Using Niche Banking to Successfully Grow Your Bank. Matt Jozwiak Senior Vice President. Griffin Financial Group LLC

Transcription

1 Using Niche Banking to Successfully Grow Your Bank Pennsylvania Bankers Convention Naples, FL May 16-19, 2018 Matt Jozwiak Senior Vice President Griffin Financial Group LLC

2 Niche Banking As A Path To High Performance What is niche banking and why does it matter? What defines a niche? What are some of the benefits, but also the concerns, to focusing on niche banking? What interesting types of niches have community banks focused on? What are some examples of banks that have been successful in specific niches? Welcome questions, thoughts, observations In this competitive banking environment which is slowly becoming commoditized, what are community banks doing to both distinguish and differentiate themselves, but also find less competitive more profitable niches with which to grow 2

3 Using Niche Banking to Successfully Grow Your Bank A clear driver of high performance for community banks, particularly smaller ones, is focusing on being deep in specific, differentiable niches and NOT being all things to all people There is no such thing as too small to succeed... smaller banks that focus their resources can be just as high performing as larger ones, but focus is key Niche banking results in better performance, more efficiency, lower risk, better returns, higher growth and more brand loyalty and success As net interest margins continue to decline, depth in differentiable niches offers a stronger market brand and a chance for revenue growth while cushioning lulls in the economy Rising interest rates mean deposit competition is just starting to intensify, and competing on price is not a recipe for long term success Niche banking is a unique aspect of your bank that allows you to deliver banking products and services better, faster, cheaper, more profitably, and more consistently than other broader lines of business or competitors 3

4 The Mountain to Climb... Is Bigger Always Better? PA National 1.00 ROA <$250M $250M-$500M $500M-$2B $2B-$10B $10B-$50B >$50B 75 Efficiency Ratio <$250M $250M-$500M $500M-$2B $2B-$10B $10B-$50B >$50B 4

5 What Makes Smaller Banks High Performing? Analysis of banks $2 billion in assets and less Percentage of high performing (> 1.25% ROA) community banks in top decile and quartile of all community banks Net interest margin Loan yield Cost of deposits % non-maturity deps Non int inc / AA Over 75% of high performing banks less than $2 billion have an efficiency ratio in the top quartile of community banks nationwide, but the path to how they get there varies greatly Non int exp / AA Efficiency 0% 10% 20% 30% 40% 50% 60% 70% 80% Top Decile Top Quartile There is no one size fits all approach for high performance in community banking; Some (certainly not all) high performing banks have high levels of fee income; Some have high margins, some have low expenses; What they all have in common is a niche or market opportunity in their footprint with which to be successful. Community banks with ROA > 1.25% Top Quartile Median Bottom Quartile Median Net interest margin Loan yield Cost of deposits % non-maturity deps Non int inc / AA Non int exp / AA Efficiency

6 What is Not a Niche A broad array of products and services to accommodate all possible constituencies for all possible needs at all times of the day Customer service levels are an expectation, not a niche Local decision making is not a niche A type of bank culture may not be a niche but a means to delivering results A community bank or community banking itself? A vast majority of consumers could not define community banking 6

7 A Niche Defined A specialized segment of the market for a particular product or service Products, services, or interests that appeal to a small, specialized section of the population A niche market is the subset of the market on which a specific product is focusing Defines the specific product features aimed at satisfying specific market needs, as well as the price range, production quality and the demographics that it is intended to impact Niche banks cater to and serve the needs of a certain demographic segment of the population Niche banks target a specific market or type of customer, and tailor a banks time, attention, advertising, product mix, delivery channel and operations to the target markets preferences Banks that understand and acknowledge sustainable competitive advantages or niches will set yourselves apart from peers and position your business for success 7

8 Types and Aspects of a Niche Banking Strategy The Provider The Commodity The Beneficiary A Company A Product A Market A Division A Service A Gap in a Market A Business Line An Expertise A Market Segment A Team A Technology A Region A Delivery Channel A Customer Segment A Customer Need 8

