Professional Documents
Culture Documents
Executive Summary: Valley Bank, Strategic Analysis
Executive Summary: Valley Bank, Strategic Analysis
This paper is a strategic analysis of Valley Bank, a community bank whose service area is the Roanoke Metropolitan Area, which is the regional center of southwest Virginia. For this purpose, both external and internal factors affecting business performance were examined, as well as Valleys strategic approach in creating sustainable competitive advantages. It is discussed here if Valleys actions in the marketplace, taken by its managers, affect business performance in such a way that strengthen its competitive position and gain a competitive edge over rivals. Is the company sufficiently profitable to validate its business model and strategy? Does the company seem to change its strategy over time? What is the company vision and what are its main objectives? All these questions are going to be answered within this paper. The strategic analysis was conducted in October-November 2008. The information used for assessments was gathered for the year 2008 (quarterly), as well as for the years ended 2005, 2006, and 2007 in order to better reflect the evolution of the company. In 2008, external factors played a major role in the business state of work for the period for which this assessment has been done. Consequently, a good understanding of environmental dynamics is of high importance for a comprehensible evaluation. The first part of the paper aims to describe the economic environment, as well as the political and social aspects. The technological factor is the only factor that could be considered as affecting the business independently of the turmoil of the other factors. The global economic downturn has created adverse effects for businesses especially for those in the banking industry. In top of that, banks whose loan activity has been mostly tied to real estate, as in Valleys case, have been especially sensitive to the financial crisis. Market volatility is one important characteristic of the period. Political debates and uncertainty associated with future directions of strategies was a state of being for 2008. Hence, taking all this into consideration, the companys reaction is both unusual and appealing to be studied.
1 |Page
In addition to the external pressure, the internal factors played their role as well. In a highly competitive environment, with low barriers to entry, under a continuous pressure from not only the large banks but from non-banking businesses that now offer substitute products, Valley found a strategy to maintain itself at a level of profitability. The interest income, the major contributor to the total income, shows a general upward trend; the interest margins, always under considerable pressure because of the intense competition for deposits, were found to be the key instrument of effectiveness. The second quarter was the most challenging, yet Valley remained profitable. Here are few input indicators of Valley strategy to success, all of them analyzed in depth within the paper:
the management was committed to maintain a ratio of loans to funding sources at a maximum of 90%; the capital structure has been adequate to support anticipated asset growth, as well as to serve as a cushion to absorb potential loses; asset/liability management activities have been designed to ensure adequate liquidity to meet loan demand or deposit outflows; nonetheless the impact of interest rate fluctuations on net interest income was closely watched;
both, a market penetration strategy with focus on increasing market share and loyalty and a product development strategy, a good tactic to help customers to overcome the economic downturns;
an active presence in the community life making an in depth understanding of community needs possible as well as promoting a positive image;
Introduction
2 |Page
The strategic analysis is a complete and indepth view of the banks external environment, banks strategies, business practices and other internal factors that influence its overall performance. The first part will contain results of the external evaluation using the following models: PEST Analysis, Five Forces Analysis and Competitor Analysis. The second part of the report will present results of the internal analysis based on financial ratios, SWOT analysis, VRIO model analysis, ANSOFF matrix and lastly, an analysis of Valley banks management. This report will then offer suggestions and possible outcomes, all subject to further discussions. The expected outcome of this strategic analysis is a better understanding of the banks current position by its management and the creation of the feedback needed for future actions.
Sources of information
Data used in this study was obtained from the following sources: Companys website, Companys financial fillings 10-K and 10-Q, and the companys Annual Report for 2007. Other information was gathered from FDICs website, Yahoo Finance, Moodys, and ValuEngine.
3 |Page
The company conducts a general commercial banking business while emphasizing the needs of small-to-medium sized businesses, professional concerns and individuals.
Deposit Services
The company offers a range of deposit services that are available in most banks and savings and loan associations, including checking accounts, NOW accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to longer-term certificates of deposit. In addition, the company offers certain retirement account services, such as Individual Retirement Accounts. The company solicits accounts from individuals, businesses, associations and organizations and government authorities.
