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
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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
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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
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Our Journey: Year 1 Retail Strategy
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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
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