9 Concerns of Utilizing Niche Banking Strategies Limited in scope Overly exposed to larger players developing the same niche Concentration risk / less diversification Funding sources / sources of liquidity Economic sensitivities (asset quality, interest rates, regulatory themes) exploiting the niche 9

10 Opportunities Afforded By Niche Banking Unique knowledge of a customer, market, market segment, geography or other unique customer needs A level of expertise beyond your competitors Ability to manage costs Ability to foresee business opportunities and trends Profitable branding, marketing and sales campaigning Ability to deliver predictable results Risk management 10

11 Opportunities Afforded By Niche Banking Ability to serve a need or a gap Overall level of comfort that allows the bank to expand out of its normal operating environment Geographically Customer size Operational efficiencies Branding, marketing, sales effectiveness Success 11

12 Niche Revenue Streams Mortgage banking (gain on sale) Small business banking (SBA gain on sale) Trust and wealth advisory Broker dealers / brokerage Insurance brokerage and sales Real estate brokerage Title companies Factoring companies and business lines There must be others 12

13 Niche Customer Segments / Delivery Channels Commercial lending (cash flow lending) Industry focused niches or expertise CRE, Agriculture, warehouse lending Leasing (equipment, auto, small ticket machines) Consumer lending (residential real estate, auto, unsecured, leasing) Traditional retail / branch banking Online, mobile banking products and services Professionals, wealthy clientele, private banking, courier service / concierge banking 13

14 Niche Customer Segments / Delivery Channels CRA focused markets, products, and services Demographically driven products, services and delivery channels Millennials, boomers, and everything in between Socially driven products, services, delivery channels Ethnic focused banks Minority focus (banks whole typically) Religious based / themed approaches 14

15 Leader Bank, Arlington, MA Premier mortgage generation engine and technology-based innovator Home Equity 10% 0 0 Owner Occupied CRE 6% Construction 4% 2017 FY Balance Sheet ($000) Assets 1,222,453 Loans 1,100,623 Deposits 901,234 Loans/ Deposits Equity 140,453 T ang Common Equity/ T ang Assets NPA Excl Restructured/ Assets 0.02 Profitability 9/30 YTD (%) Net Income ($000) 11,423 ROAA 1.35 ROAE Net Interest Margin 3.33 Efficiency Ratio Noninterest Inc/ Avg. Assets 2.01 Non-Owner Occupied 21% Multi-Family 14% Non-Int Inc / AA (%) Net Ln Gains / AA (%)* Leader Bank MA median National median *Only calculated for banks that had >0% Closed 4,925 residential mortgages and home equities in 2017 for total volume of $1.82 billion country.inc magazine named as one of 5,000 fastest growing companies in the country Outsource mortgage generation for smaller community banks Combine niche banking with technology based innovation Residential Mortgages 42% Source: SNL Financial and Leader Bank website C&I 3% Loan composition 15

16 Evergreen Bank Group, Oak Brook, IL Nationwide motorcycle lender Consumer loans / total loans of 59% 2017 FY Balance Sheet ($000) Assets 877,543 Loans 676,706 Deposits 781,817 Loans/ Deposits Equity 86,645 T ang Common Equity/ T ang Assets 9.87 NPA Excl Restructured/ Assets 0.03 Profitability 9/30 YTD (%) Net Income ($000) 6,232 ROAA 1.03 ROAE Net Interest Margin 4.35 Efficiency Ratio Noninterest Inc/ Avg. Assets Non-Owner Occupied 10% Multi-Family 2% C&I 6% Consumer / Other 59% map Owner Occupied CRE 4% Construction 2% Home Equity 12% Residential Mortgages 5% Source: SNL Financial and Evergreen Bank Group website Loan composition 16

