
4.40 %
2.25 %
2.15 %
0.66 %
0.80 %
(0.14)%
(0.40)%
(0.48)%
0.08 %
(0.48)%
(0.50)%
(0.52)%
0.12 %
Spread in “Cost Basis” section shows slight decline, but is > peer.
However, introducing FTP to each side of the balance sheet shows different perspective.
31
Change
Bank Profitability as a Strategic Tool
Strategic Objective – Maintain Net Interest Margin in Top Quartile of Peer
Exhibit 3: Branch Profitability
Q4
Q3
Change
SELECTED RATES:
Q2
Q1
Q4
Change
All percentages are % of average deposits
Credit for Funds
4.85 %
4.73 %
0.12 %
4.55 %
4.40 %
4.30 %
Interest Expense
2.42 %
2.43 %
2.24 %
0.18 %
2.06 %
1.91 %
1.77 %
0.65 %
2.49 %
(0.07)%
2.49 %
2.48 %
2.53 %
(0.10)%
0.15 %
0.13 %
0.01 %
0.09 %
0.13 %
0.11 %
0.04 %
0.74 %
0.78 %
(0.05)%
0.86 %
0.79 %
0.73 %
0.00 %
Direct Expense
1.13 %
1.07 %
0.07 %
1.04 %
1.01 %
0.97 %
0.16 %
Indirect Expense
1.11 %
1.05 %
0.05 %
0.94 %
0.87 %
0.88 %
0.23 %
0.85 %
1.01 %
(0.16)%
1.08 %
1.04 %
1.24 %
(0.39)%
3.09 %
3.13 %
(0.04)%
3.06 %
2.92 %
3.10 %
(0.01)%
1.35 %
1.49 %
(0.13)%
1.63 %
1.66 %
1.50 %
(0.14)%
Net Liability Spread
Provision for Credit Loss
Noninterest Income
Corp. Overhead Expense
Total Noninterest Expense
Pretax Profit (Loss)
Branch profitability is demonstrating a negative trend.
Indirect and overhead expense ratios are > peer, a strategic challenge.
Net liability spread is < peer and declining, contributing to the negative profit trend.
32
0.55 %
Bank Profitability as a Strategic Tool
Strategic Objective – Maintain Net Interest Margin in Top Quartile of Peer
Exhibit 4: Money Market Product Trend
Q4
Q3
Change
Q2
Q1
Q4
Change
All percentages are % of average money market deposits
P & L:
Credit for Funds
5.15 %
5.04 %
0.11 %
4.81 %
4.71 %
4.58 %
0.57 %
Interest Expense
3.41 %
2.90 %
0.51 %
2.26 %
1.92 %
1.57 %
1.84 %
1.74 %
2.14 %
(0.40)%
2.55 %
2.79 %
3.02 %
(1.28)%
Noninterest Income
0.01 %
0.01 %
0.00 %
0.08 %
0.08 %
0.07 %
(0.06)%
Noninterest Expense
0.81 %
0.78 %
0.03 %
0.70 %
0.71 %
0.71 %
0.10 %
Pretax Profit (Loss)
1.07 %
1.47 %
(0.40)%
2.03 %
2.26 %
2.47 %
(1.41)%
Total Interest Spread
Money market product spread is declining at rapid rate and is < peer.
This product is the key contributor to branch spread decline.
Through competitive and customer analysis performed by Marketing Department, this bank
must make changes to increase spread without customer attrition.
33
Bank Profitability as a Strategic Tool
Strategic Objective – Maintain Net Interest Margin in Top Quartile of Peer
Exhibit 5: Incentives Based on Profitability Reporting
Q4
P & L:
Net Asset Spread
Credit for Funds
Interest Expense
Net Liability Spread
Provision for Credit Loss
Noninterest Income
Total Income
($000)
538
3,869
1,924
1,945
Q3
% of
Deposits
Change
% of
Deposits
% of
Deposits
($000)
17
0.02%
(59)
0.01%
(132)
-0.10%
73
0.11%
4.20%
2.09%
2.11%
($000)
521
3,928
2,056
1,872
33
0.04%
26
0.03%
7
0.01%
540
0.59%
566
0.60%
(26)
-0.01%
4.19%
2.19%
2.00%
Net Revenue
Increase
(Decrease)
17
73
(26)
64
Regional and branch managers incentives are aligned to strategic objective.
Goal is to increase net revenue from profitability reports.
Decisions made at the branch manager level are geared towards increasing spread revenue. Not any
deposit balances, but the right deposit balances. Focused attention on higher profitability customers.
34
Jeffrey P. Marsico
Executive Vice President
Ph: 973.299.0300 x120
Email: [email protected]
www.kafafiangroup.com
www.jeff-for-banks.blogspot.com
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