Bank Performance II Brent Vanderheide Objectives for Today’s Discussion Go deeper on drivers and outcomes (i.e. Balanced Scorecard metrics) Connect performance to strategy and prepare you for the take-home assignment Provide some insight you can use in running your MarketSim bank and your Retail franchise back home 2 By way of review… 3 Q: Bank A earned a 1% ROA for the period ending 12/31/14. How do you feel about that? Comparison Time Period Questions to Ask 1. Against Itself Analysis of bank performance against itself over time (trend) Are the results of management’s chosen strategy becoming more evident over time? Do I like the direction? 2. Relative to peer performance Analysis of bank performance against peers either as of a point in time, or trended over time Are management’s chosen strategies being executed successfully? Are these strategies driving better outcomes than peers? Consider changes in underlying drivers like market share, asset mix, and risk tolerance. 3 Quantity vs. Quality Q: Would you rather have high earnings, or highquality earnings? A: Both, of course! The value of the bank is related to the sustainability and volatility of profits, perhaps more than the recent quantity of earnings. 4 Quantity of Earnings 2 classic measures to gauge the quantity of earnings: • Return on Assets (ROA) • Return on Equity (ROE) 5 Quality of Earnings Q: Why is quality of earnings important? A: The value of the bank is related to the sustainability and volatility of profits. The notion of quality of earnings underlies 2 critical demands on management: 1. Generate Current Period Profit & 2. Grow the value of the Franchise 6 Quality of Earnings BSI Metrics used to gauge the quality of earnings: • Net Interest Margin • Asset Quality • Non Interest Income • Efficiency Ratio • Liquidity – Loan to Deposit Ratio 7 Retail Bank Profitability Equation NIM NII NIE RLL Net Interest Margin Non Interest Income Non Interest Expense Retail Loan Losses 8 The Analyst Point of View Q: What would be the impact to banking if risk was completely eliminated? A: Sharpen up your resume! Banks exist to manage risk. Our fundamental job as Bankers is to understand and mitigate That’s what we get paid to do. RISK! 9 The Analyst Point of View Q: If share price is a function of future earnings and the expected volatility around those earnings, what do you need to know? Current Period Performance – how is the bank performing against alternative investments (i.e. peers) and what is driving their earnings? Consistency of Earnings – how consistent has management been in delivering earnings and their ability to provide guidance around those earnings? Risk Tolerance – is management generating returns within their declared risk tolerance or has the amount of risk they are forcing shareholders to bear changed? 10 Current Period Performance 11 Q: How did Veritas perform relative to its peers in year 5? HB&T Year 7 TCB Veritas Resource Net Interest Margin (Assets) Interest Bearing Assets Net Interest Margin / Interest Bearing Assets $173,980,206 $5,539,461,953 3.14% $199,379,281 $5,515,507,930 3.61% $146,744,328 $6,065,791,996 2.42% $245,814,322 $7,058,627,212 3.48% $265,658,098 $6,255,544,808 4.25% Net Interest Income (Liabilities) Interest Bearing Liabilities Net Interest Margin /Interest Bearing Liabilities $132,221,554 $5,739,459,725 2.30% $125,745,629 $5,423,700,775 2.32% $174,373,117 $7,182,312,000 2.43% $97,491,695 $6,232,652,325 1.56% $120,827,783 $6,262,738,350 1.93% % of Average Assets Total Net Interest Income Loan Loss Provisions Treasury Balancing Cost Net Interest Margin after LLP and Treasury Non Interest Revenue Total Revenue 5.53% -1.63% -0.02% 3.88% 2.60% 6.48% 5.89% -1.96% -0.01% 3.93% 3.13% 7.06% 5.29% -1.58% -0.09% 3.63% 2.00% 5.62% 4.86% -2.43% -0.06% 2.37% 1.47% 3.84% 6.18% -2.90% 0.00% 3.28% 1.80% 5.08% Variable Costs Fixed Costs Delivery Costs Marketing Costs Service Costs Corporate, Compliance, and Regulatory Costs Total Costs Net Income before taxes -3.18% -0.61% -0.82% -0.12% -0.25% -0.29% -5.28% 