17 First Farmers Financial Corp., Converse, IN Community bank focused on farm and agricultural lending Balance Sheet ($000) 2017 FY Assets 1,676,654 Loans 1,219,059 Deposits 1,334,682 Loans/ Deposits Equity 153,729 Tang Common Equity/ Tang Assets 8.52 NPA Excl Restructured/ Assets 1.63 Profitability 9/30 YTD (%) Net Income ($000) 15,591 ROAA 1.29 ROAE Net Interest Margin 3.87 Efficiency Ratio Noninterest Inc/ Avg. Assets 0.84 First Farmers has a loan yield of 5.2% on agricultural loans In 2016 they added in Fairmount, IN by acquiring a wellrespected community bank that shared its core values and commitment to rural banking. Construction 2% C&I 19% Farm 26% Commercial RE 13% Residential Mortgages 10% Consumer/ Other 6% Source: SNL Financial and First Farmers website Loan composition Agricultural 24% 17

18 Alpine Bank, Glenwood Springs, CO Full suite of Green Banking products and services Balance Sheet ($000) 2017 FY Assets 3,478,788 Loans 2,244,361 Deposits 3,083,940 Loans/ Deposits Equity 311,243 T ang Common Equity/ T ang Assets 8.48 NPA Excl Restructured/ Assets 0.35 Profitability 9/30 YTD (%) Net Income ($000) 32,281 ROAA 1.34 ROAE Net Interest Margin 4.44 Efficiency Ratio Noninterest Inc/ Avg. Assets 0.92 Since 2006, Alpine Bank has maintained the "ISO 14001" standard - the universally recognized standard for environmental management Home equity rate discount for energy-reduction home improvements For automobiles that are EPA rated with a minimum of 40 EPA MPG (hwy), a 1/2 percent discount on loan interest rate Variety of rate-discounted "green" businesses loans for fuel-efficient business vehicles and real estate-secured loans Employees started a grassroots effort called the Green Team, leading to development of Alpine Bank's Environmental Management System (EMS), designed to measure and improve environmental awareness map Source: SNL Financial and Alpine Bank website 18

19 WoodTrust Bank, Wisconsin Rapids, WI Relationship-based trust company and investment management firm 2017 FY Balance Sheet ($000) Assets 432,979 Loans 221,458 Deposits 348,722 Loans/ Deposits Equity 37,094 Tang Common Equity/ Tang Assets 8.57 NPA Excl Restructured/ Assets 0.75 Non-Int Inc / AA (%) Trust Income / AA (%)* WoodTrust National Median <$2b & >1.25% ROA Median *Only calculated for banks that had >0% Profitability (%) Net Income ($000) 7,300 ROAA 1.91 ROAE Net Interest Margin 3.17 Efficiency Ratio Noninterest Inc/ Avg. Assets 2.92 WoodTrust Asset Management manages approximately $1.8 billion in assets, servicing over 1,100 client accounts in 35 states. WoodTrust offers a comprehensive retirement plan suite of solutions, with over 25 years experience as a trusted fiduciary partner providing businesses with everything they need to offer their employees a great retirement plan benefit. WoodTrust offers expertise in planning and administering all types of personal trusts, providing and customizing Private Client services, and designing and implementing estate planning services. Designed exclusively for clients with more complex financial needs, WoodTrust Private Client Services provides an elite level of banking and asset management services Source: SNL Financial and Woodtrust website. Net Income, ROAA and ROAE adjusted as Woodtrust is a S-Corp. 19

20 University Bank, Ann Arbor, MI Specializes in mortgage sub-servicing and mortgage banking 2017 FY Balance Sheet ($000) Assets 226,823 Loans 119,079 Deposits 187,395 Loans/ Deposits Equity 23,080 Tang Common Equity/ Tang Assets 9.98 NPA Excl Restructured/ Assets 0.30 Non-Int Inc / AA (%) Loan Svcing. / AA (%)* University Bank National Median <$2b & >1.25% ROA Median *Only calculated for banks that had >0% Profitability 9/30 YTD (%) Net Income ($000) 2,826 ROAA 2.04 ROAE Net Interest Margin 3.93 Efficiency Ratio Noninterest Inc/ Avg. Assets University Bank specializes in mortgage sub-servicing through the bank s wholly-owned subsidiary, Midwest Loan Services University Lending Group (ULG), a subsidiary of University Bank, is a full service mortgage bank whose goal is to provide a comprehensive selection of competitively priced loan products University Bank averages between $10 million and $16 million per year in net loan servicing fees over the last five years, and another. $12 million to $15 million per year in gains on the sale of loans and leases over that same period Source: SNL Financial and University Bank website 20

