Attachment 1: PEST ANALYSIS Political segment- a reflection of government policy and current regulations Intensification in corporate regulation in financial sector as a consequence of the ongoing crisis. The massive intervention by the world's central banks under the Federal Reserve's direction to steady the dollar in the election season and in favor of financial institutions; 700 billion $ bailout plan. Uncertainty about the future policies in the context of presidential elections; the perspective of political change provides with a degree of nationwide concern even in stable times. Different economic strategy proposed by each side combined with an extremely volatile economic environment has been contributing to a high level of uncertainty at both social and business level. For instance, while the republican candidate promised to keep tax rates low for all, including the richest, and to reduce corporate tax, the democratic candidate proposed tax cuts for the many that will target help on the squeezed middle classes. The wars in Iraq and Afghanistan continues to weaken the economy by increasing government spending. The war in Iraq was costing $720 million a day or $500,000 a minute in 2007, according to the work of Nobel Prize-winning economist Joseph E. Stiglitz, and the estimate for 2008 was at 16 billion dollars a month for both wars. Among others, the effect of war is oil price instability that further influences the U.S. economy negatively. The global financial turmoil has been leading the FED to take a series of actions, among which the decision to lower its target for the federal funds rate to one percent- a harmonized interest rate cuts by central banks. All the FED’s extraordinary liquidity measures, and official steps to strengthen financial systems, are expected to help over 1 | Page
Transcript
Attachment 1: PEST ANALYSIS
Political segment- a reflection of government policy and current regulations
Intensification in corporate regulation in financial sector as a consequence of the ongoing crisis. The massive intervention by the world's central banks under the Federal Reserve's direction to steady the dollar in the election season and in favor of financial institutions; 700 billion $ bailout plan.
Uncertainty about the future policies in the context of presidential elections; the perspective of political change provides with a degree of nationwide concern even in stable times. Different economic strategy proposed by each side combined with an extremely volatile economic environment has been contributing to a high level of uncertainty at both social and business level. For instance, while the republican candidate promised to keep tax rates low for all, including the richest, and to reduce corporate tax, the democratic candidate proposed tax cuts for the many that will target help on the squeezed middle classes.
The wars in Iraq and Afghanistan continues to weaken the economy by increasing government spending. The war in Iraq was costing $720 million a day or $500,000 a minute in 2007, according to the work of Nobel Prize-winning economist Joseph E. Stiglitz, and the estimate for 2008 was at 16 billion dollars a month for both wars. Among others, the effect of war is oil price instability that further influences the U.S. economy negatively.
The global financial turmoil has been leading the FED to take a series of actions, among which the decision to lower its target for the federal funds rate to one percent- a harmonized interest rate cuts by central banks. All the FED’s extraordinary liquidity measures, and official steps to strengthen financial systems, are expected to help over time to improve credit conditions and promote a return to moderate economic growth. 2
Emergency Economy Stabilization Act of 2008 October 3rd was a big day as the Emergency Economy Stabilization Act of 2008 was signed by President George W. Bush. This stabilization act makes the US Treasury Department the buyer for unwanted assets on financial institutes’ balance sheets (Lynch, 2008). The goal is to take some of the pain away from the banks so they can continue normal lending. Of the $700 billion dollars of the stabilization act, $250 billion is going to buy stock in banks (Chu, Hagenbaugh, & Kirchhoff, Treasury Tries to Kick-Start Credit, 2008). The government stock purchases would swiftly give banks money to repair their balance sheets and promote lending between one another and to consumers (Chu, Hagenbaugh, & Kirchhoff, Treasury Tries to Kick-Start Credit, 2008).
