BEST PRACTICES FOR PUSHING UP PROFITABILITY

Presenter: Thomas W. Grottke, CEO

Northeastern Banking Services Group, LLCtgrottke@nebsg.com

860-436-6149

HELPING NEW ENGLAND'S BANKS AND CREDIT UNIONS MAXIMIZE BOTTOM-LINE OPPORTUNITIES MONDAY, APRIL 28, 2014 SHERATON FRAMINGHAM

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My Focus Today….Opening Remarks

BEST PRACTICES FOR PUSHING UP PROFITABILITY We will be looking at the composition of bank earnings Discussing strategies and tactics that banks have used to

improve profitability We will review performance levels and trends

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Presentation Outline

Current EnvironmentIndustry Observations What is Underlying The NumbersStrategies to Improve PerformanceRole of “E” in Performance ImprovementOpen Q&A

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Bank

“M&T Profit Dips on Regulatory Costs”

“JPM Slump Shows How Little Fun Banking Is Now”

“JPMorgan Chase Mortgage Forecast Worries Lenders”

“Regulators Shutter Bank in S.C.”

“FDIC Takes Action Against Six Lenders”

“More Community Bank Executives Ready to Sell”

“Troubling Spike in Student Loan Write-Offs”

“Orrstown in Pa. Cutting 32 Jobs After Tech Upgrades”

“Liability Concerns Impede Director Recruitment at Banks”

“Umpqua Aims to Show Community Banking Isn't a Matter of Size”

“Card Issuers Up Ante With Free Credit Score Data”

“Think of the Branch as a Product”

“High-tech Branches Turn Tellers into Storytellers”

“Smaller Banks Generating Solid Loan Growth as Others Ease Up”

“6 Apps That Are Making Bankers Jealous”

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FDIC.gov

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Return on Assets 12/31/2013 12/31/2007 12/31/2003All MA Banks 0.83 0.87 0.95

All CT Banks 0.67 0.83 0.98All US Banks 1.07 0.81 1.38

MA Banks > $1B 0.84 0.98 0.99CT Banks > $1B 0.78 0.93 1.03US Banks > $1B 1.08 0.79 1.42

MA Banks < $1B 0.70 0.53 0.85CT Banks < $1B 0.20 0.52 0.83US Banks < $1B 0.90 0.94 1.14

Looking closer to home – these slides take MA, CT and All US banks in total, those with assets above $1 billion and all those with less than $1 billion Green = Best Performance in period Yellow = Second best performance in period Red = Worst performance in period

NBS selected 2013 – 2007 – 2003 full year or year-end to provide a longer term trend analysis and timing relatively outside the 2001 and 2008 recessions

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Efficiency Ratio 12/31/2013 12/31/2007 12/31/2003All MA Banks 72.08 75.89 71.55

All CT Banks 71.05 64.56 64.77All US Banks 60.54 59.49 56.57

MA Banks > $1B 71.15 74.62 69.78CT Banks > $1B 67.15 60.80 63.59US Banks > $1B 59.47 58.47 55.07

MA Banks < $1B 78.52 81.34 76.59CT Banks < $1B 89.10 78.22 68.30US Banks < $1B 71.38 67.38 65.69

Non-Interest Expense/ Assets 12/31/2013 12/31/2007 12/31/2003

All MA Banks 2.98 4.37 3.86All CT Banks 2.86 2.70 2.99All US Banks 2.88 2.98 3.20

MA Banks > $1B 2.91 4.66 3.75CT Banks > $1B 2.73 2.63 3.05US Banks > $1B 2.83 2.95 3.16

MA Banks < $1B 3.50 3.48 4.22CT Banks < $1B 3.42 2.92 2.84US Banks < $1B 3.21 3.21 3.39

Assets/ Employee 12/31/2013 12/31/2007 12/31/2003All MA Banks 7.69 5.02 4.11

All CT Banks 6.22 5.21 4.33All US Banks 7.12 5.88 4.44

MA Banks > $1B 8.24 5.19 4.57CT Banks > $1B 6.61 5.52 4.47US Banks > $1B 7.75 6.44 4.83

MA Banks < $1B 4.95 4.53 3.14CT Banks < $1B 4.93 4.41 4.02US Banks < $1B 4.08 3.55 3.07

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Industry Observations

Community Banking FDIC December 2012 Study

o Traditional lending, deposit gathering and limited geographic scopeo 94% of all banking companies (includes 330 larger banks)

Non-community banks – 1984 to 2011 Accumulated 86% of industry assets Shift their activities to fast-growing markets Acquiring nearly 8,700 banks Asset growth led by mortgage and consumer lending (mortgage debt

grew 7.7 times and consumer debt grew 5 times)

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What is Underlying The Numbers

1993 to 2006 non-community banks reported ROA an average of 35 bps above community banks Narrowing of the traditional advantage of community banks

o Difference in NIM between community banks and others has narrowedo Community banks derive 80% pf their revenues fro Net Interest Margin

Non-community banks ability to generate non-interest income from a wider array of sources at much larger levels

These led to an “Efficiency Gap” o 1.3% in 1998 to 9.7% in 2011o Cumulative 8% increase

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What is Underlying The Numbers

Our focus today is on regional banks and community banks

What NBS observes and supports our clients with …. Revenue growth and enhancement areas and strategies …. Expense and cost management areas and strategies …..