21 Niche or Innovation You Be The Judge Financial technology Artificial intelligence ( AI ) Banking technology Automated underwriting Non banks / specialty lenders / web based only deposit gatherers Payments and payment processors 21

22 So What Is The Opportunity? Look internally and understand your core competencies and SWOT analysis, but also reflect on and understand your external market and its needs Stay in your lane, in your comfort zone, risk tolerance, efficiently and effectively, to successfully grow your bank, your way Understand competitive position in your current or desired niche Evaluate profitability potential millennials are important, but might not yet be profitable Don t jump on the latest trend or fad Adding blockchain to the name of your bank may not be effective Focus on where the market is going, not where it came from We are late in the cycle on commercial real estate Deposit gathering and core funding are timely Technology based offerings becoming more prominent 22

23 So What Is The Opportunity? Community banks cannot afford to spread themselves too thin Finding one or more attractive niches provide growth, profitability and differentiation 23

24 Speaker Biography Richard L. Quad Senior Managing Director, Head of the Financial Institutions Group Griffin Financial Group, LLC Phone: (646) Mr. Quad is a Senior Managing Director and Head of the Financial Institutions Group at Griffin Financial, where he is a trusted advisor to management teams and boards of directors of banks largely $10 billion in assets and below in the Northeast and other select geographies. Mr. Quad joined Griffin in August 2012, prior to which he was most recently Managing Director and Head of U.S. Financial Institutions M&A for RBC Capital Markets, where he had been since Mr. Quad joined RBC following its acquisition of Tucker Anthony Sutro, where he was a Vice President in its Financial Institutions Group. Mr. Quad has completed buy-side and sell-side acquisitions, common stock, preferred and trust preferred offerings, and general advisory engagements for clients throughout the northeast United States. Some of the assignments that Mr. Quad has completed include the sale of Lake Sunapee Bank Group to Bar Harbor Bankshares, the purchase of Chicopee Bancorp by Westfield Financial Inc., purchases of Lake National Bank and FC Bank by CNB Financial Corporation, the $50 million issuance of investment grade subordinated debt by CNB Financial Corporation; the sale of Connecticut River Bancorp to Mascoma Mutual Financial Services Corporation, the sale of RBC Bank USA to PNC Financial Corporation, the FDIC-assisted acquisitions of Wakulla Bank and Gulf State Community Bank by Home BancShares, Inc., the merger of Westborough Financial Services, Inc. into Assabet Valley Bancorp, the sale of Capital Crossing Bank to Lehman Brothers; the sale of Community Capital Bank to Carver Bancorp, Inc.; the sale of Mystic Financial, Inc. to Brookline Bancorp; the sale of specialty lender AmeriFee Corporation to Capital One Financial Corporation; the acquisition by Richmond County Financial Corporation of seven branches from FleetBoston Financial Corporation; and the acquisitions of North American Bank Corporation and thirteen branches of Shawmut Bank for Banknorth Group, Inc. while running Bankorth s internal M&A function. Prior to joining Tucker Anthony Sutro, Mr. Quad was a Vice President in the Financial Institutions Group at Advest, Inc., where he also worked with financial institutions clients. Preceding Advest, Mr. Quad was Vice President and Director of Mergers and Acquisitions for Banknorth Group, Inc., at the time a $2 billion bank holding company headquartered in Burlington, Vermont, where he founded the company s internal M&A function and coordinated the bank s first two acquisitions and an internal restructuring of the company s trust subsidiaries. At Banknorth, Mr. Quad also gained valuable experience in cost accounting and budgeting, asset/liability management, consolidation accounting and SEC and regulatory reporting. Mr. Quad holds a B.S. in Business Administration from The University of Vermont, magna cum laude, and an M.B.A. from Cornell University, with distinction. Mr. Quad is a Series 7 and Series 63 registered representative. 24

