THE BANK, Strategic Analysis

Executive summary

This paper is a strategic analysis of THE BANK, a community bank whose service area is the

Roanoke Metropolitan Area, which is the regional center of southwest Virginia. For this purpose,

both external and internal factors affecting business performance were examined, as well as THE

BANK’s strategic approach in creating sustainable competitive advantages. It is discussed here if

THE BANK’s actions in the marketplace, taken by its managers, affect business performance in

such a way that strengthen its competitive position and gain a competitive edge over rivals. Is the

company sufficiently profitable to validate its business model and strategy? Does the company

seem to change its strategy over time? What is the company vision and what are its main

objectives? All these questions are going to be answered within this paper.

The strategic analysis was conducted in October-November 2008. The information used for

assessments was gathered for the year 2008 (quarterly), as well as for the years ended 2005,

2006, and 2007 in order to better reflect the evolution of the company.

In 2008, external factors played a major role in the business’ state of work for the period for

which this assessment has been done. Consequently, a good understanding of environmental

dynamics is of high importance for a comprehensible evaluation. The first part of the paper aims

to describe the economic environment, as well as the political and social aspects. The

technological factor is the only factor that could be considered as affecting the business

independently of the turmoil of the other factors. The global economic downturn has created

adverse effects for businesses especially for those in the banking industry. In top of that, banks

whose loan activity has been mostly tied to real estate, as in THE BANK’s case, have been

especially sensitive to the financial crisis. Market volatility is one important characteristic of the

period. Political debates and uncertainty associated with future directions of strategies was a state

of being for 2008. Hence, taking all this into consideration, the company’s reaction is both

“unusual” and appealing to be studied.

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THE BANK, Strategic Analysis

In addition to the external pressure, the internal factors played their role as well. In a highly

competitive environment, with low barriers to entry, under a continuous pressure from not only

the large banks but from non-banking businesses that now offer substitute products, THE BANK

found a strategy to maintain itself at a level of profitability. The interest income, the major

contributor to the total income, shows a general upward trend; the interest margins, always under

considerable pressure because of the intense competition for deposits, were found to be the key

instrument of effectiveness. The second quarter was the most challenging, yet THE BANK

remained profitable. Here are few input indicators of THE BANK strategy to success, all of them

analyzed in depth within the paper:

the management was committed to maintain a ratio of loans to funding sources at a

maximum of 90%;

the capital structure has been adequate to support anticipated asset growth, as well as to

serve as a cushion to absorb potential loses;

asset/liability management activities have been designed to ensure adequate liquidity to

meet loan demand or deposit outflows; nonetheless the impact of interest rate fluctuations

on net interest income was closely watched;

both, a market penetration strategy with focus on increasing market share and loyalty and

a product development strategy, a good tactic to help customers to overcome the

economic downturns;

an active presence in the community life making an in depth understanding of community

needs possible as well as promoting a positive image;

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THE BANK, Strategic Analysis

Introduction

The strategic analysis is a complete and in–depth view of the bank’s external environment,

bank’s strategies, business practices and other internal factors that influence its overall

performance. The first part will contain results of the external evaluation using the following

models: PEST Analysis, Five Forces Analysis and Competitor Analysis. The second part of the

report will present results of the internal analysis based on financial ratios, SWOT analysis,

VRIO model analysis, ANSOFF matrix and lastly, an analysis of THE BANK’s management.

This report will then offer suggestions and possible outcomes, all subject to further discussions.

The expected outcome of this strategic analysis is a better understanding of the bank’s current

position by its management and the creation of the feedback needed for future actions.

Sources of information

Data used in this study was obtained from the following sources: Company’s website,

Company’s financial fillings 10-K and 10-Q, and the company’s Annual Report for 2007. Other

information was gathered from FDIC’s website, Yahoo Finance, Moody’s, and ValuEngine.

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THE BANK, Strategic Analysis

THE BANK at a glance

THE BANK Financial Corporation, founded in 1994, operates as the holding company for THE

BANK.

As of November, 2008, the company operated eight branch locations in the cities of Roanoke

and Salem, town of Vinton, and the county of Roanoke; and seven proprietary ATM’s in

Virginia and other regions.

Banking

The company conducts a general commercial banking business while emphasizing the needs of

small-to-medium sized businesses, professional concerns and individuals.

Deposit Services

The company offers a range of deposit services that are available in most banks and savings and

loan associations, including checking accounts, NOW accounts, savings accounts and other time

deposits of various types, ranging from daily money market accounts to longer-term certificates

of deposit. In addition, the company offers certain retirement account services, such as Individual

Retirement Accounts. The company solicits accounts from individuals, businesses, associations

and organizations and government authorities.

Lending Activities

The company offers a range of lending services including commercial loans, residential real

estate loans, construction and development loans, and consumer loans.

Commercial loans include both secured and unsecured loans for working capital (including

inventory and receivables), business expansion (including acquisition of real estate and

improvements) and purchase of equipment and machinery. Collateralized business loans may be

secured by a security interest in marketable equipment, accounts receivable, business equipment

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THE BANK, Strategic Analysis

and/or general intangibles of the business. In addition, or as an alternative, the loan may be

secured by a deed of trust lien on business real estate. The risks associated with commercial

loans are related to the strength of the individual business, the value of loan collateral, and the

general health of the economy.

