Thomas Grottke, CEO of Northeastern Banking Services Group, LLC, gave a presentation on strategies for banks to grow their core business in a profitable manner. He discussed examining bank earnings composition and strategies such as improving net interest margin, increasing non-interest income sources, managing expenses, and balancing loan and deposit growth. Grottke took questions from attendees on approaches to enhance performance metrics like return on assets and efficiency ratios.

1. 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, LLC
tgrottke@thenbsgroup.com
860-436-6149

2. 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
May 15, 2014 2

3. Presentation Outline
Current Environment
Industry Observations
What is Underlying The Numbers
Strategies to Improve Performance
Role of Risk Management and Its Burden
Open Q&A
May 15, 2014 3

4. May 15, 2014 4
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”

5. May 15, 2014 5
FDIC.gov

6. May 15, 2014 6

7. May 15, 2014 7

8. May 15, 2014 8
Return on Assets 12/31/2013 12/31/2007 12/31/2003
All MA Banks 0.83 0.87 0.95
All CT Banks 0.67 0.83 0.98
All US Banks 1.07 0.81 1.38
MA Banks > $1B 0.84 0.98 0.99
CT Banks > $1B 0.78 0.93 1.03
US Banks > $1B 1.08 0.79 1.42
MA Banks < $1B 0.70 0.53 0.85
CT Banks < $1B 0.20 0.52 0.83
US 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

9. May 15, 2014 9
Efficiency Ratio 12/31/2013 12/31/2007 12/31/2003
All MA Banks 72.08 75.89 71.55
All CT Banks 71.05 64.56 64.77
All US Banks 60.54 59.49 56.57
MA Banks > $1B 71.15 74.62 69.78
CT Banks > $1B 67.15 60.80 63.59
US Banks > $1B 59.47 58.47 55.07
MA Banks < $1B 78.52 81.34 76.59
CT Banks < $1B 89.10 78.22 68.30
US 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 3.86
All CT Banks 2.86 2.70 2.99
All US Banks 2.88 2.98 3.20
MA Banks > $1B 2.91 4.66 3.75
CT Banks > $1B 2.73 2.63 3.05
US Banks > $1B 2.83 2.95 3.16
MA Banks < $1B 3.50 3.48 4.22
CT Banks < $1B 3.42 2.92 2.84
US Banks < $1B 3.21 3.21 3.39
Assets/ Employee 12/31/2013 12/31/2007 12/31/2003
All MA Banks 7.69 5.02 4.11
All CT Banks 6.22 5.21 4.33
All US Banks 7.12 5.88 4.44
MA Banks > $1B 8.24 5.19 4.57
CT Banks > $1B 6.61 5.52 4.47
US Banks > $1B 7.75 6.44 4.83
MA Banks < $1B 4.95 4.53 3.14
CT Banks < $1B 4.93 4.41 4.02
US Banks < $1B 4.08 3.55 3.07

10. Industry Observations
 Community Banking
 FDIC December 2012 Study
o Traditional lending, deposit gathering and limited geographic scope
o 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)
May 15, 2014 10

11. 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 narrowed
o 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 2011
o Cumulative 8% increase
o Up to 10 cents more on every dollar or revenue drops to bottom line of a
non-community bank
May 15, 2014 11

12. May 15, 2014 12

13. 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 …..
May 15, 2014 13

14. 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 ……
May 15, 2014 14

15. 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
May 15, 2014 15

16. 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
May 15, 2014 16

17. 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
May 15, 2014 17

18. Mortgage Banking Metrics
May 15, 2014 18
Mortgage 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 600 950
Average 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

19. Commercial Banking Metrics
May 15, 2014 19
Large Commercial Loans vs. Small Business Loans
Average Loan Size 50,000$ 750,000$
Margin 5.00% 3.00%
NIMPer Loan 2,500.00$ 22,500.00$
Direct Cost to Originate Commercial Loan 85,000$ 150,000$
Annual Production 24 10
Direct Cost Per Loan 3,541.67$ 15,000.00$
Contribution (Loss) per Loan - 1st Year (1,041.67)$ 7,500.00$

20. Commercial Banking Metrics, cont.
May 15, 2014 20
Commercial Accounts
Typical Mthly Fee
Internet 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 Balances
DDA 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

21. 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
May 15, 2014 21

22. 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 Trails
o Major cause of paper and process interruption
o Move to straight through processing (STP)
 Banking Offices
o Cull and add
o Size/footprint and purpose - what is the strategy for the market(s)
o Utilization of facility
May 15, 2014 22

23. Strategic Planning
 So many possibilities …….
What has NBS learned?
May 15, 2014 23

24. 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!!!
May 15, 2014 24

25. Open Q&A for Tom Grottke
May 15, 2014 25

26. 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.
May 15, 2014 26

27. 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.
May 15, 2014 27