25 Speaker Biography Matt Jozwiak Senior Vice President, Financial Institutions Group Griffin Financial Group, LLC Phone: (610) Mr. Jozwiak is a Senior Vice President of Griffin Financial Group, LLC with a 25-year career in retail, commercial and investment banking. Mr. Jozwiak has three years of wealth management sales with Dean Witter Discover & Co.. He also has fourteen years of commercial banking experience with regional bank, managing areas within corporate treasury related to forecasting, ALCO, capital management, regulatory and rating agency relationships, where he was instrumental in modeling, funding and/or capitalizing over 14 M&A transactions, two transformational branch acquisitions, the issuance of debt, hybrid equity, equity, and securitization transactions. Mr. Jozwiak has been at Griffin for eight years, advising banks, thrifts and specialty lenders on a variety of capital markets, strategic advisory and M&A assignments in the Mid-Atlantic, Northeastern and Midwest regions of the United States While at Griffin, Mr. Jozwiak has advised on equity and debt offerings (sizing, timing, pricing), buy-side and sell-side M&A transactions, branch purchases and sales, transactions involving secured creditors and trustees in connection with IRC 363 sales, as well as instrumental in marketing over $1BN in credit in the form of whole loan sales, both performing and non-performing. In addition to transactional work, Mr. Jozwiak works closely with management teams and Boards of Directors providing advisory and expertise on industry themes and trends, participating in Board educational sessions as an industry expert, facilitating board and management strategic planning sessions, focusing particularly on strategic, growth and profitability improvement initiatives. Mr. Jozwiak co-manages the FIG analytics team responsible for analyzing national, regional and company specific trends, identifying key industry themes that are used in the FIG advisory practice. Mr. Jozwiak holds a Bachelors of Science in Quantitative Business Analysis from The Pennsylvania State University. He has represented Griffin at conferences with national and regional industry groups, national and regional accounting and advisory practices, regional bankers banks as well as SNL Financial to discuss the state of banking, the M&A environment, and capital related hot topics including Dodd-Frank and Basel III related issues, and holds the Series 7, 63 and 79 licenses from FINRA. 25

26 Disclosure Statement This presentation is not considered complete without the accompanying oral presentation made by Griffin Financial Group, LLC ( Griffin ). Any projections or recommendations contained herein involve many assumptions regarding trends, company-specific operating characteristics, financial market perceptions and the general state of the economy as well as internal factors within management control, such as capital investment. As such, any projections contained herein represent only one of an infinite number of outcomes and should not be construed as the only possible outcome. The information contained in this presentation and attached exhibits have been obtained from sources that are believed to be reliable. Griffin makes no representations or warranties as to the accuracy or completeness of the information herein. All terms and conditions contained herein are based upon current market conditions and are estimates based upon prevailing market rates. Any or all estimates may or may not change as market conditions dictate. As such, any or all terms and conditions presented herein are preliminary in nature and should not be construed, either in whole or in part, as a commitment to perform or provide any specific services. Any and all services that may be provided by Griffin or any other entity referred to in this discussion outline will be contingent upon the signing of a proposal or contract. Griffin Financial Group, LLC does not provide legal, tax or accounting advice. This presentation addresses some, but not all, of the potential impact of tax reform on the balance sheet and income statement. Any statement contained in this communication (including any attachments) concerning U.S. tax matters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code, and was writing to support the promotion or marketing of the transaction(s) or matter(s) addressed. Clients of Griffin Financial Group, LLC should obtain their own independent tax and legal advice based on their particular circumstances. 26