Residential real estate loans are secured by deeds of trust on 1-4 family residential properties.

The Bank also serves as a broker for residential real estate loans placed in the secondary market.

The Bank makes loans for the purpose of financing the construction of business and residential

structures to financially responsible business entities and individuals. Additionally, the Bank

makes loans for the purpose of financing the acquisition and development of commercial and

residential projects.

The company offers consumer loans, both secured and unsecured for financing automobiles,

home improvements, education, and personal investments. Loans used to purchase vehicles or

other specific personal property and loans associated with real estate are usually secured with a

lien on the subject vehicle or property.

The company also offers leasing services for its small business, private banking and business

banking customers and prospects to access equipment, technology or other capital assets that

they need to improve productivity and to facilitate growth without taking on debt or investing

significant working capital.

The company offers several forms of specialized asset-based lending to its commercial business

customers, which include: Accounts Receivable Financing – enables small businesses to unlock

the cash typically frozen in accounts receivable which provides cash flow to support operations.

The Bank utilizes an automated software program to manage and monitor collateral values on a

consistent and routine basis. Automobile Floor Plan Financing – enables auto-related businesses

to carry sufficient levels of inventories to support sales demand.

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THE BANK, Strategic Analysis

Other Services

Other Bank services include safe deposit boxes, certain cash management services including

overnight repurchase agreements, merchant purchase and management programs, traveler’s

checks, direct deposit of payroll and social security checks and automatic drafts for various

accounts. The company operates seven proprietary ATM’s and are associated with the Honor,

Cirrus and The Exchange shared networks of automated teller machines that may be used by

Bank customers throughout Virginia and other regions. The company also offers VISA and

MasterCard credit card services as well as a debit-check card. The company’s lockbox service

provides a simple and efficient way to collect accounts receivable payments locally for

businesses and non-profit organizations.

Financial Services

In 2005, THE BANK Wealth Management Services, Inc. (VWM), a wholly-owned subsidiary of

the Bank, began offering non-deposit investment products and insurance products for sale to the

public. VWM is working with Bankers Insurance LLC., a joint effort of Virginia banks, in which

the company has a small interest through its membership in the Virginia Bankers Association.

Results of PEST Analysis

The most critical issue from the bank’s standpoint is the subprime mortgage crisis which has

negatively affected financial institutes from the vast number of loans that have defaulted.

Globally, financial institutions have recorded write-downs and credit losses of over $500 billion

(Associated Press and Reuters, 2008), causing these institutions to tighten their lending which

drags on the economy. The defaulted loans are a direct hit to financial institutions, such as

banks, requiring that the banks restructure their balance sheets and raise standards to evaluate

credit risk while tightening on lending. However, not all can be saved from the inevitable and

some financial institutions have either filed for bankruptcy or have been acquired/taken-over by

an existing firm. The financial institutions that are left are hoping to be bailed out by the benefits

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THE BANK, Strategic Analysis

of The Emergency Economy Stabilization Act of 2008. Unfortunately, while the 2nd quarter of

2008 benefited from the Federal Tax Rebates of The Economic Stimulus Act of 2008, the growth

does not appear to be carrying over to the 2nd half of the year (Rosengren, 2008). This will

hopefully not be a trend that will continue into 2009.

The subprime lending by financial institutions is a primary cause of the current economic state.

From the bank’s standpoint, the loan is an asset on its balance sheet, thus, the bank will hold

some capital in case there is a loan default. Furthermore, default would cause the bank’s capital

to decline. Considering that the bank needs to have a reasonable capital-to-asset ratio, when the

capital value declines the bank needs to adjusts its assets to meet the decline. One of the

problems here is that the more a bank’s capital declines it has to reduce assets by even more to

maintain the capital-to-asset ratio (Rosengren, 2008). Research has shown that financial

institutions with high leverage reduce their lending by $10 for every $1 of capital that they lose

(Coy, 2008). Furthermore, losses on mortgages and loans can result in these institutions

lowering their lending by $900 million taking 1.3 percentage points off the economy’s growth

rate over the course of a year (Coy, 2008). This is where it becomes a “credit crunch”

(Rosengren, 2008).

To shrink the asset side of the balance sheet, a bank can be more restrictive in its lending by

increasing interest rate margins, requiring tighter underwriting standards, and reducing credit

availability (Rosengren, 2008). However, the plan is not to decrease lending overall which can

cause an even steeper economic decline resulting in further loan defaults, hurting the banks even

more (Coy, 2008).

The decline in U.S. home prices accelerated in September and the economy shrank in the third

quarter at a faster pace than first estimated as the grip of the credit crunch tightened. The

S&P/Case-Shiller home-price index fell 17.4 percent from a year earlier. The Commerce

Department reported that the GDP (Gross Domestic Product) dropped an annual 0.5 percent as

household spending slid the most since 1980 (Timothy R. Homan & Shobhana Chandra , 2008).