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What is Underlying The Numbers

Increase Revenues - Traditional Banking Lines of Business Commercial and Corporate Banking Mortgage Banking Consumer Depository Services Trust and/or High Net Worth Investment Product Sales Insurance Agency(ies) and Insurance Sales Payments – Sponsoring Banks and Private Labeling

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What is Underlying The Numbers

Expense and Cost Management Areas Cost of Funds Asset Quality and Loan Loss Provisions/Reserves Salary and Benefits Physical Distribution Channel (Offices) Advertising and Promotion and 3rd Party Reward Programs Information Technology and Operations Systems and Vendors Regulatory Burden

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Strategies to Improve Performance Growth …….. Increase Earning Assets and Low-cost Funding Balance Sheet Mix …… Increase Loans as a % of Assets Commercial Orientation ……. Increase Commercial Loans %

of Total Loans Funding Mix …… Increase Low-cost Deposits % of Total

Funding (Deposits and Borrowings)

Fee Income Sources …… Create Longer-term and More Stable Consistent Sources of Fee Income

Increase Operating Efficiency / Reduce Labor Requirements …. Increase Loans, Deposits and Fee Income Without Adding to Staff or Facilities (Utilize Existing Capacity)

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It’s the age of E-banking

All About ‘E’ – Strategic Margins Conference Today …. Increasingly tech-reliant customer base Most important factors and changes facing community

financial institutions How you can efficiently, smartly and profitably meet those

challenges

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Role of “E” in Performance Improvement

Consumer eBanking Wallet

Single Sign-on

Bill-Pay – Timing Options

Customized Alerts to any devise

Image Access

Transfer among accounts and lines of credit

Internet Banking Suite - PFM

Mobile and Tablet Devise Communications

Consistent Look & feel

P to P PaymentsEnabling

TechnologiesDirect Deposit and E-Statements

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Role of “E” in Performance Improvement

Commercial eBanking Wallet

Single Sign-on and Consistent Look and Feel

Bill-Pay, Positive Pay and Acct Recon

Alerts to any devise – person roles

RDC and Image Access

Transfer among accounts and lines of credit access

Internet Banking Suite – entitlement options (users)

Mobile and Tablet Devise Communications

Merchant Acquiring – Internet and hand-held Store Devise Pmt Acceptance

Wire, ACH, and Sweep

EnablingTechnologies

Lockbox and E-Statements

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Open Q&A for Tom Grottke

Special Thanks to Vincent M. Valvo, CEO Agility Resources Group

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Biographical Summary of Thomas W. Grottke, CEO, NBS

Tom has led the northeastern banking advisory services practice since May 2002 and has over 28 years of professional services experience assisting banks improve business performance through strategic planning, organizational and department studies and by implementing new applications/systems, improving business processes, selecting new systems, negotiating core and related systems agreements and developing technology assessments and plans.

In addition to being the lead advisor to hundreds of banks and thrifts since forming his own company in 2002, Mr. Grottke has been the lead audit and/or consulting partner or senior manager for numerous banks and thrifts in New England and New York State with his previous firms - KPMG Peat Marwick, LLP (1995 to 2002) and Arthur Andersen & Company (1985 to 1995).

Mr. Grottke specializes in providing consulting services to community and regional banks, but he developed unique personal expertise in developing strategic and business plans, facilitating Board/management sessions, reorganizing banks or departments, reengineering banks, developing bank technology plans, performing core banking system vendor selections, negotiating major vendor agreements and managing core system conversions and bank mergers (enterprise-wide projects).

Tom, past chair of the CSCPA Banking Committee, is a graduate of the University of Connecticut (‘85). He has spoken on banking matters to chapters of Robert Morris Associates, New York, New Jersey, Connecticut and Massachusetts Bankers Associations, Independent Bankers Association, American Community Bankers Association, American Bankers Association and at other industry seminars during his professional career. He has been a guest lecturer at UCONN, Central Ct State University, Southern Connecticut State University and Bryant University.

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Background on NBS

NBS Mission Statement

Enable clients to become high-performing financial institutions and create long-term relationships through

highly responsive value-added services.

NBS inspires trust by saying what we mean, matching our behaviors to our words and taking responsibility for our

actions and work.