Western Independent Banker - March/April 2008 - (Page 18)

By Lawrence Scott Building Franchise Value Transition Your Asset/Liability Mix and Increase Your Product per Relationship Ratio FRANCHISE VALUE IS not necessarily money in the bank. Regardless of where a bank is in its growth cycle, the growth strategy can be an asset equal to or greater than its financial assets. It may be a small bank struggling to grow past the low-hanging fruit of real estate construction loan relationships. Or, it may be a large institution focused on growing the number of products per customer relationship. A solid understanding of how the growth model differences impact total franchise value is essential for any bank that desires to build sustained value, is seeking targets for growth via acquisition, or wants to be acquired as an exit strategy. By walking through a comparison of two banks posting similar asset levels but committed to different growth strategies, differences become obvious, as does the looming impact of future economic cycles. Let’s compare two banks that have approximately $250 million in assets — one that is value-based with a high product-per-relationship ratio and one that is a transactional price-play model. The $250 million asset milestone signifies a maturation point where all banks should be transitioning their asset/liability mix to a more mature portfolio. Bank “A” is our transactional example. It emphasizes a highly competitive commercial real estate (CRE) loan product. In order to keep their prices as low as possible, the margins on their product are low and concentration on one particular asset delivers a narrow and high-yielding liability source. Customer acquisition is very high as new customers flock in to take advantage of the CRE product, which generates revenue, yet the financials reflect no diversification of products. Value-based bank “B” recently launched a convenient online checking product and appears to offer a variety of products. Its rates are competitive, but not necessarily the low-price leader. The behavior reflected in its advertising, marketing materials and 18 Web site all signify that the customer relationship is very important. Transactions appear to be reasonably fast, including the teller line, loan decision-making and the pulling of statements or check copies. The technologies used and the employee attitudes consistently signify that the customer’s time is valued. Most banks begin as an “A” because the price-based positioning helps them gain the revenue and the customer base necessary to fuel product and asset growth. It is a logical starting position, provided it doesn’t linger and become the bank’s longterm market positioning. Eventually, the product cost and yield will converge, making profit through a stronger margin more critical, and the bank should begin to shift its strategy toward a bank “B.” As an “A,” customers may be quickly gained but they are also easily lost because the product is regarded as a commodity. When customers defect to another bank that offers a lower interest rate or when new customers are infrequent because the market goes through a decline and local CRE construction has slowed significantly, bank “A” has its very existence threatened. If a diversified bank “B” goes through a market downturn that affects one product, the loss is buffered by other transactions. This is the advantage of a high productper-relationship ratio where customers have more than one product. For example, revenue lost on a CRE loan product because of the slowing market can be offset by the commercial line of credit product. If customers are satisfied with the bank and willing to take on more product, bank “B” can ride out the stormy economic cycle and continue growth in other areas because it is positioned for long-term, sustained customer value and local market leadership. In terms of franchise value, bank “B” is more attractively positioned as an acquisition prospect than is bank “A.” After all, why acquire a bank founded on a simple commodity that can fall out of favor with a shift ing economy? That the bank’s growth strategy factors in a product-per-relationship ratio is critical to evaluating its franchise value. Lawrence K. Scott is president & CEO of Community Bank of Nevada, which has 13 branches in the greater Las Vegas area. He can be reached at (702) 878-0700. At a Glance … BANK “A” • Price-based. • One primary product offered (e.g., commercial real estate loans or CDs). • Margins are minimal to remain competitive on price; liabilities are narrow and high-yielding. • Growth comes from customer acquisition. • Financials reflect revenue generation, but little to no diversification and low product-per-relationship ratios. • Short-tenured employees have minimal knowledge beyond the primary product. • Customers have a greater demand for price than service. BANK “B” • Value-based. • Multiple products available. • High product-per-relationship ratios signify expanded customer relationships. • Financials reflect significant non-interestbearing activity. • Transactions are fast. • Bank technologies and attitudes substantiate its customer’s time is valued. • Low turnover and long-tenured employees reflect that the bank values its employees and related skill levels. • Customers expect a high level of service and are willing to compromise on rates, provided they are reasonably competitive. www.wib.org Western Independent Banker http://www.wib.org

Table of Contents Feed for the Digital Edition of Western Independent Banker - March/April 2008

Western Independent Banker - March/April 2008 Contents A Message from the President & CEO The Forest Through the Trees Differentiating Your Bank Through the Five Senses 51st Annual Conference for Bank Presidents, Senior Officers and Directors Building Franchise Value Deposit Gathering Steps to Determine ROI on a Successful Brand Want to Improve Customer Loyalty? Managing the Change Your Bank Needs to Grow Ten No-Fail Strategies to Create Profit-Rich Growth Niche Banking Rethinking ROI Using The Reserve’s On-Balance-Sheet Sweep to Their Advantage WIB Calendar Welcome New Members Index to Advertisers Advertiser.com

Western Independent Banker - March/April 2008

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