1.20% -3.75% -0.54% -1.19% -0.13% -0.20% -0.29% -6.10% 0.97% -2.46% -0.54% -1.50% -0.05% -0.23% -0.27% -5.05% 0.57% -1.90% -0.56% -0.58% -0.12% -0.20% -0.23% -3.58% 0.26% -2.48% -0.36% -0.72% -0.12% -0.22% -0.26% -4.16% 0.91% 11 Consistency of Earnings 12 Q: How did Veritas perform relative to itself and peers over time? Return on Assets 1.50% 1.00% 0.50% 0.00% 0 1 2 Bank 3 4 -0.50% -1.00% -1.50% Year HB&T Year 7 TCB Veritas Average 5 Volatility (Std. Dev.) HB&T 0.79% 0.38% Year 7 0.81% 0.35% TCB -0.10% 0.66% Veritas 0.58% 0.22% Resource 0.73% 0.28% Resource 12 Risk Tolerance 13 Q: Is Veritas management forcing Shareholder’s to bear more or less risk over time? 2.50% 140.0% 2.30% 130.0% 120.0% 2.10% 110.0% 1.90% 100.0% 1.70% 90.0% 1.50% 80.0% 0 1 2 3 4 Loan to Deposit Ratio LLP to Assets Risk Measures 5 Year Provision to Assets Liquidity - Loan to Deposit Ratio 13 Some Strategic Opportunities? Q: Based on your analysis, where should Veritas Management focus to drive Quantity and Quality of Earnings? Opportunity Best-in-Class Veritas Outcome 14 Some Strategic Opportunities? Q: Based on your analysis, where should Veritas Management focus to drive Quantity and Quality of Earnings? Opportunity Best-in-Class Veritas Outcome 1. Reduce dependency on Interest Income ‒ low Non-interest income as a percent of Assets 3.13% of Assets 1.47% of Assets 100bps = $70MM in Non Interest Income 2. Ensure shareholders are paid for risk and improve riskadjusted returns ‒ low Margin on Assets less LLP 1.66% of Assets 1.05% of Assets 50bps = $35MM in Interest Income 2.43% of Liabilities; 84.5% Loan to Deposit Ratio 1.56% of Liabilities; 113.3% Loan to Deposit Ratio 3. Grow low-cost sources of funds ‒ low margin on Liabilities ‒ high loan to deposit ratio 50bps = $30MM in Interest Income 15 The CRO Point of View Q: If share price is a function of future earnings and the expected volatility around those earnings, what do I need to drive? Market acceptance – will my product offerings meet the needs of my target customer group? Customer behavior – will customers use my products as intended (frequency, value, location, payments, etc) Profitability – will the profit model hold up (profit per account – quantity and quality)? Growth – will my strategy deliver expected profit and growth targets? 16 Customer Based Profitability Customers Products per Customer Product Profitability Delivery Costs Profits Moves financials out of accounting to the people who generate the profits Can be computed on a single customer, a geography, or a market segment Actionable information 17 Drivers and Outcomes In order to drive long-term sustainability and current period balance sheet and income statement outcomes, Retail officers must focus on the underlying drivers. Drivers must… Be actionable Be measurable Be controllable by Retail bank management Lead to long-term predictable expected outcomes Outcomes must… Represent the future of your strategy Be long-run focused Be not only bottom line focused Drive current period financial performance and great long-term value 18 Bank Performance Summary BSI Metric Quantity ROE, ROA Outcomes Drivers Quality Asset Quality, Liquidity Ratio, Efficiency Ratio, NIM, Noninterest income to Assets Business Strategy CRA, Product Breadth, Access to Delivery, Customer Service, Market Share, Turnover, Cost per Tran 19 Strategy to Improve BSI Q: How will your strategy impact the Balanced Scorecard Index? 