Lending Activities
The company offers a range of lending services including commercial loans, residential real estate loans, construction and development loans, and consumer loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements) and purchase of equipment and machinery. Collateralized business loans may be secured by a security interest in marketable equipment, accounts receivable, business equipment and/or general intangibles of the business. In addition, or as an alternative, the loan may be secured by a deed of trust lien on business real estate. The risks associated with commercial
4 |Page
Other Services
5 |Page
Financial Services
In 2005, Valley Wealth Management Services, Inc. (VWM), a wholly-owned subsidiary of the Bank, began offering non-deposit investment products and insurance products for sale to the public. VWM is working with Bankers Insurance LLC., a joint effort of Virginia banks, in which the company has a small interest through its membership in the Virginia Bankers Association.
The most critical issue from the banks standpoint is the subprime mortgage crisis which has negatively affected financial institutes from the vast number of loans that have defaulted. Globally, financial institutions have recorded write-downs and credit losses of over $500 billion (Associated Press and Reuters, 2008), causing these institutions to tighten their lending which drags on the economy. The defaulted loans are a direct hit to financial institutions, such as banks, requiring that the banks restructure their balance sheets and raise standards to evaluate credit risk while tightening on lending. However, not all can be saved from the inevitable and some financial institutions have either filed for bankruptcy or have been acquired/taken-over by an existing firm. The financial institutions that are left are hoping to be bailed out by the benefits of The Emergency Economy Stabilization Act of 2008. Unfortunately, while the 2 nd quarter of 2008 benefited from the Federal Tax Rebates of The Economic Stimulus Act of 2008, the growth
6 |Page
A final rule requiring the largest insured depository institutions to adopt mechanisms that would, in the event of the institutions failure, provide the FDIC with standard deposit account and other customer information and allow the placement and release of holds on liability accounts, including deposits. The rule applies only to very large institutions, currently estimated to be seven in number.
Deposit Insurance Regulations, Revocable Trust Accounts (September, 2008)
An interim rule to simplify and modernize its deposit insurance rules for revocable trust accounts: The aim is faster deposit insurance determinations after depository institution closings and to help improve public confidence in the banking system. Under the new rules, a trust
8 |Page
An interim rule to amend its deposit insurance regulations to reflect Congresss recent action to temporarily increase the standard deposit insurance amount from $100,000 to $250,000 and to simplify the deposit insurance rules for funds maintained in mortgage servicing accounts.
Federal Deposit Insurance Corporations proposal for restoring the Deposit Insurance Fund to its required minimum of 1.15 percent of insured deposits and, ultimately, to its target designated reserve ratio of 1.25 percent (October,2008)
The Federal Deposit Insurance Corp. said banks categorized as problem institutions increased 46 percent in the third quarter to the highest level in 13 years. The FDIC identified 171 problem banks as of Sept. 30, up from 117 in the second quarter and the highest since December 1995 (Vekshin, 2008). Socio-cultural investigation brought to surface the following aspects: the demographic in Virginia has a slightly lower rate, 6.8% as opposed to 8% for the US, while the education level is above the nations average. The unemployment rate has been lower in Virginia for the past few years. As of August 2008, a 4.6% unemployment rate was reported for this state as opposed to 6.1% for the entire nation. One reason found was the large number of Virginia residents working for the federal government in the Washington D.C., metropolitan area. Technological advance plays a central role in the banking industry. It is not only a matter of costtime enhancement, but also a measure of competitiveness. The rationale behind this evidence is
9 |Page
The competitive rivalry in the banking sector is high. With a long history of existence dominated by the relative ease of opening a new business, the banking industry forces its players to continuously seek ways to lure clients away from competitors. Banks have learned to handle the few tools they have in order to grow. Interest rates (the most common tool), the active introduction of next generation products, cutting edge technology usage, development of expertise in narrowed areas, elaborate marketing tactics, along with a well-maintained capital adequacy ratio are among them. The competition issue is not limited here to other banks however, as recently, companies from other industries have started to compete with banks (loans or other financial instruments offered by manufacturers or intermediaries to increase consumption). The threat of new entrants is also high as the banking sector has few barriers to entry. Since more institutions have developed the skills to broaden their service areas, the threat of new entrants has become steeper despite certain discouraging signals. For example, the average return on assets in banking industry has fallen below 1.21 percent last year and, even worse, there is a growing trend of failure in this area. It is not a big issue for an insurance company to start offering
10 | P a g e
Two other banks were evaluated as being Valleys competitors in the geographical area. Both are subsidiaries of Wachovia Bank, which was acquired by Wells Fargo and is itself a subsidiary of SunTrust Bank. There are only three other locally owned and operated commercial banks in the
11 | P a g e
On the whole, the mission statement is reaching its goal. That is, when used properly, vision and mission statements (although different) can be a very powerful tool, especially for new and small businesses. Without a mission statement it is difficult to develop a solid strategy. Valley Banks mission statement is a concise statement of business strategy, developed from the customer's perspective. The mission statement does answer the following questions:
1. What do we do? - by the real and psychological needs that are fulfilled when
customers pay for one of Valleys services the answer is: high quality services, enduring relationships, long and strong relationships thus becoming the Bank of choice for Roanoke Valley.