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THE BANK, Strategic Analysis

The overall economy has been slowing and analysts believe that we currently face an accelerated

downturn. The Producer Price Index (PPI) dropped for a third month in a row, ending on -2.8%,

proving that consumers in the U.S are in a slump. The Building Permits survey dropped to a

mere 0.71 million new permits that were issued in October, dropping for the fifth consecutive

month. The housing sector in the U.S is one of the best gauges of the deteriorating economic

condition. Banks are willing to provide fewer new mortgages which mean fewer citizens can

purchase new homes. The Unemployment Claims figure reached 542K individuals who filed for

unemployment insurance for the first time during the past week (FXYard, Market Overview,

November 25, 2008). The unemployment rate dramatically rose and is expected to climb more.

The stock market faces a historic downturn in an extremely volatile environment. The collapse in

the private sector credit market pushed governments around the world to desperately try to

counteract its effects with interest rate cuts, liquidity injections and fiscal stimulus.

Until November 2008, the political environment has been dominated by the presidential

elections. The level of uncertainty associated with this fact, led to a typical reaction- the decline

in spending both in business and non-business areas- when the future policies directions and

actions are different based upon different economic strategy viewed by each of the candidates.

The debate about the war is an ongoing issue in the view of government spending associated

with a weakened economy.

There has also been an increase in government regulations in the finance industry as a

consequence of the ongoing crisis; here are a few examples (FDIC citations):

Large-Bank Deposit Insurance Determination Modernization (July, 2008)

A final rule requiring the largest insured depository institutions to adopt mechanisms that would,

in the event of the institution’s failure, provide the FDIC with standard deposit account and other

customer information and allow the placement and release of holds on liability accounts,

including deposits. The rule applies only to very large institutions, currently estimated to be

seven in number.

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THE BANK, Strategic Analysis

Deposit Insurance Regulations, Revocable Trust Accounts (September, 2008)

An interim rule to simplify and modernize its deposit insurance rules for revocable trust

accounts: The aim is faster deposit insurance determinations after depository institution closings

and to help improve public confidence in the banking system. Under the new rules, a trust

account owner with up to five different beneficiaries named in all of his or her revocable trust

accounts at one FDIC insured institution will be insured up to $100,000 per beneficiary.

Revocable trust account owners with more than $500,000 and more than five different

beneficiaries named in the trust(s) will be insured for the greater of either $500,000 or the

aggregate amount of all the beneficiaries’ interests in the trust(s), limited to $100,000 per

beneficiary.

Deposit Insurance Regulations, Temporary Increase in Standard Coverage Amount;

Mortgage Servicing Accounts (October, 2008)

An interim rule to amend its deposit insurance regulations to reflect Congress’s recent action to

temporarily increase the standard deposit insurance amount from $100,000 to $250,000 and to

simplify the deposit insurance rules for funds maintained in mortgage servicing accounts.

Federal Deposit Insurance Corporation’s proposal for restoring the Deposit Insurance

Fund to its required minimum of 1.15 percent of insured deposits and, ultimately, to its

target designated reserve ratio of 1.25 percent (October,2008)

The Federal Deposit Insurance Corp. said banks categorized as “problem” institutions increased

46 percent in the third quarter to the highest level in 13 years. The FDIC identified 171 problem

banks as of Sept. 30, up from 117 in the second quarter and the highest since December 1995

(Vekshin, 2008).

Socio-cultural investigation brought to surface the following aspects: the demographic in

Virginia has a slightly lower rate, 6.8% as opposed to 8% for the US, while the education level is

above the nation’s average. The unemployment rate has been lower in Virginia for the past few

years. As of August 2008, a 4.6% unemployment rate was reported for this state as opposed to

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THE BANK, Strategic Analysis

6.1% for the entire nation. One reason found was the large number of Virginia residents working

for the federal government in the Washington D.C., metropolitan area.

Technological advance plays a central role in the banking industry. It is not only a matter of cost-

time enhancement, but also a measure of competitiveness. The rationale behind this evidence is

the rapid expansion of ATMs nationwide, and the growing dependence on internet and mobile

banking. People have come to depend on the convenience of having non-stop access to their

accounts in recent years, and the trend is going to continue. As for Virginia, since a high

concentration of advanced technology is a characteristic of the area, using cutting edge

technology become an even more important element for consideration by a bank. Moreover,

there is also a trend toward mobile banking services for all forms of banking transactions,

including payments. However, small community banks still successfully use the traditional

method of banking services as many people living in these areas continue to prefer a personal

relationship with their banks and more traditional methods of banking service. Yet, there is not

an either-or relationship between the two aspects, rather it should be considered as having an

additive relationship.

Results of Porter Five-Force Analysis

The competitive rivalry in the banking sector is high. With a long history of existence dominated

by the relative ease of opening a new business, the banking industry forces its players to

continuously seek ways to lure clients away from competitors. Banks have learned to handle the

few tools they have in order to grow. Interest rates (the most common tool), the active

introduction of next generation products, cutting edge technology usage, development of

expertise in narrowed areas, elaborate marketing tactics, along with a well-maintained capital

adequacy ratio are among them. The competition issue is not limited here to other banks

however, as recently, companies from other industries have started to compete with banks (loans

or other financial instruments offered by manufacturers or intermediaries to increase

consumption).