1 Information available at: http://www.washingtonpost.com/wp-dyn/content/article/2007/09/21/AR2007092102074.html http://www.telegraph.co.uk/arts/main.jhtml?xml=/arts/2008/03/08/bosti108.xml2 Information available on FED website at http://www.federalreserve.gov/newsevents/press/monetary/20081029a.htm
Economic segment- the state of the economy; the implications, good effects and downturn
In 2008, a global economic crisis was suggested by several important indicators of economic downturn worldwide. Among these: high oil prices, which led to both high food prices (due to a dependence of food production on petroleum, as well as using food crop products (ethanol, biodiesel) as an alternative to petroleum and global inflation; a substantial credit crisis leading to the bankruptcy of large and well established investment banks as well as commercial banks in various nations around the world; increased unemployment; and the possibility of a global recession.
Inflation reached 4.1 percent in December of 2007, and hit 5.1 percent after a peak of 5.6 in July (seasonally adjusted annualized rate for the first 8 months of 2008), according to Bureau of Labor Statistics; this was considered the sharpest year-on-year increase since January 1991.The forecast for December 2008 is 3.6 percent. 1
The collapse in private sector credit pushes governments around the world to desperately try to counteract its effects with interest rate cuts, liquidity injections and fiscal stimulus. 2
According to the BEA’s advance estimate, real GDP contracted at an annualized rate of 0.3% during the third quarter. This is the first of a run of negative GDP numbers; the economy is in recession. GDP is expected 1% in the fourth quarter and first quarter of 2009. 3
Consumption was grim, down 3.1%, while corporate capital spending dropped 5.5%.
Housing investment
plunged 19.1% but commercial structures continued to rise, up a hefty 7.9%. Still, the sector is slowing; expect an outright drop in the fourt quarter. 3
Number of U.S. household properties subject to foreclosure actions by quarter
In addition to the baseline forecast (i.e., the most likely economic scenario), Moody's Economy.com forecasts the CSIs under alternative economic scenarios. Understanding the future path of house prices in relation to economic stresses such as oil price shocks, financial market distress, dollar devaluation, and others is critical to successful strategic planning and risk management
Despite a stronger dollar, net exports provided a substantial boost to GDP growth, adding 1.1% to the total number. 3
Goods exports, much of which was likely the result of orders placed in a period of a weaker dollar, grew by 7.5%, while goods imports shrunk by 2.8% on energy costs which, judging by the average quarterly price of oil, declined by around 4.5%. 3
The process of importing deflation (or, more precisely, disinflation) from developing nations – especially China and India – relied on trade: raw materials in; finished goods out. 2
1 Data available at: (http://www.guardian.co.uk/business/2008/aug/15/inflation.useconomy) and (http://www.forecasts.org/inflation.htm )2 Information available at: http://www.businessspectator.com.au/bs.nsf/Article/The-end-of-deflationary-trade-KWREY?OpenDocument&src=mp3 All data available at: http://wsj.com/economics/2008/10/30/economists-react-gdp-report-shape-of-things-to-come/4 Moody's Economy.com, a division of Moody's Analyticshttp://www.economy.com/home/products/case_shiller_indexes.asp
Socio-cultural factors- population demographics, life-style, other social changes
Demographics with an annual rate of 0.88% below the world average annual rate of 1.16%, population percent change in the U.S. from 2000 to 2007 registered a growth of 6.8% while in Virginia area showed an increase of 8.0 % . The U.S. Census Bureau projection is that U.S. population will continue to decline.
81.5% of population over 25 in Virginia and 80% in the U.S. are high school graduates. In addition to education level, there is a high concentration of high-technology industry in Virginia, with the two largest high-tech fields being computer and data processing services and electronic equipment.1
11.6% of Virginia population and 12.4% of U.S. is above 65 years old, showing the trend of increasingly aging population
Unemployment rate rose to 6.1%, the highest level since September 2003. The US economy suffered a net loss of 605,000 jobs this year, according to the U.S. Department of Labor. In Virginia the unemployment rate was 4.6% in August 2008, one of the lowest in U.S.