2. How do we do it? - understanding the communitys needs, keeping promises, becoming
a friend for small businesses or individuals, rather than only a place of financing.
3. For whom do we do it?- for Roanoke Valley customers.
Overall, the statement is not vague or misleading, Valleys customer target is clear, and its vision is uncomplicated. The statement is a brief representation of the enterprises purpose for existence. Nevertheless, it incorporates socially meaningful ideas and addresses the concept of moral responsibility. What could be claimed as insufficient in the mission statement is the lack of any mention of growth or profitability.
Valley is a small bank with assets available of $642.8 million as of the end of the third quarter of 2008, and deposits of $461.9 million for the same period. Its loan portfolio was dominated by commercial real estate at 37.9% of the portfolio, followed by residential real estate at 23.9% and real estate construction at 20%. Commercial loans accounted for 16.4%. The major contributor to the total income is the interest income, 94%, which has kept an overall slight growing trend over
13 | P a g e
14 | P a g e
This analysis was done in two directions: an internal trend and by comparing Valley performance with its peers in the greater context of the industry.
15 | P a g e
Regarding the internal trend, the company faces a steady deterioration of its main indicators. For example, the Return on Assets is down from 0.78 in 2005 to 0.49 in 2007. Return on Equity is also substantially down, from 11.49 in 2005 to 7.9 in 2007. Revenue per employee increased however. The liquidity has been kept quite constant at 1.12 Loans to Deposits, as well as the Total Asset Turnover, 0.07. Cash & Equivalents Turnover shows a slight improvement in 2007. Regarding peer analysis and valuation ratios compared with those of the industry sector and the S&P 500, the following conclusions have been drawn: Taken as a whole, the bank performs in the range of its peers, but underperforms the S&P 500 benchmark. Asset utilization, as the internal trend shows, needs improvement yet Valley is in the range of its comparable competitors. The capital adequacy was thought to maintain a capital structure sufficient to absorb potential losses. The bank adopted a cautionary strategy by keeping itself quite solvent as the liquidity ratio shows. Liquidity and capital levels are currently adequate to fund anticipated near-term business expansion. The company struggles to maintaining a total risk based capital ratio of 10% or greater at the Bank level as is required for a "well capitalized" institution. The debt ratio does not show that the company extensively uses debts to finance its assets. Total Debt to Equity ratio is actually pretty close to the S&P 500 standard. The bank finances its shortterm needs by the following kind of borrowings: federal funds purchased and securities sold under agreements to repurchase, sweep accounts and Federal Home Loan Bank of Atlanta borrowings. For long term debts, Federal Home Loan Bank constitutes a cost-effective funding source for Valley Bank. The profitability ratios reflected by the operating margin and the net profit margin over-perform the industry. Dividend yield ratio under-performs the peer median but is in the industry range and the S&P 500 range. Price/Earnings ratio is higher than both the peer average and the industry but not far away from the S&P 500.
16 | P a g e
A number of strengths were found and they facilitated the companys growth over time. The bank has proved to have a good understanding of its competitive advantages and has capitalized on them. Mainly, the management showed a consistent strategy of constant growth which has helped the business to maintain a reasonable profit level even in the most turbulent economic periods. Here are a few results of findings: Valley has an active presence in the area it serves with enough availability to be comfortably reached by clients. This strength was exploited in combination with two other advantages, heritage and personalized services. That is, the bank made itself known by extensive involvement in community life, understood customers needs, built close relationships and opened enough offices to be the choice. There were some opportunities associated with the success of this strategy, which the bank recognized and took advantage of, including the need of trust that the communitys people seek and, under the same roof, answers for financial problems they have. Valley successfully understood the communitys needs and had the necessary solutions to respond to them. To reach its goal and make its competitive advantages sustainable, Valley chose to make use of cutting edge technology and in doing so, has created another strength. The quality of staff and the expertise created made Valley the third bank in market share in only a few years. The economy of the community, with a level of well-being above the average in the U.S., and a local unemployment rate always under the national rate, led to viewing the area as a good place to have financial solutions for those who seek to grow, both businesses and as individuals. The experience of investing in real estate in the area was considered when it came to formulating strategy.
