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High Performance

GROWTH
Trends

For more information, contact 770-670-6717 or clientservices@resurgentperformance.com

2014 Resurgent Performance Inc.

High Performance
Growth Trends in the Past Decade
By L. T. (Tom) Hall, President & CEO Resurgent Performance, Inc.

When you stop growing, you start dying. William S. Burroughs


Warning: High Growth Rates contained herein could be shocking.

A new, broader perspective on revenue growth is needed to enhance sustainable bank share value, even amidst the almost-overwhelming degree of industry change that is happening today. Despite the financial challenges of the recent recession (which may or may not be over depending upon whom you ask), the highest performing banks in the country have managed to sustain an overwhelmingly healthy rate of growth in the past decade. Growthwhether organic or via acquisitionis vital to the ongoing success of financial institutions. As William S. Burroughs tells us, when we stop growing, we start dying. That maxim is particularly meaningful in community banking today, as we face what could potentially be the greatest period of consolidation in the industrys history. In fact, knowing that they do not have the resources to remain competitive, some organizations are strategically planning to be part of the acquired side of that equation. This strategy makes sense, as many banks dont have the resourcespeople, culture, products, capital, sales / marketing, markets, and systemsto generate significant growth. But what about those banks that do want to be thriving in 2025? What marks do they need to be hitting today in order to stay in the top 20% of growth performance in the coming decade?

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WHERE HAVE WE BEEN?


Utilizing RPIs proprietary methodology for charting High Growth, we created the RPI Modified Universe of banks according to multiple parameters: Year-end data was queried from the FDIC for the years 2004 to 2013. Banks from $50 million to $10 billion in todays assets were divided into four groups. Ten-year growth (using year-end Total Assets for 2004 and 2013) was calculated for each bank. Within each asset band, the extreme performers (3% from both high and low) in terms of growth were removed, as were banks not in business the entire ten-year period.

These normalizations resulted in the following size groups: Asset Size Bank $50 million to $300 million $300 million to $1 billion $1 billion to $3 billion $3 billion to $10 billion All included in this analysis Number of Banks 3268 1324 365 135 5092

A Player High Growth banks are those whose growth numbers ranked from the 90th to 99th percentile. B Players are those whose growth numbers ranked from the 80th to 89th percentile.

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The first measure that we considered was the historic growth in asset size from 2004 to 2013. The A Players and B Players, not surprisingly, saw growth rates heavily dependent upon their asset size today. While the A Player banks from $50 million to $300 million in assets more than doubled their asset size within the ten-year period, their counterparts from $3 billion to $10 billion in assets increased their size more than 1300 percent. For the B Players, the multiples were lower, but the asset-size-based trend remained the same. Particularly in the banks over $1 billion in assets, the ten-year growth rates appear astronomical at first glance. However, when viewed in terms of Compound Annual Growth Rate (CAGR), they seem more achievable. A Player banks that, in todays assets are from $3 to $10 billion in assets, were literally doubling in size every year. CAGRs below provide a high-level framework for well-performing banks going forward.

Compound Annual Growth Rate at High Growth Banks


120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% A Players B Players 70.6% 59.7% 80.7% 66.2% 106.2% 94.5% 73.6% 86.4%

For perspective, note that the C Players and below (those in the zero to 79 percentile) for all asset bands combined grew at only 46% (CAGR) over this same period. The difference between those players and the top 20% points to the degree of revenue growth concentration within the industry.

HOW DO WE GET THERE?


Banks achieve growth in two primary ways: organically or by purchasing another organization. While there are almost unlimited variants within each of those two strategies, from building a sales culture to utilizing successful direct mail campaigns to buying a branch, a failed bank, or merging two equals, internal and acquisitive expansion are ultimately the only two roads to reach the multiples of growth that you see in the chart above.

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ACQUISITION OR ORGANIC GROWTH?