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THE BANK, Strategic Analysis

The threat of new entrants is also high as the banking sector has few barriers to entry. Since more

institutions have developed the skills to broaden their service areas, the threat of new entrants has

become steeper despite certain discouraging signals. For example, the average return on assets in

banking industry has fallen below 1.21 percent last year and, even worse, there is a growing

trend of failure in this area. It is not a big issue for an insurance company to start offering

mortgage and loans. Large banks represent a threat to community banks. Statistics show that

during the last year, the percentage of mergers and acquisitions overcame the percentage of new

establishments.

The threat of businesses that offer substitute products is considerable as the substitutes in the

banking industry include credit cards offered by retailers or companies, the convenience of

internet bill payment, insurance, mutual funds and fixed income securities which are all available

at non-bank institutions. A bank can offer services beyond its core competency, which is taking

deposits and lending money, but almost all other capabilities can now be offered by other

institutions. Unless the bank is very large and capable of exploiting advantages derived from this

fact, the bank should have a good strategy to create and exploit expanded core competences in

order to survive and grow.

Customer power is high as well and can be partially explained as being a consequence of the

other three forces discussed above. There is considerable pressure that customers put on a bank’s

performance. Building loyalty among customers is a hard task for banks especially considering

the wildly competitive environment. The fact that a customer experiences no cost when

switching from one bank to another adds to the difficulty of building customer loyalty. Not

surprisingly, this is the skill that many community banks develop and capitalize on. These

banks, among which THE BANK is included, aim to take advantage of creating loyalty by

developing expertise in a community area, in other words, meeting community needs.

Supplier power is the only force less risky in the banking industry. Supplier power might be

considered FED policy regarding discount window lending, the contractual clearing balances,

reserves required to be hold with FED or its actions taken through open market operations.

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THE BANK, Strategic Analysis

Results of Competitor Analysis

Two other banks were evaluated as being THE BANKs competitors in the geographical area.

Both are subsidiaries of Wachovia Bank, which was acquired by Wells Fargo and is itself a

subsidiary of SunTrust Bank. There are only three other locally owned and operated commercial

banks in the same area as THE BANK, none of which are the THE BANK’s size and thus cannot

be considered as real competition or even as peers in peer analysis. THE BANK is the number

four bank in Roanoke and Salem, VA with a 9.89% market share as opposed to Wachovia with a

29.56% market share and SunTrust Bank with 22.49% market share. Statewide in Virginia, THE

BANK is ranked 43rd with 0.23% market share.

Wachovia is the fourth largest bank holding company in the United States based on assets.

Wachovia provides full financial services through offices in 21 states including Virginia. In

Virginia, Wachovia has a total of 289 banking offices and 453 ATMs; in Roanoke and Salem,

VA, the bank has a total of 12 branches. In general, with the range of services it offers, it is more

widely oriented then other direct competitors in the market. The bank tries to attract customers

by offering them everything from loans, savings opportunities, retirement planning, insurance

and investing services, and online banking, enabling them to do all their business at one place.

On October 3, 2008 federal regulators approved the purchase of Wachovia for $15.1 billion by

Wells Fargo. Three directors from Wachovia will join the Wells Fargo board of directors. This

acquisition will lead to a combined company with $787 billion in total deposits and $1.42 trillion

in assets. This doubles Wells Fargo’s totals for both (Lepro, 2008).

SunTrust Banks, Inc. is also one of the nation’s largest and strongest financial holding

companies. It operates 1,699 retail branches and 2,506 ATMs in 12 states. In Virginia, SunTrust

Banks, Inc. accounts for a total of 246 banking offices and 453 ATMs. In Roanoke and Salem,

VA, it has a total of 18 branches. With the range of services it offers, it is oriented to retail, but

also supports business and institutional clients in the market.

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THE BANK, Strategic Analysis

In contrast to Wachovia and SunTrust Bank which offer a wide range of services and more

diverse customer base, THE BANK uses its knowledge to adjust to small community needs.

A financial-peer-analysis is available within Attachment five- financial analysis. Discussions

regarding peers’ financial performance and THE BANK’s position in the context of its

competitors will be presented later in this paper.

Results of THE BANK Mission Statement Analysis

On the whole, the mission statement is reaching its goal. That is, when used properly, vision and

mission statements (although different) can be a very powerful tool, especially for new and small

businesses. Without a mission statement it is difficult to develop a solid strategy. THE BANK’s

mission statement is a concise statement of business strategy, developed from the customer's

perspective. The mission statement does answer the following questions:

1. “What do we do? “ - by the real and psychological needs that are fulfilled when

customers pay for one of THE BANK’s services – the answer is: high quality services,

enduring relationships, long and strong relationships thus becoming the Bank of choice

for Roanoke THE BANK.