17 | P a g e
Regarding weaknesses, Valley Banks lack of diversification in loan management has been and could continue to be harmful from the perspective of the present crisis in real estate. This coupled with a too timid expansionary strategy, a runner-up strategy, makes it hard for Valley to cope with changes or take on other opportunities. One consequence of being a small runner-up is the lack of resources (that is less money to spend on mass media and quite limited funds for capital expansion or making acquisitions). The choice to open seven branches in the same county can be a signal of a short term orientation, risk adverse strategy and timidity in taking on business opportunities. Assets management is another main weakness. The state of the economy is both a source of opportunities and a source of threats for Valley. From the standpoint of its expertise and current involvement in the community, the financial problem that the large banks face could be an opportunity for Valley to grow market share and build stability. The governments capital infusion in the banking system is another capstone in formulating a viable long term strategy; maybe an overextension across Virginias borders. The general state of Virginias economy and Roanoke MSAs position as a regional center is a better source of opportunities for Valley. It is also a source of threats as being an attractive place for new entrants. These threats come from the overall state of the economy and from growth/ reorganization of the banking sector.
As Valleys main income is interest income, pricing has been an important element in formulating their strategy. For checking accounts, Valley offers a good yield, the third most attractive for the state of Virginia. For regular savings accounts Valley has a variable yield. For money market accounts, the interest rates are tied to the Wall Street Journal Prime rate. As compared with the same period of 2007, the yield on earning assets decreased at 6.31% from 7.08% during the first 6 months of 2008. Competing on price has been proved an effective strategy for Valley as it continued to attract customers and so has accumulated over $90 million in deposits as of the end of the third quarter
18 | P a g e
Although not having an aggressive strategy of expansion, or being a pioneer of innovation and diversification, Valley Bank successfully evaluated its capabilities and resources and embodied them in strengths; as a result the company was capable of coping with rapid changes in the turbulent market environment. There are few valuable resources that the bank possesses and exploits. Good service, which although easy to imitate in the banking sector, was focused on community needs, therefore turning this into a strength; the expertise developed in the area of operation coupled with a high level of technology used is another example. Its worth mentioning that technology adoption would not result in strength without a high level of specialization. A growing market share coupled with enough offices available and a proved healthiness of business (capital adequacy) helped the company to gain competitive advantages. There are however, resources available that would result in strengths, if well exploited, that Valley has not used so far. One example would be a possible strategic alliance with a larger bank or a possible acquisition. While management does not seem reluctant to the idea, as results from their approach to the FASB requirement SFAS No 141(R) Business Combinations show, (December 2007), no further plans are clearly shown in this regard. Between mid-2004 to February of 2007, there were no bank closures in the U.S. (Moyer, 2007). However, with the depleting capital levels of many institutions and banks getting stuck with
19 | P a g e
The matrixs alternatives of corporate growth strategy: market penetration, market development, product development and diversification, result in ways to grow through existing products and/or potential products as well as focusing on present customers and/or potential new ones. Valley is constantly concerned with both maintaining and increasing the market share for the current services, and increasing customer loyalty, therefore, it can be concluded that a market penetration strategy is in place. Secondly, expansion into a new geographical market is part of their short-term strategy. They intend to open a new office in 2009, the ninth one, thus making Valley a candidate for a market development strategy as well. Nonetheless, the new product, MyLifeStyle Checking account, launched at the beginning of 2008 signals that the company adopted a product development strategy in addition. The new product was created to appeal to existing markets and also to help customers to overcome the economic downturn. The only remaining alternative, diversification, is not a strategy that the company has used so far. Diversification is a growth strategy by which the bank would market new services in new markets.
A good strategy always begins, with a clear understanding of the present situation. That is, a good evaluation of the business itself with its strengths and weakness, then a good understanding of the environment, from macro to micro, a good understanding of the industry and of the
20 | P a g e
The external environment is very challenging for the company; consequently, a long term strategy is difficult to be defined; Taking into account the actual context of the global financial crisis, the company has had a working strategy, a fact proven by the results; There are strategies or elements of strategy that could be considered from this point on.