Growth through acquisition clearly creates an immediate and sometimes exponential increase in not only asset size, but also personnel, number of locations, and organizational complexity. As such, we counsel banks who are seeking to acquire to have their own processes, policies, products, and profitability in high performing order before seeking target organizations. The Flavors of Acquisition For arguments sake, lets say that your bank has decided to pursue an acquisition strategy, and you have streamlined your organizational structure and business process so that you are ready to take on something new. Clearly, there are still several decisions to make in terms of what kind of acquisition you want to pursue. Acquisitions and mergers with banks and other financial services companies Full bank acquisitions are usually the ones that make the news. They represent the largest transactions, they take the most time, and they have the most impact on both employees and customers. For this reason, its most critical to be fully prepared internally before pursuing a transaction of this size. Addition of new branches or loan production offices Conversely, new branches or loan production offices can also create a quick lift in terms of revenue without the same level of change management required in a full bank acquisition. Acquiring troubled banks Although not as hot a market as it was two years ago, there are still great advantages to pursuing troubled bank acquisition for those bankers highly skilled in turnarounds, asset quality management and merger integration. Exploitation of in-market bank acquisitions or bank failures that displace customers While its not a true acquisition strategy, following other acquisitions in your market can present a clear opportunity for winning over customers who may be anxious about the changes in their organization. Recipe for Organic Growth Not all banks are prepared for or decide to pursue growth through acquisition. While exact numbers are difficult to calculate, we estimate that roughly half of the High Growth banks under consideration in this analysis grew through acquisition. That leaves hundreds of organizations that documented higher levels of growth than 80% of their peerswithout acquiring another bank. What drove that organic growth? It was more than culture or market economics.

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They Have a Strategy First and foremost, High Growth banks all have a strategy that sets forth goals over clearly defined timeframes. These banks have decided where they want to be in terms of customers, deposits, loans, and products. Then they also have the ability and the will to execute on those strategies. They Have Diversified Their Income Since the advent of Gramm-Leach-Bliley in 1999, youve heard the refrain over and over again: Successful banks will have diversified revenue streams. Even smaller organizations have launched or purchased insurance companies, mortgage and title companies, brokerage firms, and more. Its not necessary to find the most creative avenue ever; its more important to determine, depending on your market, which line of business is likely to be consistent and profitable while aligning with a market need of your customers and prospects. They Have Implemented Business Intelligence Years ago, just knowing how you thought your bank was performing against the competition, within market trends, and in terms of customer, branch, and product profitability was enough. Its no longer even near enough. High growth organizations understand that banking is first and foremost a business, and to run their businesses successfully they have implemented tools that combine financial analysis, market trends, and customer behavior. They Have Maximized Customer Interaction We have successfully steered many of our most profitable customers to alternative delivery channels, like web and mobile. But now we dont get to see these profitable customers much anymore. High growth organizations have found ways to stay in touch with customers, whether they have business development teams making personal calls, are incenting customers back to the branch, by focusing on advisory services, or by maximizing Omni-Channel banking.

HIGH GROWTH PERFORMANCE


Does it make strategic sense for banks to grow at rates this accelerated? Are banks in high growth mode able to sustain viable performance? In fact, the data indicates that they are able to perform well consistently, which might conflict with the old wisdom that guarded against growing much faster than the general economy. Double digit compounded growth is a way of life for high performers. Early in 2014, RPI released its Executive Briefing on High Performance, in which we demonstrated that High Performance banks are regularly achieving ROA of 1.5 or better, dependent upon asset size. While the High Growth banks did not hit the extreme high performance numbers that we documented in High Performance Executive Briefing on Financial Performance, they still turned in solid performances on both of those measures.

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ROA Comparison between High Growth and High Performance A Player Banks
2.00 1.50 1.00 0.50 0.00 $50M to $300M $300M to $1B $1B to $3B $3B to $10B 1.17 1.48 1.12 1.50 1.00 1.85 1.74 1.62

High Growth A Players

High Performance A Players

In terms of Return on Equity, High Growth banks do seem to take a reduction in favor of High Growth. The A Player High Growth banks under $3 billion achieved respectable numbers in the range of ~11%, while High Performance banks saw numbers almost 3 points higher. High Growth Banks between $3 and $10 billion performed much more closely to their High Performance counterparts.

ROE Comparison between High Growth and High Performance A Player Banks
16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 $50M to $300M $300M to $1B $1B to $3B $3B to $10B
14.26 15.13 14.94 14.72

13.34

11.11

11.22 9.91

High Growth A Players

High Performance A Players

Also, the Efficiency Ratio in High Growth Banks is significantly higher than Efficiency Ratios at their High Performance A Player counterparts. Its a truth universally acknowledged that banks experiencing growth spurts, either through acquisition or with increased focus on organic growth, can simultaneously lose some efficiencies, at least temporarily. Again, these High Growth banks are clear

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high performers on many measures; as such, their Efficiency Ratios are still highly respectable. Still, they do not reach the level of efficiency that similar high performing banks not experiencing growth can achieve. Yes, there is a short-term (if managed properly) cost to high revenue growth. It comes with the territory but is truly manageable.