20 Tools at your Disposal See the Call Report for insight into BSI Metric Performance 21 Tools at your Disposal See the Competitive Report for insight into Competitive Positioning 22 Some Strategic Opportunities? Q: What drivers could Veritas Management employ to realize the desired outcomes? Opportunity Drivers Outcome 1. Reduce dependency on Interest Income ‒ low Non-interest income as a percent of Assets 100bps = $70MM in Non Interest Income 2. Ensure shareholders are paid for risk and improve risk-adjusted returns ‒ low Margin on Assets less LLP 50bps = $35MM in Interest Income 3. Grow low-cost sources of funds ‒ low margin on Liabilities ‒ high loan to deposit ratio 50bps = $30MM in Interest Income 23 Some Strategic Opportunities? Q: What drivers could Veritas Management employ to realize the desired outcomes? Opportunity Drivers 1. Reduce dependency on Interest Income ‒ low Non-interest income as a percent of Assets Increase Fees Target Fee Paying Customers Align Marketing 2. Ensure shareholders are paid for risk and improve risk-adjusted returns ‒ low Margin on Assets less LLP Increase Yields, Asset Mix Change Credit Policy and Exposure Target Segments and Align Marketing 3. Grow low-cost sources of funds ‒ low margin on Liabilities ‒ high loan to deposit ratio Identify Alternative, Lower Cost Sources of Funds Grow Lower Cost Products Target Segments and Align Marketing Outcome 100bps = $70MM in Non Interest Income 50bps = $35MM in Interest Income 50bps = $30MM in Interest Income 24 A ProForma Call Report Year 5 Financials HB&T Profit and Loss Net Interest Income Loan Loss Provision Treasury NII Minus LLP and Treas. Non Interest Income Total Income Non Interest Expenses Pretax Earnings Year 7 $306,201,760 ($90,515,702) ($999,989) $214,686,069 $144,033,247 $358,719,316 ($292,327,841) $66,391,475 Pro Forma Balance Sheet Credit Card Receivables All Other Loans Treasury Lending Total Assets Liabilities Treasury Borrowings Total Liabilities and Treasury Borrowings TCB $325,124,910 ($107,972,529) ($459,036) $216,693,345 $172,883,172 $389,576,518 ($336,290,417) $53,286,101 $1,535,792,751 $4,003,669,202 $199,997,772 $5,739,459,725 $5,739,459,725 $0 $5,739,459,725 Veritas $321,117,445 ($95,560,092) ($5,582,600) $219,974,752 $121,112,359 $341,087,111 ($306,395,289) $34,691,822 $1,703,403,891 $3,812,104,039 $0 $5,515,507,930 $5,423,700,775 $91,807,155 $5,515,507,930 Resource $343,306,017 ($171,714,266) ($4,129,874) $167,461,876 $103,680,913 $271,142,789 ($253,027,587) $18,115,202 $1,174,660,420 $4,891,131,576 $1,116,520,004 $7,182,312,000 $7,182,312,000 $0 $7,182,312,000 $386,485,880 ($181,281,210) ($35,968) $205,168,703 $112,571,075 $317,739,778 ($260,506,897) $57,232,881 $1,799,860,680 $5,258,766,532 $0 $7,058,627,212 $6,232,652,325 $825,974,887 $7,058,627,212 $2,257,047,068 $3,998,497,740 $7,193,543 $6,262,738,350 $6,262,738,350 $0 $6,262,738,350 Rankings Market Share Deposits Loans Revenue Branches ATM's Share 19% 18% 21% 21% 18% HB&T Rank 4 4 2 2 4 Share 18% 18% 23% 22% 22% Rank 5 5 1 1 1 Share 23% 20% 20% 17% 21% Rank 1 3 3 5 3 Share 20% 23% 16% 20% 22% Rank 3 1 5 3 1 Resource Share Rank 20% 2 21% 2 19% 4 20% 3 17% 5 Customer Satisfaction Rates Fee's Service Levels Access Product Breadth Rating C C A C B Rank 2 4 1 3 2 Rating C C B C B Rank 5 1 5 1 4 Rating C C A D B Rank 1 3 1 5 2 Rating C D A C B Rank 4 5 1 2 1 Rating C C A D C Financial Position Revenue Earnings ROA Efficiency Ratio Loan Losses Year 7 This Year Last Year This Year $358,719,316 $350,655,661 $389,576,518 $66,391,475 $65,975,515 $53,286,101 1.16% 1.19% 0.97% 64.9% 64.6% 67.5% $90,515,702 $89,589,668 $107,972,529 TCB Veritas Last Year This Year Last Year $380,388,473 $341,087,111 $266,301,730 $68,233,333 $34,691,822 -$7,503,052 1.24% 0.48% -0.11% 65.3% 69.3% 80.6% $96,980,812 $95,560,092 $64,098,605 Rank 3 2 1 4 5 This Year Last Year This Year Last Year $271,142,789 $322,877,470 $317,739,778 $279,128,574 $18,115,202 $40,689,480 $57,232,881 $36,698,494 0.26% 0.71% 0.91% 0.59% 56.6% 66.5% 52.2% 51.4% $171,714,266 $101,121,606 $181,281,210 $192,030,974 25 Impact to the BSI Q: What BSI outcomes do you anticipate? Category Team 1 Team 2 Team 3 Team 4 Team 5 1 Results Bank Management 1 2 3 4 5 Capital - Return on Equity Provision to Assets Management - Community Reinvestment Act Earnings - Return on Assets Liquidity - Loan to Deposit Ratio 1 2 4 1 2 2 3 1 2 4 4 1 5 4 1 5 4 3 5 5 3 3.9% 5 -2.43% 2 Low Satisfactory 3 0.26% 3 113.3% 3 4 1 1 3 1 1 4 1 3 1 1 5B 2C 1A 2 1 1 2 5 5 4 4 3 3 16.60% 33.3% 4 1 3 2 2.21 2 3 3 2 1 2.07 1 5 4 5 4 3.50 4 2 5 4 5 3.64 5 1 2 1 3 2.64 3 56.6% $0.64 4.86% 