Take a stance
First, as an immediate response to the turbulent market environment, a stance should be taken in order to be able to cope with the rapid changes. There are three possible choices: 1. to continue to take all necessary measures to keep the bank away of risk, that is, high liquidity and capital adequacy, in order to allow the business to react to change. In this case of defensive approach, the bank would watch competitors reactions and introduce better products, as possible; 2. to go a step further and anticipate change; here a short-to-medium term plan could include mergers and acquisitions; 3. to become the leader of change by pioneering new and better products. There are few chances for Valley to become a leader of change as the main competitors in Roanoke Valley are Wachovia (now Wells Fargo) and SunTrust. Keep services fresh and exciting
21 | P a g e
enough to not only maintain the customer base but to increase it. Nonetheless, teller staff should keep serving customers not the clock. Service should be customer driven. Allay the fear
There is a level of trust that customers in the bank industry are seriously seeking now, beyond the FDIC insurance. One way to counteract customers confusion is to speak out. Many community banks are doing just that by launching PR campaigns that specifically address concerns about the safety and soundness of banks with an emphasis on stability (Community banker, 2008). Valley experienced loan losses in 2005-2006 and the undesired outcomes derived from it. It took actions in 2007 and in 2008 to run with a better quality of assets. In effect, a possible deterrent position regarding loan activity could hurt the bank in the long run. A solution for this blockage would be to focus on industrial loan diversification. Diversification would allow lowering the overall impact on portfolio if one or more loans go into default.
Studies show that between 30 and 40 percent of new clients leave the financial institution during the first year (Scarborough, 2008). There are a few important things regarding the on-boarding strategy. One would be good communication with customers regarding not only the services available but also about the banks policy. One study done by Kimberly Clay, director of marketing research for Birmingham, Ala.-based Bancography Inc., showed that customers who understood a bank's policies were more likely to blame themselves - not the bank - if they made a costly mistake (Scarborough, 2008). Conversely, if not aware of a banks policy, the customer goes and spreads bad information about the bank. This is a peril for community banks especially. Another aspect is the importance of technology. Saving customers time by having software that prevents multiple trips to the bank or multiple stops inside the bank is important. Surveys, follow-up calls, and having a staff comfortable with current product offerings are other examples. Update appraisals for real estate loans
22 | P a g e
One reason for this option is to expand the geographic coverage beyond the Roanoke proximity as it is the quickest way to become a presence in different locations. Valleys size is less likely to allow an acquisition unless a big opportunity is in place. Another reason would be the extension of business into new service categories. A merger with a bank with a different expertise and different area of activity could lead to risk diversification in addition to the increase in market share and better coverage of industry segments. There are many examples of banks that have successfully pursued this kind of strategy, among them Wachovia and SunTrust. There is, however, rationale behind focusing on a limited geographic area such as a chance to dominate, greater operating efficiency and a stronger brand awareness with saturation advertising.
CRM approach
The justification for CRM (Customer Relationship Management) projects is tied to the bank's ability to sell more products and services to existing customers and to acquire new customers more cost effectively. Assumption the bank has not previously done so, one first step in assessing performance before adopting CRM is the balanced scorecard. This could help the bank to combine hard financial indicators of performance with indicators not as easy to measure, for example, customer satisfaction. That would be the first indicator for performance measurement that would make more sense when translated into a financial value. Keep the optimism up
23 | P a g e
As a member of the American Banker Association (ABA), Valley needs to keep close ties with this institution and take advantage of the value-added business solutions available for ABA members. ABA Total Business Solutions is an affiliate of ABA and has a palette of solution areas available ranging from services in capital markets and commercial banking to mortgage solutions and card solutions (Bill, 2008).
Bibliography
Associated Press and Reuters. (2008, September 15). Lehman Brothers File for Bankruptcy. Retrieved November 3, 2008, from CNBC.com: http://www.cnbc.com/id/26708143 Coy, P. (2008). How New Global Banking Rules Could Deepen the US Crisis. BusinessWeek . Timothy R. Homan & Shobhana Chandra (2008, November 25) U.S. Economy: Home-Price Decline Accelerates, GDP Contracts, Bloomberg news available at: http://www.bloomberg.com/apps/news? pid=20601087&sid=agE8Sg.gs3l8&refer=home Vekshin A. (2008, November 25) Problem Banks Rose 46% in Third Quarter, FDIC Says, Bloomberg news available at : http://www.bloomberg.com/apps/news? pid=20601208&sid=a9B2vhgJOztU&refer=finance FXYard Ltd (2008, November 25, 2008) Market Overview by Forex Yard, available at: http://www.forexhound.com/article.cfm?articleID=118689 24 | P a g e
25 | P a g e