Working Conditions Because of Virginia's extensive military installations and the large number of Virginia residents working for the federal government in the Washington, D.C. metropolitan area, the federal government plays a larger role in the Virginia economy than in any other state except Hawaii.
Technological environment
Growing Dependence on technology, internet, mobile banking services and e-commerce. The significant advance of the Internet and other technology improvements give companies new and greater opportunities and help them conduct business operations that reach every corner of the worldwide economy.
Increasing Risk of a Costly Internet Disruption. Risks exist in all aspects of the Internet, as well as the business operations that depend on it. These risks include malicious code, disruptions caused by coding error, natural disasters that have major impacts on vital Internet hubs, and attacks by terrorists or other adversaries. The World Economic Forum estimates a 10 to 20 percent probability of a breakdown of the critical information infrastructure in the next 10 years — one of the most likely risks it studied. 3
Growth in Use of ATMs The automated teller machine (ATM) with its cash anytime anywhere facility has revolutionized banking in the last two decades. In mature markets
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such as North America and the United Kingdom, technological advances notwithstanding, cash withdrawals continue to account for 80 percent of all ATM transactions
Web banking has become a must-have for retail banking relationships today. Consumers want the convenience of 24 hours a day, 7 days a week access to their accounts. With such strong market forces at play it’s no surprise that industry analysts agree web banking will continue to grow in use and importance.
Trends According to Aite Group’s Nick Holland, the recent rapid growth of U.S. subscribers to mobile banking services is part of a transformation that eventually will place mobile phones at the heart of all forms of banking transactions, including payments. At this time, mobile banking services provide much the same information as can be accessed via online banking or an ATM, such as account balances, last five transactions or the ability to transfer funds between existing accounts. Mobile banking services have been designed to be reassuringly safe in order to build trust and encourage adoption.
1Information available at: http://en.wikipedia.org/wiki/Demographics_of_the_us andhttp://www.census.gov/main/www/popclock.html2 Information available at http://money.cnn.com/2008/09/05/news/economy/jobs_august/index.htm?cnn=yes and http://www.bls.gov/news.release/laus.nr0.htm3 http://www.businessroundtable.org/pdf/Security/BR_Internet_Business_Dependence_Report_09252007.pdf
The political environment has been dominated by the presidential elections at the end of this year. There is a level of uncertainty associated with this, a typical reaction when the future policy directions and actions are different based upon different economic strategies viewed by each of candidates. Due to this fact, the usual reaction of the customers is a decline in spending, a fact actually proved by the customer spending coefficient. Nonetheless, businesses have reduced spending, and might respond to the recent turmoil by cutting back more. There has also been an increase in governmental regulation in the finance industry as a consequence of the ongoing crisis. The debates regarding the war are based on the assumption that by increasingly government spending on military action in Iraq, the economy will continue to weaken.
The economy is slowing since the subprime-rate crisis launched. Real GDP has been resilient; during the past nine months jobs have been lost, the unemployment rate rose (and is expected to climb more); housing got weaker, foreclosures reached impressing levels, which in turn created a stock of unsold homes and leaved less demand for newly, constructed houses. Loan defaults have been affecting banks increasingly. The stock market faces an historic downturn on an extremely volatile environment. The collapse in private sector credit pushed governments around the world to desperately try to counteract its effects with interest rate cuts, liquidity injections and fiscal stimulus.
Socio-cultural factors such as the unemployment rate seem to have less impact in Virginia (4.6% in August 2008 as opposed to 6.1% for the entire country), one reason would be that a large number of Virginia residents are working for the federal government in the Washington, DC, metropolitan area.
Technological advancement has a significant impact on a backing business. There is growing dependence on technology, internet and mobile banking, a growing use of ATMs and a significant growth in Web banking since consumers have a need for the convenience of 24 hours a day, 7 days a week access to their accounts. Web banking will continue to grow in use and importance. There is also a trend toward mobile banking services for all forms of banking transactions, including payments. As a logical conclusion, the bank should invest in technology. However, small banks in small town still successfully use the traditional way of banking services as many people living in these arias continue to prefer personal relationships with their banks or more traditional ways of banking servicing. Yet, for Virginia, where in addition to a high educational level, there is a high concentration of high-technology industries, therefore, a level of technological adequacy is to be considered.