1.47% Customer Satisfaction 6 Product Breadth 7 Access to Delivery 8 Customer Service Market Measures 9 10 Performance Management 11 12 13 14 Market Share Index (Combination of Deposits & Loans) Customer Turnover Ratio Efficiency Ratio Average Cost per Transaction Net Interest Margin Non-Interest Income to Assets Balanced Scorecard Index Balanced Scorecard Index Rank 26 The Drivers Checking Product 1 Checking Product 2 Checking Product 3 Non-Interest Income Non-Interest Income to Assets Product Offered Linked Accounts Billpay Overdraft Spread to FTP Minimum Balance Fee for falling below min Balance Fee Per Check ATM Fee Off Us ATM Fee On Us Marketing Budget Product Offered Linked Accounts Billpay Overdraft Spread to FTP Minimum Balance Fee for falling below min Balance Fee Per Check ATM Fee Off Us ATM Fee On Us Marketing Budget Product Offered Linked Accounts Billpay Overdraft Spread to FTP Minimum Balance Fee for falling below min Balance Fee Per Check ATM Fee Off Us ATM Fee On Us Marketing Budget HB&T $144,033,247 2.60% Basic Checking No No $25 5.00% $1,000 $10 $0.50 $1.50 $0.00 $200,000 Year 7 $172,883,172 3.13% Basic Checking No Yes $35 5.00% $0 $0 $0.70 $2.00 $0.00 $500,000 ` Premium Checking Yes Yes $25 4.00% $3,000 $12 $0.00 $2.00 $0.00 $400,000 Premium Checking Yes Yes $20 3.50% $2,500 $20 $0.00 $1.50 $0.00 $500,000 TCB $121,112,359 2.00% Everyday Checking No No $25 5.00% $1,000 $12 $0.40 $2.00 $0.00 $0 Personal Checking Yes Yes $25 4.00% $2,500 $14 $0.00 $1.00 $0.00 $1,000,000 Premium Checking Yes Yes $25 4.00% $4,500 $20 $0.00 $0.00 $0.00 $500,000 Veritas $103,680,913 1.47% Basic Checking No No $35 5.00% $1,000 $12 $0.70 $2.00 $0.50 $100,000 Gold Checking Yes Yes $35 4.00% $2,000 $16 $0.50 $2.00 $0.00 $100,000 Executive Checking Yes Yes $35 3.50% $5,000 $20 $0.00 $1.50 $0.00 $1,000,000 Resource $112,571,075 1.80% Basic Checking No No $35 5.00% $500 $6 $0.30 $3.00 $0.25 $0 Gold Checking Yes Yes $30 3.00% $2,500 $20 $0.00 $1.00 $0.00 $1,000,000 28 27 Some Strategic Opportunities? Q: What drivers could Veritas Management employ to realize the desired outcomes? Opportunity Drivers 1. Reduce dependency on Interest Income ‒ low Non-interest income as a percent of Assets Increase Fees Target Fee Paying Customers Align Marketing 2. Ensure shareholders are paid for risk and improve risk-adjusted returns ‒ low Margin on Assets less LLP Increase Yields, Asset Mix Change Credit Policy and Exposure Target Segments and Align Marketing 3. Grow low-cost sources of funds ‒ low margin on Liabilities ‒ high loan to deposit ratio Identify Alternative, Lower Cost Sources of Funds Grow Lower Cost Products Target Segments and Align Marketing Outcome 100bps = $70MM in Non Interest Income 50bps = $35MM in Interest Income OR Improved LLP 50bps = $30MM in Interest Income 28 A ProForma Call Report Year 5 Financials HB&T Profit and Loss Net Interest Income Loan Loss Provision Treasury NII Minus LLP and Treas. Non Interest Income Total Income Non Interest Expenses Pretax Earnings Year 7 $306,201,760 ($90,515,702) ($999,989) $214,686,069 $144,033,247 $358,719,316 ($292,327,841) $66,391,475 Pro Forma Balance Sheet Credit Card Receivables All Other Loans Treasury Lending Total Assets Liabilities Treasury Borrowings Total Liabilities and Treasury Borrowings TCB $325,124,910 ($107,972,529) ($459,036) $216,693,345 $172,883,172 $389,576,518 ($336,290,417) $53,286,101 $1,535,792,751 $4,003,669,202 $199,997,772 $5,739,459,725 $5,739,459,725 $0 $5,739,459,725 Veritas $321,117,445 ($95,560,092) ($5,582,600) $219,974,752 $121,112,359 $341,087,111 ($306,395,289) $34,691,822 $1,703,403,891 $3,812,104,039 $0 $5,515,507,930 $5,423,700,775 $91,807,155 $5,515,507,930 Resource $343,306,017 ($171,714,266) ($4,129,874) $167,461,876 $103,680,913 $271,142,789 ($253,027,587) $18,115,202 $1,174,660,420 $4,891,131,576 $1,116,520,004 $7,182,312,000 $7,182,312,000 $0 $7,182,312,000 $386,485,880 ($181,281,210) ($35,968) $205,168,703 $112,571,075 $317,739,778 ($260,506,897) $57,232,881 $1,799,860,680 $5,258,766,532 $0 $7,058,627,212 $6,232,652,325 $825,974,887 $7,058,627,212 $2,257,047,068 $3,998,497,740 $7,193,543 $6,262,738,350 $6,262,738,350 $0 $6,262,738,350 Rankings Market Share Deposits Loans Revenue Branches ATM's Share 19% 18% 21% 21% 18% HB&T Rank 4 4 2 2 4 Share 18% 18% 23% 22% 22% Rank 5 5 1 1 1 Share 23% 20% 20% 17% 21% Rank 1 3 3 5 3 Share 20% 23% 16% 20% 22% Rank 3 1 5 3 1 Resource Share Rank 20% 2 21% 2 19% 4 20% 3 17% 5 Customer Satisfaction Rates Fee's Service Levels Access Product Breadth Rating C C A C B Rank 2 4 1 3 2 Rating C C B C B Rank 5 1 5 1 4 Rating C C A D B Rank 1 3 1 5 2 Rating C D A C B Rank 4 5 1 2 1 Rating C C A D C Financial Position Revenue Earnings ROA Efficiency Ratio Loan Losses Year 7 This Year Last Year This Year $358,719,316 $350,655,661 $389,576,518 $66,391,475 $65,975,515 $53,286,101 1.16% 1.19% 0.97% 64.9% 64.6% 67.5% $90,515,702 $89,589,668 $107,972,529 TCB Veritas Last Year This Year Last Year $380,388,473 $341,087,111 $266,301,730 $68,233,333 $34,691,822 -$7,503,052 1.24% 0.48% -0.11% 65.3% 69.3% 80.6% $96,980,812 $95,560,092 $64,098,605 Rank 3 2 1 4 5 This Year Last Year This Year Last Year $271,142,789 $322,877,470 $317,739,778 $279,128,574 $18,115,202 $40,689,480 $57,232,881 $36,698,494 0.26% 0.71% 0.91% 0.59% 56.6% 66.5% 52.2% 51.4% $171,714,266 $101,121,606 $181,281,210 $192,030,974 29 Impact to the BSI Q: What outcomes do you anticipate? Category Team 1 Team 2 Team 3 Team 4 Team 5 1 Results Bank Management 1 2 3 4 5 Capital - Return on Equity Provision to Assets Management - Community Reinvestment Act Earnings - Return on Assets Liquidity - Loan to Deposit Ratio 1 2 4 1 2 2 3 1 2 4 4 1 5 4 1 5 4 3 5 5 3 3.9% 5 -2.43% 2 Low Satisfactory 3 0.26% 3 113.3% 3 4 1 1 3 1 1 4 1 3 1 1 5B 2C 1A 2 1 1 2 5 5 4 4 3 3 16.60% 33.3% 4 1 3 2 2.21 2 3 3 2 1 2.07 1 5 4 5 4 3.50 4 2 5 4 5 3.64 5 1 2 1 3 2.64 3 56.6% $0.64 4.86% 1.47% Customer Satisfaction 6 Product Breadth 7 Access to Delivery 8 Customer Service Market Measures 9 10 Performance Management 11 12 13 14 Market Share Index (Combination of Deposits & Loans) Customer Turnover Ratio Efficiency Ratio Average Cost per Transaction Net Interest Margin Non-Interest Income to Assets Balanced Scorecard Index Balanced Scorecard Index Rank 30 The Drivers Total Net Interest Income (Assets) LLP Total Loans Net Interest Margin on Assets Net Interest Margin less LLP Spread to FTP Credit Cards Loans Lines Home Equity Volume Credit Cards Loans Lines Home Equity Risk Policy Credit Cards Loans Lines Home Equity 7.75% 3.40% 4.11% 0.93% 8,470,764,809 2,583,173,504 3,333,915,585 16,047,080,000 HB&T 173,980,206 ($90,515,702) 5,539,461,953 3.14% 1.51% Year 7 199,379,281 ($107,972,529) 5,515,507,930 3.61% 1.66% TCB 146,744,328 ($95,560,092) 6,065,791,996 2.42% 0.84% Veritas 245,814,322 ($171,714,266) 7,058,627,212 3.48% 1.05% Resource 265,658,098 ($181,281,210) 6,255,544,808 4.25% 1.35% 7.00% 3.00% 4.00% 1.00% 8.00% 4.00% 9.00% 1.25% 6.00% 4.00% 4.00% 0.75% 9.00% 4.00% 4.00% 0.75% 8.00% 3.00% 4.00% 1.00% 1,535,792,751 608,561,427 475,559,775 2,919,548,000 Average Conservative Conservative Conservative 1,703,403,891 358,887,069 72,080,970 3,381,136,000 Average Average Aggressive Average 1,174,660,420 213,219,396 1,004,664,180 3,673,248,000 Average Conservative Average Conservative 1,799,860,680 458,271,892 907,454,640 3,893,040,000 Aggressive Aggressive Average Average 2,257,047,068 944,233,720 874,156,020 2,180,108,000 Aggressive Average Average Conservative 31 Are S-curves for real? 32 Are S-curves for real? HB&T Credit Card Balance 1,535,792,751 Credit Cards Offer Credit Cards Yes Rewards Yes Fraud Protection Yes Contactless Smart Card Yes Spread to FTP 7.00% Card Line $40,000 Annual Fee $5 Marketing Budget $1,000,000 Underwriting Risk Policy Average Appeal Points Rewards Fraud Smart Card Spread Line Fee Marketing Credit Total Year 7 1,703,403,891 Yes Yes Yes No 8.00% $30,000 $5 $1,000,000 Average TCB 1,174,660,420 Yes Yes Yes Yes 6.00% $75,000 $5 $1,000,000 Average Veritas 1,799,860,680 Yes Yes Yes Yes 9.00% $50,000 $5 $1,000,000 Aggressive Resource 2,257,047,068 Yes Yes Yes No 8.00% $50,000 $5 $1,000,000 Aggressive 33 $2.5B Are S-curves for real? $2.0B $1.5B $1B 10 20 30 34 Some Strategic Opportunities? Q: What drivers could Veritas Management employ to realize the desired outcomes? Opportunity Drivers 1. Reduce dependency on Interest Income ‒ low Non-interest income as a percent of Assets Increase Fees Target Fee Paying Customers Align Marketing 2. Ensure shareholders are paid for risk and improve risk-adjusted returns ‒ low Margin on Assets less LLP Increase Yields, Asset Mix Change Credit Policy and Exposure Target Segments and Align Marketing 3. Grow low-cost sources of funds ‒ low margin on Liabilities ‒ high loan to deposit ratio Identify Alternative, Lower Cost Sources of Funds Grow Lower Cost Products Target Segments and Align Marketing Outcome 100bps = $70MM in Non Interest Income 50bps = $35MM in Interest Income OR Improved LLP 50bps = $30MM in Interest Income 35 A ProForma Call Report Year 5 Financials HB&T Profit and Loss Net Interest Income Loan Loss Provision Treasury NII Minus LLP and Treas. Non Interest Income Total Income Non Interest Expenses Pretax Earnings Year 7 $306,201,760 ($90,515,702) ($999,989) $214,686,069 $144,033,247 $358,719,316 ($292,327,841) $66,391,475 Pro Forma Balance Sheet Credit Card Receivables All Other Loans Treasury Lending Total Assets Liabilities Treasury Borrowings Total Liabilities and Treasury Borrowings TCB $325,124,910 ($107,972,529) ($459,036) $216,693,345 $172,883,172 $389,576,518 ($336,290,417) $53,286,101 $1,535,792,751 $4,003,669,202 $199,997,772 $5,739,459,725 $5,739,459,725 $0 $5,739,459,725 Veritas $321,117,445 ($95,560,092) ($5,582,600) $219,974,752 $121,112,359 $341,087,111 ($306,395,289) $34,691,822 $1,703,403,891 $3,812,104,039 $0 $5,515,507,930 $5,423,700,775 $91,807,155 $5,515,507,930 Resource $343,306,017 ($171,714,266) ($4,129,874) $167,461,876 $103,680,913 $271,142,789 ($253,027,587) $18,115,202 $1,174,660,420 $4,891,131,576 $1,116,520,004 $7,182,312,000 $7,182,312,000 $0 $7,182,312,000 $386,485,880 ($181,281,210) ($35,968) $205,168,703 $112,571,075 $317,739,778 ($260,506,897) $57,232,881 $1,799,860,680 $5,258,766,532 $0 $7,058,627,212 $6,232,652,325 $825,974,887 $7,058,627,212 $2,257,047,068 $3,998,497,740 $7,193,543 $6,262,738,350 $6,262,738,350 $0 $6,262,738,350 Rankings Market Share Deposits Loans Revenue Branches ATM's Share 19% 18% 21% 21% 18% HB&T Rank 4 4 2 2 4 Share 18% 18% 23% 22% 22% Rank 5 5 1 1 1 Share 23% 20% 20% 17% 21% Rank 1 3 3 5 3 Share 20% 23% 16% 20% 22% Rank 3 1 5 3 1 Resource Share Rank 20% 2 21% 2 19% 4 20% 3 17% 5 Customer Satisfaction Rates Fee's Service Levels Access Product Breadth Rating C C A C B Rank 2 4 1 3 2 Rating C C B C B Rank 5 1 5 1 4 Rating C C A D B Rank 1 3 1 5 2 Rating C D A C B Rank 4 5 1 2 1 Rating C C A D C Financial Position Revenue Earnings ROA Efficiency Ratio Loan Losses Year 7 This Year Last Year This Year $358,719,316 $350,655,661 $389,576,518 $66,391,475 $65,975,515 $53,286,101 1.16% 1.19% 0.97% 64.9% 64.6% 67.5% $90,515,702 $89,589,668 $107,972,529 TCB Veritas Last Year This Year Last Year $380,388,473 $341,087,111 $266,301,730 $68,233,333 $34,691,822 -$7,503,052 1.24% 0.48% -0.11% 65.3% 69.3% 80.6% $96,980,812 $95,560,092 $64,098,605 Rank 3 2 1 4 5 This Year Last Year This Year Last Year $271,142,789 $322,877,470 $317,739,778 $279,128,574 $18,115,202 $40,689,480 $57,232,881 $36,698,494 0.26% 0.71% 0.91% 0.59% 56.6% 66.5% 52.2% 51.4% $171,714,266 $101,121,606 $181,281,210 $192,030,974 36 Impact to the BSI Q: What outcomes do you anticipate? Category Team 1 Team 2 Team 3 Team 4 Team 5 1 Results Bank Management 1 2 3 4 5 Capital - Return on Equity Provision to Assets Management - Community Reinvestment Act Earnings - Return on Assets Liquidity - Loan to Deposit Ratio 1 2 4 1 2 2 3 1 2 4 4 1 5 4 1 5 4 3 5 5 3.9% 3 -2.43% 5 2 Low Satisfactory 0.26% 3 113.3% 3 3 4 1 1 3 1 1 4 1 3 1 1 5B 2C 1A 2 1 1 2 5 5 4 4 3 3 16.60% 33.3% 4 1 3 2 2.21 2 3 3 2 1 2.07 1 5 4 5 4 3.50 4 2 5 4 