Bank Profitability and Strategic Issues

1. Confidential

2. Bank Profitability and Strategic Issues

3. Strategy – Why Do You Need It?

4. Strategy – Why Do You Need It?

5. Strategy – Why Do You Need It?

6. Strategy – Why Do You Need It?

7. Strategy Development Strategic Planning Pyramid Situation Analysis Situation Analysis

8. Strategy Development

9. Strategy Development

10. Strategy Development

11. Strategy Development

12. Strategy Development

13. Strategy Development

14. Strategy Development Strategic Objectives

15. Strength: Experienced commercial lenders Strategic Obj.: Triple small business clients in three years. Weakness: Small business products/services Opportunity: Small business market growth Strategy Development

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17. Strategy Development

18. Strategy Development

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22. Strategy Development

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25. Strategy Development

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30. Strategy Development

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33. Strategy Development

34. Exhibit 1: Overall Financial Performance Current Quarter CQ -1 CQ -2 CQ -3 CQ -4 (Percentage of Average Assets:) Interest Income--FTE 6.90 % 6.79 % 6.54 % 6.33 % 6.26 % Interest Expense 2.63 % 2.45 % 2.27 % 2.13 % 1.97 % Net Interest Spread--FTE 4.27 % 4.34 % 4.27 % 4.20 % 4.29 % Provision for Credit Loss 0.17 % 0.16 % 0.19 % 0.21 % 0.16 % Noninterest Income 2.49 % 2.53 % 2.50 % 2.36 % 2.49 % Noninterest Expense 4.39 % 4.52 % 4.39 % 4.27 % 4.45 % ROA - Pretax 2.20 % 2.19 % 2.20 % 2.08 % 2.17 % Tax Equivalent Adjustment 0.20 % 0.22 % 0.21 % 0.22 % 0.22 % Income Taxes 0.62 % 0.58 % 0.58 % 0.48 % 0.56 % ROA--After Tax 1.37 % 1.40 % 1.40 % 1.39 % 1.39 % ROE--After Tax 13.65 % 13.61 % 13.72 % 13.72 % 13.68 % Efficiency Ratio 65.76 % 66.34 % 65.49 % 65.42 % 65.86 % Noninterest Income/Total Income 36.04 % 36.33 % 36.37 % 35.53 % 36.51 % Loans/Deposits 96.06 % 96.11 % 93.96 % 94.81 % 95.84 % Equity/Assets 10.07 % 10.28 % 10.20 % 10.15 % 10.16 % Bank Profitability As a Strategic Tool Overall financial performance is very good, and in Top Quartile of Peer. At this level, management sees no reason for tactical action.

35. Exhibit 2: Testing the Spread Assumption Current Quarter CQ -1 Change CQ -2 CQ -3 CQ -4 Change PRODUCTS--COST BASIS Yield on Earning Assets--FTE 7.72 % 7.60 % 0.12 % 7.35 % 7.10 % 7.01 % 0.71 % Rate Paid on Total Deposits and Borrowings 3.05 % 2.85 % 0.20 % 2.64 % 2.45 % 2.25 % 0.80 % Spread - FTE 4.67 % 4.75 % (0.08)% 4.71 % 4.65 % 4.76 % (0.09)% PRODUCTS--MARKET BASIS FUNDS USING PRODUCTS Yield on Earning Assets--FTE 7.72 % 7.60 % 0.12 % 7.35 % 7.10 % 7.01 % 0.71 % Cost of Funds (FTP) 4.66 % 4.45 % 0.21 % 4.21 % 4.05 % 3.88 % 0.78 % Asset Product Spread--FTE 3.06 % 3.15 % (0.09)% 3.14 % 3.05 % 3.13 % (0.07)% FUND PROVIDING PRODUCTS Credit for Funds (FTP) 5.06 % 4.93 % 0.13 % 4.69 % 4.55 % 4.40 % 0.66 % Rate Paid on Total Deposits and Borrowings 3.05 % 2.85 % 0.20 % 2.64 % 2.45 % 2.25 % 0.80 % Liability Product Spread 2.01 % 2.08 % (0.07)% 2.05 % 2.10 % 2.15 % (0.14)% Maturity/Rate Mismatch (0.40)% (0.48)% 0.08 % (0.48)% (0.50)% (0.52)% 0.12 % Bank Profitability As a Strategic Tool Spread in “Cost Basis” section shows slight decline, but is > peer. However, introducing FTP to each side of the balance sheet shows different perspective.

36. Exhibit 3: Branch Profitability Q4 Q3 Change Q2 Q1 Q4 Change SELECTED RATES: All percentages are % of average deposits Credit for Funds 0.12 % 0.55 % 4.85 % 4.73 % 4.55 % 4.40 % 4.30 % Interest Expense 0.18 % 0.65 % 2.42 % 2.24% 2.06 % 1.91 % 1.77 % Net Liability Spread (0.07)% (0.10)% 2.43 % 2.49 % 2.49 % 2.48 % 2.53 % Provision for Credit Loss 0.01 % 0.04 % 0.15 % 0.13 % 0.09 % 0.13 % 0.11 % Noninterest Income (0.05)% 0.00 % 0.74 % 0.78 % 0.86 % 0.79 % 0.73 % Direct Expense 0.07 % 0.16 % 1.13 % 1.07 % 1.04 % 1.01 % 0.97 % Indirect Expense 0.05 % 0.23 % 1.11 % 1.05 % 0.94 % 0.87 % 0.88 % Corp. Overhead Expense (0.16)% (0.39)% 0.85 % 1.01 % 1.08 % 1.04 % 1.24 % Total Noninterest Expense (0.04)% (0.01)% 3.09 % 3.13 % 3.06 % 2.92 % 3.10 % Pretax Profit (Loss) (0.13)% (0.14)% 1.35 % 1.49 % 1.63 % 1.66 % 1.50 % Bank Profitability As a Strategic Tool Branch profitability is demonstrating a negative trend. Indirect and overhead expense ratios are > peer, a strategic challenge. Net liability spread is < peer and declining, contributing to the negative profit trend.

37. Exhibit 4: Money Market Product Trend Q4 Q3 Change Q2 Q1 Q4 Change All percentages are % of average money market deposits P & L: Credit for Funds 0.11 % 0.57 % 5.15 % 5.04 % 4.81 % 4.71 % 4.58 % Interest Expense 0.51 % 1.84 % 3.41 % 2.90 % 2.26 % 1.92 % 1.57 % Total Interest Spread (0.40)% (1.28)% 1.74 % 2.14 % 2.55 % 2.79 % 3.02 % Noninterest Income 0.00 % (0.06)% 0.01 % 0.01 % 0.08 % 0.08 % 0.07 % Noninterest Expense 0.03 % 0.10 % 0.81 % 0.78 % 0.70 % 0.71 % 0.71 % Pretax Profit (Loss) (0.40)% (1.41)% 1.07 % 1.47 % 2.03 % 2.26 % 2.47 % Bank Profitability As a Strategic Tool Money market product spread is declining at rapid rate and is < peer. This product is the key contributor to branch spread decline. Through competitive and customer analysis performed by Marketing Department, this bank must make changes to increase spread without customer attrition.

38. Bank Profitability As a Strategic Tool Regional and branch managers incentives are aligned to strategic objective. Goal is to increase net revenue from profitability reports. Decisions made at the branch manager level are geared towards increasing spread revenue. Not any deposit balances, but the right deposit balances. Focused attention on higher profitability customers.

39. Profitability & Strategic Issues