Blue Rock Golf Resort, South Yarmouth, MA - May 15, 2014

Strategies to Grow Your Core Business in a Profitable Manner

Presenter: Thomas W. Grottke, CEO

Northeastern Banking Services Group, LLCtgrottke@thenbsgroup.com

860-436-6149

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My Focus Today….Opening Remarks

Strategies to Grow Your Core Business in A Profitable Manner

We will be looking at the composition of bank earnings

Discussing strategies and tactics that banks have used and are investigating to improve profitability and performance

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Presentation Outline

Current EnvironmentIndustry Observations What is Underlying The NumbersStrategies to Improve PerformanceRole of Risk Management and Its BurdenOpen 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% increaseo Up to 10 cents more on every dollar or revenue drops to bottom line of a

non-community bank

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So How Do We Compete?

Our focus today is on strategies and tactics that regional banks and community banks can use to improve performance

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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Let’s Define Performance

What really matters to your bank can vary from another bank and does vary by where your bank is in terms of it’s:

Current position Opportunities

Which lever(s) should an executive should push ……

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Performance

Performance metrics (Goals) typically include Profitability – Gross $$$ targets, ROA, ROE, EPS … Net Interest Margin Asset Quality – NPA, NPL, Delinquent Loans, ALLL to Loans …. Growth – Capital, Revenues, Assets, Loans, Deposits, Fee Income … Market Share – HH, Businesses, Mortgages Closed, FDIC Deposits …. Accounts per customer or relationship (Define accounts to be???) Accounts/Balances per FTE (or selected positions) Headcount, Assets/FTE, Operating Income/FTE NIE/Assets or Efficiency Ratio NII/Assets or Gross Other Income IRR Measurements – Liquidity Thresholds

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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 % of Total Loans and/or Deposits 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) and/or lower costs

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Let’s Look At Some Levers – Earnings Side

Increase Revenues - Traditional Banking Lines of Business Commercial and Corporate Banking Mortgage Banking Consumer Depository Services MSB Depository Services (niche businesses) 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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Mortgage Banking MetricsMortgage Banking - Gain On Sale

Mortgage Loan Balance 150,000$ 150,000$ 400,000$ 400,000$ Premium on Loan Sale 1.35% 0.65% 1.35% 0.65%

Gross Proceeds Loan Sale 2,025$ 975$ 5,400$ 2,600$ Mortgage Loan Servicing

Mortgage Loan Balance 150,000$ 400,000$ Servicing fee 0.25% 0.25%

Annual Mortgage Servicing Income 375$ 1,000$ Mortgage Loan Servicing Staff

Mortgages Serviced Per FTE 600 950Average Fully Loaded Cost of FTE $50,000 $50,000

Annual Cost Per Loan Serviced $83.33 $52.63

Annual Profit per Serviced Loan 291.67$ 947.37$

Scenarios

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Commercial Banking MetricsLarge Commercial Loans vs. Small Business Loans

Average Loan Size 50,000$ 750,000$ Margin 5.00% 3.00%

NIM Per Loan 2,500.00$ 22,500.00$

Direct Cost to Originate Commercial Loan 85,000$ 150,000$

Annual Production 24 10Direct Cost Per Loan 3,541.67$ 15,000.00$

Contribution (Loss) per Loan - 1st Year (1,041.67)$ 7,500.00$

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Commercial Banking Metrics, cont.Commercial Accounts

Typical Mthly FeeInternet Banking 45.00$ 45.00$ 45.00$ 45.00$ 45.00$ 45.00$

Comm Bill Pay 15.00$ 15.00$ 15.00$ 15.00$ 15.00$ 15.00$ RDC 35.00$ 35.00$ 35.00$

Account Recon 20.00$ 20.00$ 20.00$ Positive Pay 20.00$ 20.00$

(10.00)$ (20.00)$ (15.00)$ (15.00)$ (30.00)$ Monthly fee Per Account 50.00$ 75.00$ 65.00$ 65.00$ 85.00$ Annual Fee Per Account 600$ 900$ 780$ 780$ 1,020$

Compensating BalancesDDA Average Balance 25,000$ 50,000$ 75,000$ 100,000$

Margin on Balance (Transfer Price) 3.00% 3.00% 3.00% 3.00%Annual Income From Funding Source 750$ 1,500$ 2,250$ 3,000$

Possible Customer Relationship Scenarios

Multi-product Discount

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Let’s Look At Some Levers – Cost Side

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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Cost Drivers Critical Drivers of Costs – And Thus Efficiency Targets

Paper – eliminate it everywhere!!!! Reports (typically larger banks $800M plus)

o Redundancy, excessive time to prepare, integrity, use of technology Inbound Calls – Reception/Offices/Call Center/Operations/Etc.

o You can still and must retain the human touch with a Call Center…actually better human touch, if done right

Internal Controls – Evidential Matter and Audit Trailso Major cause of paper and process interruptiono Move to straight through processing (STP)

Banking Officeso Cull and addo Size/footprint and purpose - what is the strategy for the market(s)o Utilization of facility

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Strategic Planning

So many possibilities …….

What has NBS learned?

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Lesson’s Learned in Nearly 30 Years

Read the Landscape …. Not just today and recent past, but opportunities that may present

themselves in next three to five years Retain a Laser Focus on Current and Growing Issues

Act quickly and decisively…solve the problem(s) and then move on Commercial Credit Risk Can Kill …. other areas can maim Regulatory Purgatory …. Slow and Painful Death Vendor Agreements can Inhibit and/or Hurt Performance …if

not careful It’s the People Stupid!!!

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Open Q&A for Tom Grottke

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Biographical Summary of Thomas W. Grottke, CEO, NBS

Tom has led his 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.