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Attachment 2: THE FIVE-FORCES OF COMPETITIVE POSITION
In this section the state of competition in banking industry is analyzed as a composite of competitive pressure in five areas of the overall market: rivalry among existing banks, threat of new entrants, businesses in other industries offering substitute products, supplier power and customer’s power.
Rivalry among competition The banking industry is highly competitive. The financial services industry has been around for hundreds of years and just about everyone who needs banking services already has them. Because of this, banks fight to lure clients away from competitor banks. Among the tools, interest rates and fees, the active introduction of next generation-products or improved products and services, or other differentiation strategies. Also, marketing tactics, what effort the rivals pursue to build stronger dealer networks or how hard the competitors are striving to gain market edge. Taking into account the state of the economy as a whole, and the financial sector crisis in particular, the competition has become an issue of survival rather than of growth. With the FED capital infusion in banks (seen as an essential short-term measure to ensure the viability of America's banking system at this time) a process of merger and acquisitions has been facilitated above and beyond the foremost expectation regarding the boost of the capital adequacy ratio. Also, banks are viewed as likely to pursue new business lines like wealth management and asset reconstruction. Thus, the actual competition has slightly departed from the traditional competition in the banking sector. During the second quarter of 2007 for example, there was 8,614 U.S. FDIC insured banks and a growing trend expectation (in reality, in the second quarter of 2008, only 8,451 FDIC insured banks exists). Small banks are most likely competing on personalized service and specialty expertise rather than on wide range of services and far reaching coverage. Competition on interest rates usually has not been seen as yielding significant outcome.
The threat of new entrants. The average person can't come along and start up a bank, but there are services, such as internet bill payment, on which entrepreneurs can capitalize. What would it take for an insurance company to start offering mortgage and loan services? Not much. Also, when analyzing for regional banks, the possibility of a mega bank entering into the market poses a real threat. However, taking into consideration that Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation reported net income of $5.0 billion in the second quarter of 2008, a decline of $31.8 billion from the $36.8 billion that the industry earned in the second quarter of 2007 (higher loan-loss provisions were the most significant factor in the earnings decline).1 Even with little or no barrier to entry, the threat of new entrants has lessened in the last year. The average return on assets (ROA) in the second quarter was 0.15 percent, falling from 1.21 percent in the second quarter of 2007. For example,
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from January to April 2008, 38 new banks were established and 66 mergers took place. From July 1, 2008 – to October 30, 2008, there were only 27 newly established, 96 merged or closed and 12 failed. 2
Threat of businesses that offer substitute products. There are plenty of substitutes in the banking industry. Banks offer a suite of services over and above taking deposits and lending money, but whether it is insurance, mutual funds or fixed income securities, chances are there is a non-banking financial services company that can offer similar services. Moreover, the threat of retailers that have started to offer credit cards with competitive interest rates should be considered. The convenience of using cards issued by companies without having an actual bank account poses a threat for commercial banks. THE BANK conducts a general commercial banking business while emphasizing the needs of small-to-medium sized businesses, professional concerns, and individuals. Consequently, when the core competence is “to best serve the needs of the people of the Roanoke THE BANK”, the threat of substitute products is especially high.
Customer power is considered significant in banking industry especially in commercial banking system because of the ability of the consumers to put pressure on the bank performance. Since the bank deregulation regarding branching limitation and other restrictions that have been lifted over time in the banking sector, the competition between banks rose substantially. And with wild competition and with a low to zero cost of switching, the buyer power is high. To build loyalty is a pretty difficult mission for both large and small banks. However, in small communities providing friendly, local service and decision making, combined with current technology is a shorter way to rich the goal.
