Adding Rocket Fuel to Your Strategic

Growth Plan Presented by

John Dearing

Capstone

Photo credit: NASA Goddard Space Flight Center, CC BY 2.0, flickr.com/photos/gsfc/5613449925.

How Did Capstone Get Here?

Growth Engineers: 23 years, helping organizations grow!

Identify & prioritize the best fit external growth options

Collaborating for 15 years with credit unions & CUSOs

Opening eyes & minds…

The Capstone Roadmap to AcquisitionsSM

From Beginning To Beginning

“Have one reason to buy, and many companies to choose from.”

“Every company is for sale —for the right equation.”

“It is far more expensive to buy the wrong company than overpay for the right one.”

3 Simple Objectives

1. Generate new ideas for your strategic growth planning process & options

2. Share a thought-provoking perspective onproactive, growth through M&A

3. Provide tools for exploration & execution

The Credit Union Market Today

Credit Union Success in 2018• Record loan-to-share: 85%

• Membership growth accelerates (4.5% vs. 4.1%)

• CUs growing faster than banks– Assets 2.6x

– Loans 3.4x

CU-Fintech Partnerships to Rise

• 94% of financial institutions are planning two or more fintech acquisitions in 2019

Source: Fintech Acquisitions on the minds of Bankers in 2019. http://www.bankingexchange.com/news-feed/item/7709-fintech-acquisitions-on-the-minds-of-bankers-in-2019Photo credit: Barn Images, Public Domain https://barnimages.com/iphone-6/

Hot CU Trends

Cloud Digital Fintech Marketing Automation

AnalyticsAI &

Machine Learning

IT Security

Source: Ongoing Operations, “2019 Credit Union Technology Trends to Watch”

Financial Institution Demographics

Source: The Financial Brand, “Community Banks and Credit Unions Face Generational Obsolescence” https://thefinancialbrand.com/65707/millennials-community-banks-credit-unions/ 2017 June.

46% of CU members are over age 52

CU Generation Gap

• 31% of members are 18-36 years old…

• 16% of CEOs are over age 60– Average age 51

• 36% of board members are over age 56– Average age 56

1.Source: The Financial Brand, “Community Banks and Credit Unions Face Generational Obsolescence” https://thefinancialbrand.com/65707/millennials-community-banks-credit-unions/ 2017 June.

2.Source: YCUP Oregon & SW Washington, https://www.ycupportland.com/about-us/. Accessed 19 February 2019.

Credit Union Trends• About 27% fewer credit unions since 2010

• ~ 1 merger per day

0

1000

2000

3000

Under $2M $2-$10M $10-$50M $50-$100M $100-$500M Over $500M# of

cre

dit

unio

ns

Number of Credit Unions by Asset Size – 2010 vs. 2018

September 2010 September 2018

55% 3%47% 29% 12% 50%

Source CUData.com / NCUA

Challenges Credit Unions Face Today

• Cost of regulatory compliance

• Non-interest income sources

• Consolidation

• Technology evolution

• Cybersecurity

• Membership growth

…Challenges or Opportunities?

Grow or Die

Photo credit: Jerry Kirkhart www.flickr.com/photos/jkirkhart35/15828183277/in/photostream, CC BY 2.0

New Ideasfor Strategic Growth

Improving Valueto Members

Developing Your Vision

• What services are applicable to your members?

• What will drive your membership growth?

• What will drive non-interest income?

• How can you collaborate with others to create additional value?

Vision: Paint a Picture 1st

5 Options for GrowthStrategic Growth

Tool

What Is Your Growthcast?

10

15

20

25

30

35

40

45

2015 2016 2017 2018 2019 2020

Desired Growth

Organic growth

$

Inco

me

/ Ass

ets

/ M

embe

rs

External Growth Options

ResellSpot

Transaction or Contract

Distributor/ Channel Partner

Licensing Technology

Minority Share

Joint Ventures

Fully-Owned

Subsidiary

Transactional Direct Investment

CUSOs…A (New) Opportunity• Have you considered investing in a CUSO to grow?

• New investment opportunities– Reach new markets and new potential members

– Access to products, services, technologies, talent from outside the CU space

• Develop independently or jointly with other credit unions

• Drive non-interest income

Why Strategic M&A?

CONFIDENTIAL

Common Reasons for Strategic M&A

• Top/Bottom Line Growth

• More Products/Services

• Follow Members

• Leverage Technologies

• Consolidate

• Stabilize Financials

• Expand Member Base

• Add Talent

• Defensive

• Position for Future

Have ONEReason

Build the Foundations Build the Relationship Build the Deal

1 2 3

Strategy: Considering Options & Focus

Opportunity Matrix Tool

CA

PA

BIL

ITIE

S

MARKETS: MEMBERS / GEOGRAPHY

EXISTING NEW

EX

IST

ING Consolidation

Get deeper in current markets/members; acquire competitors in current market

Distribution

Bring services and/or competencies to new markets

NE

W

Breadth

Add complementary products/services to existing markets/members

Diversification

Offer new products and technologies to new markets (typically more risky)

Strategic Growth

Tool

CA

PA

BIL

ITIE

S

MARKETS: MEMBERS / GEOGRAPHY

EXISTING NEW

EX

IST

ING Consolidation Distribution

NE

W

Breadth Diversification

Opportunity Matrix Tool: Example

Changes in the Market

Expanded with New Solution

Criteria Development

Identify Characteristics

Develop Metrics

Prioritize & Weight

Refine Through

Examples

Ideal Characteristics• Define what you’re looking for…

– Market Size?

– Growth?

– Members?

– Products/Services?

– Geographic Location?

– Management Team?

– Culture?

– Other?

Partner Evaluation CriteriaCriteria Metric Weight

Geography• Midwest – Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska

35%

Demographics• Millennials represent at least 10% of market• Businesses with over 50 employees

30%

Management

• Management has over 10 years average experience

• Low turnover with leadership team (been at organization for at least 5 years)

25%

Industries• Healthcare, technology or education• No competitors with more than 15% of market

10%

Strategic Growth

Tool

Apples-to-Apples Prospect MatrixCriteria Prospect A Prospect B Prospect C Prospect D

Criteria 1

(30%)Meets criteria

Does not meet criteria

Meets criteriaPartially

meets criteria

Criteria 2

(25%)Does not meet

criteriaPartially

meets criteriaMeets criteria

Does not meet criteria

Criteria 3

(20%)Meets criteria

Partially meets criteria

Meets criteriaDoes not meet

criteria

Criteria 4

(15%)Meets criteria

Partially meets criteria

Partially meets criteria

Does not meet criteria

Criteria 5

(10%)Meets criteria

Partially meets criteria

Partially meets criteria

Does not meet criteria

Strategic Growth

Tool

Building Your Pipeline

3 Pursue Markets

10+ Potential Markets

100 Candidates50 Candidates Profiled

24 Interested12 Meetings4 Negotiate***1 DEAL***

2 Segments

Markets

Prospects

Tim

elin

e

Create Your Partner Funnel

“Usual Suspects”

Market Research

Internal Input (e.g., Sales team)

Trade Shows/ Associations

Other

For-sale Organizations

Prospect Pipeline

Top Five Tips1. Be passionate about your vision

2. Consider all your options for external growth

3. Use criteria to define your ideal

4. Use tools to remain efficient & objective

5. External growth can accelerate growth!

Strategic Growth

Tool

Questions and Resources

John DearingManaging Director, Capstone703.854.1910JDearing@CapstoneStrategic.com

linkedin.com/in/jdearingcfa

www.CapstoneStrategic.com