5 3.64 5 1 2 1 3 2.64 3 56.6% $0.64 4.86% 1.47% Customer Satisfaction 6 Product Breadth 7 Access to Delivery 8 Customer Service Market Measures 9 10 Performance Management 11 12 13 14 Market Share Index (Combination of Deposits & Loans) Customer Turnover Ratio Efficiency Ratio Average Cost per Transaction Net Interest Margin Non-Interest Income to Assets Balanced Scorecard Index Balanced Scorecard Index Rank 37 Net Interest Income 38 Which bank would have higher interest income? Interest expense? Assets Bank A Non-earning Liabilities & Shareholders Equity Bank B Non-earning Bank A Bank B Equity Equity Investments Investments Loans Other Borrowings Loans Other Borrowings Non-Int Bearing Non-Interest Bearing Dep Interest Bearing Deposits Interest Bearing Deposits 38 The Drivers Q: How is Veritas funding the Balance Sheet? Net Interest Income (Liabilities) Interest Bearing Liabilities NIM (Liabilities) Total Loans Loan to Deposit Ratio Spread to FTP Total Checking Savings Money Market CDs Volume Checking Savings Money Market CDs % of Total Checking Savings Money Market CDs Total 650,659,776 30,840,863,175 2.11% 30,434,933,898 98.68% HB&T 132,221,554 5,739,459,725 2.30% 5,539,461,953 96.52% Year 7 125,745,629 5,423,700,775 2.32% 5,515,507,930 101.69% TCB 174,373,117 7,182,312,000 2.43% 6,065,791,996 84.45% Veritas 97,491,695 6,232,652,325 1.56% 7,058,627,212 113.25% Resource 120,827,783 6,262,738,350 1.93% 6,255,544,808 99.89% 3.76% 3.21% 0.94% 0.53% 4.15% 3.50% 1.00% 0.60% 3.75% 4.50% 1.50% 0.50% 4.07% 3.50% 1.00% 0.50% 3.83% 3.00% 0.75% 0.50% 3.05% 2.50% 1.00% 0.60% 12,641,368,600 1,927,722,950 6,271,304,925 9,837,433,500 41.0% 6.3% 20.3% 31.9% 2,282,910,600 370,967,925 1,466,264,250 1,590,732,000 39.8% 6.5% 25.5% 27.7% 2,721,426,500 180,935,625 289,951,350 2,201,614,500 50.2% 3.3% 5.3% 40.6% 3,378,438,950 389,187,650 1,110,645,000 2,237,472,000 47.0% 5.4% 15.5% 31.2% 1,457,345,550 491,917,950 2,124,188,325 2,129,305,500 2,801,247,000 494,713,800 1,280,256,000 1,678,309,500 44.7% 7.9% 20.4% 26.8% 23.4% 7.9% 34.1% 34.2% 39 The Drivers Checking Product 1 Checking Product 2 Checking Product 3 Total Checking Spread to FTP Product Offered Linked Accounts Billpay Overdraft Spread to FTP Minimum Balance Fee for falling below Fee Per Check ATM Fee Off Us ATM Fee On Us Marketing Budget Product Offered Linked Accounts Billpay Overdraft Spread to FTP Minimum Balance Fee for falling below Fee Per Check ATM Fee Off Us ATM Fee On Us Marketing Budget Product Offered Linked Accounts Billpay Overdraft Spread to FTP Minimum Balance Fee for falling below Fee Per Check ATM Fee Off Us ATM Fee On Us Marketing Budget HB&T 2,282,910,600 4.15% Basic Checking No No $25 5.00% $1,000 min Balance $10 $0.50 $1.50 $0.00 $200,000 min Balance Premium Checking Yes Yes $25 4.00% $3,000 min Balance $12 $0.00 $2.00 $0.00 $400,000 Year 7 TCB Veritas 2,721,426,500 3,378,438,950 1,457,345,550 3.75% 4.07% 3.83% Basic Checking Everyday Checking Basic Checking No No No Yes No No $35 $25 $35 5.00% 5.00% 5.00% $0 $1,000 $1,000 $0 $12 $12 $0.70 $0.40 $0.70 $2.00 $2.00 $2.00 $0.00 $0.00 $0.50 $500,000 $0 $100,000 Personal Checking Gold Checking Yes Yes Yes Yes $25 $35 4.00% 4.00% $2,500 $2,000 $14 $16 $0.00 $0.50 $1.00 $2.00 $0.00 $0.00 $1,000,000 $100,000 Premium Checking Premium Checking Executive Checking Yes Yes Yes Yes Yes Yes $20 $25 $35 3.50% 4.00% 3.50% $2,500 $4,500 $5,000 $20 $20 $20 $0.00 $0.00 $0.00 $1.50 $0.00 $1.50 $0.00 $0.00 $0.00 $500,000 $500,000 $1,000,000 Resource 2,801,247,000 3.05% Basic Checking No No $35 5.00% $500 $6 $0.30 $3.00 $0.25 $0 Gold Checking Yes Yes $30 3.00% $2,500 $20 $0.00 $1.00 $0.00 $1,000,000 40 To Recap… Q: What drivers could Veritas Management employ to realize the desired outcomes? Opportunity Drivers 1. Reduce dependency on Interest Income ‒ low Non-interest income as a percent of Assets Increase Fees Target Fee Paying Customers Align Marketing 2. Ensure shareholders are paid for risk and improve risk-adjusted returns ‒ low Margin on Assets less LLP Increase Yields, Asset Mix