Supplier power refers to the competitive pressure stemming from supplier bargain power and supplier-seller collaboration. In the banking industry, supplier power is not a factor except maybe for the FED regulations regarding the target for the federal fund rates or as a lender of last resort. Generally, the suppliers of capital do not pose a big threat, but the threat of suppliers luring away human capital do. If a talented individual is working in a smaller regional bank, there is the chance that person will be enticed away by bigger banks or an investment firm.
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Overall:
Generally the banking industry is very competitive, it is also a sector not highly regulated when it comes to entering the market. The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems and new competition from non-traditional financial services. With strong competition and business condition threats by other industries with substitute products, commercial banks are keen to keep their performance from case to case by providing friendly, local services and decision making (the case of small community banks) or by heavy usage of technological advancements. Competition on interest rates and fees is not a long term viable solution for a healthy existence. The easy access to money in mortgage banking industry was one factor that triggered the general financial crisis in 2008. For the period of 2008, the banking industry passes an extremely difficult moment- the global financial crisis; the market is extremely volatile, the five forces create different areas of sensitivity. For example, while lessening the treat of new entrants, the new opportunities created by the government’s capital infusion in banks are a new valence given to competitors.
1,2 Data available on FDIC website :http://www.fdic.gov/bank/analytical/quarterly/index.htmlhttp://www2.fdic.gov/idasp/KeyStatistics.asp?tdate=10/30/2008&pDate=10/29/2008
THE BANK, founded in 1995 with headquartered in Roanoke, Virginia, is a community bank with branch, mortgage and loan offices throughout the Roanoke THE BANK. THE BANK offers its services to the cities of Roanoke and Salem, and Roanoke County, Virginia. In the same area there are two more banks that are considered competitors of THE BANK and studied in this paper; they are Wachovia Bank N.A. (Wells Fargo) with 12 branches and SunTrust Bank with 18 branches. THE BANK competes for loans and deposits with other commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other nonbank financial service providers. Bank of Botetourt, Bank of Fincastle, and Hometown Bank are the only locally owned and operated commercial banks. The reason for choosing subsidiaries of holding companies as competitors in this analysis is to underline the difference in strategies between a community local bank and a subsidiary of a very large bank holding company.
Wachovia Bank N.A. (now Wells Fargo) is the fourth largest bank holding company in the United States based on assets, is a 800+ billion national bank headquartered in Charlotte, North Carolina. It provides full financial services through offices in 21 states among which Virginia—plus Washington, D.C. On October 9, 2008 – Wells Fargo & Company reaffirmed that it is proceeding with its merger with Wachovia Corporation as a whole company transaction with all of Wachovia’s banking and other operations.
o In Virginia State Wachovia has total of 289 banking offices and 453 ATMs. In Roanoke and Salem, VA, it has total of 12 branches.
o Wachovia Bank is a federal, multi-state bank holding company. Through its subsidiaries, provides complete financial services, full-service retail brokerage, investment banking products and services, mortgage lending, student lending, and auto dealer finance. It also offers international correspondent services and trade finance, as well as corporate and investment banking in selected sectors and is provided through more than 40 international offices.
o The Wachovia Bank N.A. counts for 3,400 offices across the U.S, including 2,200 banking centers with brokerage offices, as well as 40 foreign offices. As of Dec 31 2007, the bank had total assets of $ 782.90 billion and total deposits of $ 449.13 billion (Wachovia Annual Report, 2007).
o As a direct competitor to THE BANK, it has first market share 29.56% in Roanoke and Salem, VA. With the range of services it offers, it is more widely oriented than 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 also online banking, therefore enabling them to do all business at one place.