2. “How do we do it? “- understanding the community’s needs, keeping promises, becoming

a “friend” for small businesses or individuals, rather than only a place of financing.

3. “For whom do we do it?”- for Roanoke THE BANK customers.

Overall, the statement is not vague or misleading, THE BANK’s customer target is clear, and its

vision is uncomplicated. The statement is a brief representation of the enterprise’s purpose for

existence. Nevertheless, it incorporates socially meaningful ideas and addresses the concept of

moral responsibility. What could be claimed as insufficient in the mission statement is the lack of

any mention of growth or profitability.

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THE BANK, Strategic Analysis

Results of Financial Statement Analysis

THE BANK is a small bank with assets available of $642.8 million as of the end of the third

quarter of 2008, and deposits of $461.9 million for the same period. Its loan portfolio was

dominated by commercial real estate at 37.9% of the portfolio, followed by residential real estate

at 23.9% and real estate construction at 20%. Commercial loans accounted for 16.4%. The major

contributor to the total income is the interest income, 94%, which has kept an overall slight

growing trend over time. The fluctuations witnessed during last two years were concurrent with

the fluctuations recorded in interest margin. Changes in the volume and mix of earning assets as

well as of interest-bearing liabilities have a significant impact on the level of net interest income.

Nevertheless, the income is highly sensitive to yields and rates. Generally, the net interest

margins have always been under considerable pressure because of intense competition for

deposits and the relatively flat yield curve.

For a strategic analysis that would reveal THE BANK’s evolution of financial performance over

time, the last three years ending were examined. Then, further investigations were made for the

year 2008 based on quarterly comparisons, in order to assess the business reactions to the current

turbulence in the economy.

As of December 2007, the company showed a trend of slight growth in total assets and loans,

while a decrease in total deposits held was recorded from 2006 to 2007. During 2007, one of the

biggest issues that affected the bank’s performance was an unusually high level of

nonperforming assets (1.24%). However the company’s goal for 2007 to restore asset quality

was reached. As a result, better performance was anticipated and was declared for 2008. In

addition, during the same period, the company raised its capital with $4.2 million equity in the

private placement offering. What actually happened in 2008 can be summarized as follows:

The company increased its assets 8% and recorded a net loan growth of 7%. A total deposit

growth of 8% was recorded along with an increase in interest-bearing deposits. Liabilities rose

5%. Furthermore, the company decided to increase its investment in securities available for sale

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and decrease those held to maturity. This measure of liquidity maintenance was most probably a

response to the financial crisis. On the same line, the company increased long term borrowings

and decreased short-term borrowings. A considerable increase in federal funds purchased and

securities sold under agreements to repurchase was traced. From the standpoint of interest

margin, THE BANK took steps to boost it, so that in contrast to the previous year (2007) when it

was down 30 basis points for the first six months of 2008, the interest margin was up 4 basis

points. The company measures the net interest margin as an indicator of profitability. The

increase in net interest margin is partially due to the result of the bank effort in reduction of

nonperforming assets. The net income was the most affected between March and June 2008.

Quarterly, THE BANK measures the Asset Liability Management position using earnings

simulation modeling to estimate what assets and liabilities would re-price, and to what extent.

They examine mainly the response to a rapid change in the Prime Rate, but also the response to a

more gradual interest rate change as well. THE BANK’s policy is to keep the change in net

interest income over twelve months at or below 5%, and the change in the net income at or

below 10% under an immediate interest rate shock scenario.

Non-interest expenses increased in 2008 in response to the following: an increase in

compensation of officers based on merit, an investment in equipment and renovation, expenses

incurred to support the opening of a new full-service branch office and increased spending in

marketing and advertising (radio and TV) as a new checking account product was offered (My

LifeStyle Checking).

The investments (including both available-for-sale and held-to-maturity) and the restricted equity

securities with amortized costs were pledged as collateral for: public deposits, a line of credit

available from the Federal Home Loan Bank, customer sweep accounts, and for other purposes

in compliance with the law (the company has an outstanding long-term debt with the Federal

Home Loan Bank of Atlanta).

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THE BANK, Strategic Analysis

The company declared that they did not participate in the subprime, Alt-A, or third-party

originated mortgage programs that are now resulting in heavy loan losses at many banks. Still,

the fact that a major percentage of loans are tied up in real estate implies a degree of adverse

effect that the subprime crisis has had over their business.

Results of Competitive Ratio Analysis

This analysis was done in two directions: an internal trend and by comparing THE BANK

performance with its peers in the greater context of the industry.

Regarding the internal trend, the company faces a steady deterioration of its main indicators. For

example, the Return on Assets is down from 0.78 in 2005 to 0.49 in 2007. Return on Equity is

also substantially down, from 11.49 in 2005 to 7.9 in 2007. Revenue per employee increased

however. The liquidity has been kept quite constant at 1.12 Loans to Deposits, as well as the

Total Asset Turnover, 0.07. Cash & Equivalents Turnover shows a slight improvement in 2007.

