Western Independent Banker - March/April 2008 - (Page 28)

By Steve Cotton Niche Banking A Silver Bullet for Building Franchise Value branch location. Average projected same store growth can be developed for any market to assess that market’s relative growth potential. By dividing projected market growth in deposits (both consumer and commercial) by the number of competitor locations within the market, you can assess the relative growth potential of their footprints. If your market’s relative growth potential is poor, then you must either increase the numerator (market growth potential) or decrease the denominator (number of competitors); you can accomplish both of these actions by identifying attractive market niches. For example, if medical professionals are growing at well above market growth rates, then focusing upon this niche will improve market growth potential; by focusing on a specific niche, you also lessen the number of direct competitors. From a strategic perspective, focused niche strategies are ideal for community banks unable to sustainably compete on cost leadership. A community bank can quickly become a market leader within the confines of a market niche. As part of the strategic planning process, banks should: • Define Market Area – The defined market area (“DMA”) can be based on geography (radius or county) or other variables (drive time or population density); • Identify Niche(s) – A significant commercial niche can be determined as a percent of DMA revenues, employees or business establishments for either SIC or NAICS industry classification codes. Consumer niches of significance can be identified through consumer segmentation data by housecontinued on page 32 VIRTUALLY ALL INSTITUTIONS cite maximizing shareholder or franchise value as their primary strategic objective, but how many of those institutions have actually constructed their plans around what truly drives that value? The critical driver of franchise value is earnings growth. Institutions that can establish the precedence (and expectation) of strong earnings growth will generally experience higher appreciation in franchise value. Bank management has two routes towards accelerating earnings growth – profitability enhancement and franchise growth. Interestingly, most analysis focuses upon profitability enhancement, rather than franchise growth; perhaps this is because there is a better developed structure for analyzing financial statements. One, however, can effectively make the argument that franchise growth is the more critical driver of earnings growth. To illustrate that assertion, let’s use the example of a bank that is highly profitable, generating more than a two percent return on assets and 25 percent return on equity after taxes. This bank’s ability to grow earnings going forward is almost solely predicated on the ability of its footprint to grow and how well-aligned its strategy is with the higher velocity components of that footprint. For that highly profitable bank, and really all banks, intermediate to long-term earnings growth is a function of its footprint and the bank’s strategic match to its higher velocity niches. Earnings growth is easier to achieve for institutions fortunate enough to reside in the highest growth markets. However, the reality is that most institutions are not in high growth markets, and it is even more crucial that they identify higher velocity niches within their footprints that can enhance their growth potential. To illustrate how a niche strategy improves your franchise growth potential, let’s inject some much needed analytical structure into the assessment. Same store growth, typically of deposits, is a very high-profi le metric for financial institutions, as it is a great gauge of organic growth. To simplify, same store growth is the average annual growth in deposits per Earnings growth is easier to achieve for institutions fortunate enough to reside in the highest growth markets. However, the reality is that most institutions are not in high growth markets, and it is even more crucial that they identify higher velocity niches within their footprints that can enhance their growth potential. 28 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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