Efficiency Ratio Comparison between High Growth and High Performance A Player Banks
80.00 60.00 40.00 20.00 0.00 $50M to $300M $300M to $1B $1B to $3B $3B to $10B 66.18 56.30 65.53 54.82 68.32 59.26 54.48 48.27

High Growth A Players

High Performance A Players

TRACKING THE REVENUE


The combination of Total Interest Income and Total Non Interest Income follows a similar trend across asset size bands and over the past ten years. Obviously, Interest Income still carries the lions share of the revenue burden, although Non Interest Income has started to trend up in the last two years of margin compression. In 2004, High Growth banks saw less than 20% of their revenues come from Non Interest Income, while by 2013 the average was closer to 25%.

Annual Revenue at High Growth Banks $50M to $300M


100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20.7% 19.2% 17.0% 16.1% 16.7% 17.8% 18.9% 19.0% 21.8% 22.9%

Total Interest Income

Total Non Interest Income

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Annual Revenue at High Growth Banks $300M to $1B


100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total Interest Income Total Non Interest Income 17.4% 16.7% 16.7% 16.8% 12.8% 15.2% 17.3% 18.4% 21.4% 21.4%

Annual Revenue at High Growth Banks $1B to $3B


100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total Interest Income Total Non Interest Income 21.3% 18.1% 16.2% 16.8% 18.0% 21.5% 21.5% 22.0% 25.6% 26.9%

Annual Revenue at High Growth Banks $3B to $10B


100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total Interest Income Total Non Interest Income 17.7% 15.6% 14.4% 14.1% 14.7% 20.2% 20.8% 21.3% 24.4% 24.9%

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WHAT GOT YOU HERE WONT GET YOU WHERE YOURE GOING
As compelling as are these numbers, should High Growth be a goal for every bank? Most assuredly, it is profitable growth that will determine the winners in the consolidation. Well-managed profitable growth will likely be more significant than we can imagine right now because the consolidation is just gaining momentum. While many banks should be extremely pleased with how far they have come, the same activity that propelled these High Growth banks will not produce the same levels of growth for the next ten years. The industry has changed too drastically for the same strategies that worked last decade to continue to work, at least to the same extent, in the coming decade. Banks who want to continue to grow will prepare for changeongoing and sometimes unpredictable change. The community banking model and the delivery models for many commercial and retail services are changing rapidly.

CONCLUSION: PREPARING FOR GROWTH


The same way a real estate agent will help you stage your home prior to listing and sale, banks will be well served to tweak performanceor in some cases significantly change operationsprior to any concentrated attempts at rapid growth. Even organizations that are not planning to buy or sell will benefit from a close, critical review of their strategies that will carry their lines of businesses into the next ten years.

The Next Ten Years: Technology


Its mobile. The Federal Reserve reported that 48% of survey respondents had used mobile banking via their smart phone in the past year. That number is only going to increase as mobile devices are increasingly ingrained into the fabric of personal finance and commercial banking. Even the underbanked and unbanked populations reported regular access to mobile banking applications and online services. Technology will support higher levels of services in all aspects of commercial and consumer banking. Strategies to consider in terms of technology: Growing the number of accounts opened online Promoting and innovating new technologies and services that compete with the largest banksmobile, payments, omni-channel

The Next Ten Years: People


Younger and younger customers are going to demand more and more. Yes, in terms of technology, but also in terms of advice, convenience, and service. Be prepared to look differently at all of these. And while its not a new refrain, banks must bring back (or implement for the first time) a culture of sales and accountability in order to grow their revenues.

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Strategies to consider in terms of people: Hiring lift out teams of lenders, bankers, and mortgage personnel Developing sales cultures with associated training and accountabilities Expanding into new lines of business coupled with successful sales integration

The Next Ten Years: Consolidation


Predictions for industry consolidation vary, but even the most conservative analysts continue to predict a steady drip if not significant flow of merger and acquisition activity. Because of the complexity of concluding a successful transaction, the rush to consolidate may more closely resemble a busy but manageable teller line than a run on the bank. Still, with the number of banks decreasing, it is those banks that find innovative ways to provide value that will grow and prosper in 2025. Strategies to consider in a consolidating market: Watching your competition to exploit location and market driven growth; being in the right place at the right time Developing specialties and niche services, such as professional lines of business (medical, accounting, non-profit, education, real estate)

The Bottom Line


Your banks growth is absolutely critical to maximizing share value, regardless of your strategic direction relative to acquisitions and mergers. While today it seems like a zero sum game with Bank A focused on stealing Bank Bs customers, it is also about relating better to the needs of your truly profitable customer relationships. Banks failing to improve their delivery methods, service offerings, and cost effectiveness will find share value growth challenging at best. Some banks will be vulnerable for change of control, shareholder discontent, or a weakened position in their respective marketplace. Think differently about growth!

For more information, contact 770-670-6717 or clientservices@resurgentperformance.com

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