Regarding peer analysis and valuation ratios compared with those of the industry sector and the

S&P 500, the following conclusions have been drawn:

Taken as a whole, the bank performs in the range of its peers, but underperforms the S&P 500

benchmark. Asset utilization, as the internal trend shows, needs improvement yet THE BANK is

in the range of its comparable competitors. The capital adequacy was thought to maintain a

capital structure sufficient to absorb potential losses.

The bank adopted a cautionary strategy by keeping itself quite solvent as the liquidity ratio

shows. Liquidity and capital levels are currently adequate to fund anticipated near-term business

expansion. The company struggles to maintaining a total risk based capital ratio of 10% or

greater at the Bank level as is required for a "well capitalized" institution.

The debt ratio does not show that the company extensively uses debts to finance its assets. Total

Debt to Equity ratio is actually pretty close to the S&P 500 standard. The bank finances its short-

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term needs by the following kind of borrowings: federal funds purchased and securities sold

under agreements to repurchase, sweep accounts and Federal Home Loan Bank of Atlanta

borrowings. For long term debts, Federal Home Loan Bank constitutes a cost-effective funding

source for THE BANK.

The profitability ratios reflected by the operating margin and the net profit margin over-perform

the industry. Dividend yield ratio under-performs the peer median but is in the industry range

and the S&P 500 range. Price/Earnings ratio is higher than both the peer average and the industry

but not far away from the S&P 500.

On the whole, despite limitations in management effectiveness expressed in returns on assets and

equity, the company seems to do well especially taking into consideration the current economic

roughness. Part of this outcome is due to the cautionary approach in the strategy the management

crafted. There is a risk adverse attitude associated with the company vision.

Results of SWOT study

A number of strengths were found and they facilitated the company’s growth over time. The

bank has proved to have a good understanding of its competitive advantages and has capitalized

on them. Mainly, the management showed a consistent strategy of constant growth which has

helped the business to maintain a reasonable profit level even in the most turbulent economic

periods. Here are a few results of findings:

THE BANK has an active presence in the area it serves with enough availability to be

comfortably reached by clients. This strength was exploited in combination with two other

advantages, heritage and personalized services. That is, the bank made itself known by extensive

involvement in community life, understood customers’ needs, built close relationships and

opened enough offices to be “the choice”. There were some opportunities associated with the

success of this strategy, which the bank recognized and took advantage of, including the need of

trust that the community’s people seek and, under the same roof, answers for financial problems

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they have. THE BANK successfully understood the community’s needs and had the necessary

solutions to respond to them.

To reach its goal and make its competitive advantages sustainable, THE BANK chose to make

use of cutting edge technology and in doing so, has created another strength. The quality of staff

and the expertise created made THE BANK the third bank in market share in only a few years.

The economy of the community, with a level of well-being above the average in the U.S., and a

local unemployment rate always under the national rate, led to viewing the area as a good place

to have financial solutions for those who seek to grow, both businesses and as individuals. The

experience of investing in real estate in the area was considered when it came to formulating

strategy.

Regarding weaknesses, THE BANK’s lack of diversification in loan management has been and

could continue to be harmful from the perspective of the present crisis in real estate. This

coupled with a too timid expansionary strategy, a runner-up strategy, makes it hard for THE

BANK to cope with changes or take on other opportunities. One consequence of being a small

runner-up is the lack of resources (that is less money to spend on mass media and quite limited

funds for capital expansion or making acquisitions). The choice to open seven branches in the

same county can be a signal of a short term orientation, risk adverse strategy and timidity in

taking on business opportunities. Assets management is another main weakness.

The state of the economy is both a source of opportunities and a source of threats for THE

BANK. From the standpoint of its expertise and current involvement in the community, the

financial problem that the large banks face could be an opportunity for THE BANK to grow

market share and build stability. The government’s capital infusion in the banking system is

another capstone in formulating a viable long term strategy; maybe an overextension across

Virginia’s borders. The general state of Virginia’s economy and Roanoke MSA’s position as a

regional center is a better source of opportunities for THE BANK. It is also a source of threats as

being an attractive place for new entrants. These threats come from the overall state of the

economy and from growth/ reorganization of the banking sector.

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THE BANK, Strategic Analysis

Results of Pricing Analysis

As THE BANK’s main income is interest income, pricing has been an important element in

formulating their strategy. For checking accounts, THE BANK offers a good yield, the third

most attractive for the state of Virginia. For regular savings accounts THE BANK has a variable

yield. For money market accounts, the interest rates are tied to the Wall Street Journal Prime

rate. As compared with the same period of 2007, the yield on earning assets decreased at 6.31%

from 7.08% during the first 6 months of 2008.

Competing on price has been proved an effective strategy for THE BANK as it continued to

attract customers and so has accumulated over $90 million in deposits as of the end of the third

quarter of 2008; an increase of 25% over the same period last year. There are other rewards

associated with having accounts with THE BANK and also free access to any ATM nation-wide.

In order to fund the loan growth, often the bank relies on higher cost of certificates of deposit.