Change Credit Policy and Exposure Target Segments and Align Marketing 3. Grow low-cost sources of funds ‒ low margin on Liabilities ‒ high loan to deposit ratio Identify Alternative, Lower Cost Sources of Funds Grow Lower Cost Products Target Segments and Align Marketing Outcome 100bps = $70MM in Non Interest Income 50bps = $35MM in Interest Income 50bps = $30MM in Interest Income 41 Pro Forma BSI Q: Easy, right? Category Bank Management 1 Capital - Return on Equity 2 Provision to Assets 3 Management - Community Reinvestment Act 4 Earnings - Return on Assets 5 Liquidity - Loan to Deposit Ratio Customer Satisfaction 6 Product Breadth 7 Access to Delivery 8 Customer Service Market Measures 9 Market Share Index (Combination of Deposits & Loans) 10 Customer Turnover Ratio Performance Management 11 Efficiency Ratio 12 Average Cost per Transaction 13 Net Interest Margin 14 Non-Interest Income to Assets Balanced Scorecard Index Balanced Scorecard Index Rank HB&T Year 5 Proforma 1 2 2 2 4 4 1 2 2 3 Year 7 Year 5 Proforma 2 3 3 4 1 1 2 3 4 5 Year 5 TCB Proforma 4 5 1 1 1 1 4 5 1 1 Veritas Year 5 Proforma 5 1 4 3 4 4 5 1 5 2 Resource Year 5 Proforma 3 3 5 5 3 3 3 3 3 4 2 3 1 2 3 1 4 1 5 4 1 5 2 5 1 2 5 1 1 2 1 1 2 1 5 4 1 5 4 1 2 3 4 3 1 2 5 2 5 1 2 1 4 5 1 5 3 4 3 4 3 1 3 2 2.14 1 3 1 3 2 2.50 2 4 4 2 1 2.57 2 4 4 2 1 3.14 4 5 3 5 4 3.00 4 5 3 5 5 3.00 3 2 5 4 5 3.71 5 1 5 4 3 2.43 1 1 2 1 3 2.93 3 2 2 1 4 3.14 4 42 Why does this Matter? This matters because we are managing a bank to create value! Stock Price = EPS x P/E [earnings per share; price earnings ratio] P/E = f(future earnings, variability of future earnings) Variability = f(inherent risks, quality of risk management) 43 The Shareholder Point of View Q: Is Capital an Unlimited Resource? A: No! Your shareholders expect to earn a rate of return consistent with the risk they accept. Our fundamental job as Bankers is to understand and mitigate That’s what we get paid to do. RISK! (And ensure our shareholders are compensated for the risk that we force them to bear.) 44 Back to the Balance Sheet Equity is a Source of Funds and serves as a ‘cushion’ on the balance sheet to reduce the risk that the bank’s creditors won’t be paid. Liabilities & Shareholders Equity Assets Uses of Funds Bank A Bank A Non-earning Equity Investments Other Borrowings Sources of Funds Non-Int Bearing Loans Interest Bearing Deposits 45 What’s not to love about Retail? Q: So how does Retail compete for and typically impact Enterprise performance? Contribution Significant source of stable, low cost liquidity Potentially higher margins Non-interest Revenue! Network equity, market presence Through-the-cycle diversification Offset Major source of expense (distribution network) Lots of customers and transactions; higher operational risk Table stakes Higher efficiency ratios 46 Expense Management Q: How might you drive a 10% reduction in expenses without negatively impacting your business strategy? Opportunity Reduce non-interest expense ‒ Optimize Distribution Network ‒ Optimize Product Continuum ‒ Optimize Product Features and Benefits Drivers Fixed expense Variable expense ‒ Product ‒ Distribution Marketing ‒ Branding ‒ Segment ‒ Product Target Segments Outcome 10% Reduction = $25MM in Non Interest Expense 47 Back to Our Objectives… Go deeper on drivers and outcomes (i.e. Balanced Scorecard metrics) Connect performance to strategy and prepare you for the take-home assignment Provide some insight you can use in running your MarketSim bank and your Retail franchise back home 48 Our Journey: Year 1 Retail Strategy 49 Retail Strategy Financial Strategy • Customer acquisition • Branding & marketing • Product & pricing • Delivery optimization • Financial analysis • Key performance drivers • Earnings power • Risk considerations Bank Management Strategy • Economic value & risk • Capital considerations • Analyst influences • 360° executive management 49 50 EVALUATIONS Please fill out your evaluation for this course. 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