Within the certificate of deposits category, THE BANK marketed CDs nationally to institutional

depositors, primarily banks, thrift institutions and credit unions, through an internet based rate

posting service. The percent of national market CDs was 1.9% of total CDs and 1.1% of total

deposits as of the end of second quarter of 2008.

Results of VRIO model

Although not having an aggressive strategy of expansion, or being a pioneer of innovation and

diversification, THE BANK successfully evaluated its capabilities and resources and embodied

them in strengths; as a result the company was capable of coping with rapid changes in the

turbulent market environment. There are few valuable resources that the bank possesses and

exploits. Good service, which although easy to imitate in the banking sector, was focused on

community needs, therefore turning this into a strength; the expertise developed in the area of

operation coupled with a high level of technology used is another example. It’s worth

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THE BANK, Strategic Analysis

mentioning that technology adoption would not result in strength without a high level of

specialization. A growing market share coupled with enough offices available and a proved

healthiness of business (capital adequacy) helped the company to gain competitive advantages.

There are however, resources available that would result in strengths, if well exploited, that THE

BANK has not used so far. One example would be a possible strategic alliance with a larger bank

or a possible acquisition. While management does not seem reluctant to the idea, as results from

their approach to the FASB requirement SFAS No 141(R) “Business Combinations” show,

(December 2007), no further plans are clearly shown in this regard.

Between mid-2004 to February of 2007, there were no bank closures in the U.S. (Moyer, 2007).

However, with the depleting capital levels of many institutions and banks getting stuck with

mortgage-related assets, regulators are fearing there will be an increase in the near future of bank

closings (Moyer, 2007). The consequences of the mortgage crisis for financial institutions can

result in a merger, acquisition, filing for bankruptcy, or failing. This could be a moment of

changing strategy for THE BANK.

Results of ANSOFF Matrix

The matrix’s alternatives of corporate growth strategy: market penetration, market development,

product development and diversification, result in ways to grow through existing products and/or

potential products as well as focusing on present customers and/or potential new ones.

THE BANK is constantly concerned with both maintaining and increasing the market share for

the current services, and increasing customer loyalty, therefore, it can be concluded that a market

penetration strategy is in place. Secondly, expansion into a new geographical market is part of

their short-term strategy. They intend to open a new office in 2009, the ninth one, thus making

THE BANK a candidate for a market development strategy as well. Nonetheless, the new

product, MyLifeStyle Checking account, launched at the beginning of 2008 signals that the

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THE BANK, Strategic Analysis

company adopted a product development strategy in addition. The new product was created to

appeal to existing markets and also to help customers to overcome the economic downturn.

The only remaining alternative, diversification, is not a strategy that the company has used so far.

Diversification is a growth strategy by which the bank would market new services in new

markets.

Suggestions, possible outcomes

A good strategy always begins, with a clear understanding of the present situation. That is, a

good evaluation of the business itself with its strengths and weakness, then a good understanding

of the environment, from macro to micro, a good understanding of the industry and of the

competition. The core of any strategy consists of managers’ decisions and actions in the

marketplace. The expected outcome is improving financial performance and strengthening the

business’s long term competitive position, in other words, gaining a sustainable competitive edge

over rivals. The point to which managers aspire to bring the business, defines the strategy they

adopt. A suitable strategy tied with proficiency in executing the strategy will build sustainable

competitive advantages.

Following the results presented above, three main conclusions were drawn:

The external environment is very challenging for the company; consequently, a long term

strategy is difficult to be defined;

Taking into account the actual context of the global financial crisis, the company has had

a working strategy, a fact proven by the results;

There are strategies or elements of strategy that could be considered from this point on.

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THE BANK, Strategic Analysis

Take a stance

First, as an immediate response to the turbulent market environment, a stance should be taken in

order to be able to cope with the rapid changes. There are three possible choices: 1. to continue

to take all necessary measures to keep the bank away of risk, that is, high liquidity and capital

adequacy, in order to allow the business to react to change. In this case of defensive approach,

the bank would watch competitor’s reactions and introduce better products, as possible; 2. to go

a step further and anticipate change; here a short-to-medium term plan could include mergers and

acquisitions; 3. to become the leader of change by pioneering new and better products. There are

few chances for THE BANK to become a leader of change as the main competitors in Roanoke

THE BANK are Wachovia (now Wells Fargo) and SunTrust.

Keep services fresh and exciting

In any of the first two options however, the bank needs to keep its services fresh and exciting

enough to not only maintain the customer base but to increase it. Nonetheless, teller staff should

keep serving customers not the clock. Service should be customer driven.

Allay the fear

There is a level of trust that customers in the bank industry are seriously seeking now, beyond

the FDIC insurance. One way to counteract customers’ confusion is to speak out. Many

community banks are doing just that by launching PR campaigns that specifically address

concerns about the safety and soundness of banks with an emphasis on stability (Community

banker, 2008). THE BANK experienced loan losses in 2005-2006 and the undesired outcomes

derived from it. It took actions in 2007 and in 2008 to run with a better quality of assets. In

effect, a possible deterrent position regarding loan activity could hurt the bank in the long run. A

solution for this blockage would be to focus on industrial loan diversification. Diversification

would allow lowering the overall impact on portfolio if one or more loans go into default.

Strengthen new clients loyalty

Studies show that between 30 and 40 percent of new clients leave the financial institution during

the first year (Scarborough, 2008). There are a few important things regarding the on-boarding

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THE BANK, Strategic Analysis

strategy. One would be good communication with customers regarding not only the services

available but also about the bank’s policy. One study done by Kimberly Clay, director of

marketing research for Birmingham, Ala.-based Bancography Inc., showed that customers who

understood a bank's policies were more likely to blame themselves - not the bank - if they made a

costly mistake (Scarborough, 2008). Conversely, if not aware of a bank’s policy, the customer

goes and spreads bad information about the bank. This is a peril for community banks especially.

Another aspect is the importance of technology. Saving customers’ time by having software that

prevents multiple trips to the bank or multiple stops inside the bank is important. Surveys,

follow-up calls, and having a staff comfortable with current product offerings are other

examples.

Update appraisals for real estate loans

In conformance with OCC’s policies and expectations with regard to commercial real estate,

bank management is responsible for maintaining appropriate borrower financial information and

current real estate appraisals, to take the initiative to promptly and realistically identify problem

assets and to maintain an adequate allowance for loan and lease losses. “There are no standard

criteria for determining the useful life of an appraisal (maybe less than a year; maybe more than

a year)” (Long, 2008). The bank should have an internal process to determine when the

reappraisal in necessary and that might be due to changes in the market, on collateral values, or

deterioration of the project performance.

Possible merger or acquisitions

One reason for this option is to expand the geographic coverage beyond the Roanoke proximity

as it is the quickest way to become a presence in different locations. THE BANK’s size is less

likely to allow an acquisition unless a big opportunity is in place. Another reason would be the

extension of business into new service categories. A merger with a bank with a different

expertise and different area of activity could lead to risk diversification in addition to the

increase in market share and better coverage of industry segments. There are many examples of

banks that have successfully pursued this kind of strategy, among them Wachovia and SunTrust.

There is, however, rationale behind focusing on a limited geographic area such as a chance to

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THE BANK, Strategic Analysis

dominate, greater operating efficiency and a stronger brand awareness with saturation

advertising.

CRM approach

The justification for CRM (Customer Relationship Management) projects is tied to the bank's

ability to sell more products and services to existing customers and to acquire new customers

more cost effectively. Assumption the bank has not previously done so, one first step in

assessing performance before adopting CRM is the balanced scorecard. This could help the bank

to combine hard financial indicators of performance with indicators not as easy to measure, for

example, customer satisfaction. That would be the first indicator for performance measurement

that would make more sense when translated into a financial value.

Keep the optimism up

Keeping a level of optimism among the bank employees is important especially in these

challenging times for all financial services institutions. A recent article in The Washington Post

discussed a book by Jon Gordon, "The No Complaining Rule: Positive Ways to Deal with

Negativity at Work" (2008, John Wiley & Sons Inc.). Here are a few of the book’s suggestions:

encourage workers that are concerned about the future to come up with ideas to solve the

problems, show gratitude for the effort they make and for their accomplishments, and ask staff to

look for ways to justifiably praise the contributions of co-workers (Community bankers, 2008).

ABA Total Business Solutions

As a member of the American Banker Association (ABA), THE BANK needs to keep close ties

with this institution and take advantage of the value-added business solutions available for ABA

members. ABA Total Business Solutions is an affiliate of ABA and has a palette of solution

areas available ranging from services in capital markets and commercial banking to mortgage

solutions and card solutions (Bill, 2008).

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THE BANK, Strategic Analysis

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November 3, 2008, from CNBC.com: http://www.cnbc.com/id/26708143

Coy, P. (2008). How New Global Banking Rules Could Deepen the US Crisis. BusinessWeek .

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Accelerates, GDP Contracts, Bloomberg news available at: http://www.bloomberg.com/apps/news?

pid=20601087&sid=agE8Sg.gs3l8&refer=home

Vekshin A. (2008, November 25) ‘Problem’ Banks Rose 46% in Third Quarter, FDIC Says, Bloomberg

news available at : http://www.bloomberg.com/apps/news?

pid=20601208&sid=a9B2vhgJOztU&refer=finance

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Lepro, S. (2008, October 9). Wells Fargo Buys Wachovia for $15.1 billion. Retrieved November 6, 2008,

from ABCnews.com: http://abcnews.go.com/Business/SmartHome/story?id=5946486&page=1

Community Banker ( 2008, November), Advancing your cause, Vol. 18 Issue 11, p12-12, 1/3p

Community Banker, (2008, October), Keeping a lid on negativity, Vol. 17, Issue 10

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bad? Vol. 17 Issue 10, p24-24, 1p

(Timothy W. Long, senior deputy comptroller, bank supervision policy, and chief national bank

examiner, Office of the Comptroller of the Currency)

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clients' loyalty to your bank, Vol. 18 Issue 11, p20-20, 1p

Bill, K., Community Banker, (2008, November), Smart Solutions for Your Bank: ABA Total Business

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