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SunTrust Banks, Inc., is one of the nation’s largest and strongest financial holding companies. Atlanta-based SunTrust has leadership positions in some of the highest growth markets in the United States and also serves clients in selected markets nationally.
o SunTrust Banks, Inc. operates 1,699 retail branches and 2,506 ATMs in 12 states including Virginia.
o In Virginia, State SunTrust Banks, Inc counts a total of 246 banking offices and 453 ATMs. In Roanoke and Salem, VA, it has total of 18 branches.
o SunTrust Banks, Inc. is a multi-state bank holding company. Through its banking subsidiaries, it provides deposit, credit, trust, and investment services to a broad range of retail, business, and institutional clients. Other subsidiaries provide mortgage banking, brokerage, investment management, equipment leasing, and capital market services.
o As a direct competitor to THE BANK, it has second market share 22.49% in Roanoke and Salem, VA. With the range of services it offers, it is oriented to retail, but also to business and institutional clients in the market. It offers investment services to wealthy individuals and corporate clients. The bank also offers, through its subsidiaries, mortgage loans, insurance premium financing primarily to small businesses and provides equipment-related lease financing to businesses.
Overall:
THE BANK is the number four bank in Roanoke and Salem, VA with 9.89% as opposed to Wachovia with a 29.56% market share and SunTrust Bank with 22.49%. In the Virginia area, the bank is ranked 43rd with a 0.23% market share. Yet, from the standpoint of competition strategy, THE BANK relays on service-based business philosophy, personal relationships with customers, specialized services tailored to meet customers’ needs and the convenience of office locations. The two competitors having a wide range of services and more diverse customer base are usually more sensitive to the general economic environment, have a better expertise in their adjustment to the global market but less knowledge to adjust in depth to small community needs. Further analyses are to be made in order to evaluate the success of THE BANK’s strategy in exploiting its core competences, that is, the community reacts favorably or not to community bank focus and emphasis on service to small businesses, individuals and professional concerns.
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Percent of Assets Wachovia Bank, National Association Charlotte, NCJune 30, 2008
Insured Subsidiaries of SUNTRUST BANKS, INC. 1 Atlanta, GAJune 30, 2008
THE BANK
Roanoke
Virginia
June 30, 2008
1 Number of institutions reporting 1 8 1
Assets and Liabilities
2 Total assets 100.00% 100.00% 100.00%
3 Cash and due from depository institutions 3.80% 2.06% 1.65%
4 Interest-bearing balances 1.39% 0.00% 0.02%
5 Securities 15.10% 7.42% 12.37%
6 Federal funds sold & reverse repurchase agreements
1.99% 1.74% 0.00%
7 Net loans & leases 60.57% 74.79% 80.82%
8 Loan loss allowance 1.16% 1.05% 0.80%
9 Trading account assets 7.50% 4.38% 0.00%
10 Bank premises and fixed assets 0.63% 0.77% 1.10%
11 Other real estate owned 0.10% 0.23% 0.21%
12 Goodwill and other intangibles 5.22% 4.59% 0.00%
13 All other assets 5.10% 4.02% 3.85%
14 Life insurance assets 2.17% 0.36% 1.94%
15 Total liabilities and capital 100.00% 100.00% 100.00%
16 Total liabilities 89.59% 88.68% 92.12%
17 Total deposits 67.24% 70.50% 72.45%
18 Interest-bearing deposits 57.41% 64.95% 69.14%
19 Deposits held in domestic offices 59.31% 66.69% 72.45%
20 Federal funds purchased & repurchase agreements
“Our mission at THE BANK is to offer an unmatched level of service and to be the Bank of choice for the Roanoke THE BANK. To us “My THE BANK My Bank” doesn’t ring true unless we deliver on that promise. Building strong and enduring relationships with our customers have been, and always will be the key to our success.”
The statement is aimed to keep THE BANK’s members and users aware of the organization's purpose. It aims to tell who THE BANK is, what do they do and why are they here. It seems obvious from the mission statement that THE BANK is a community bank, focused on understanding community’s needs and here to give a hand to those who need a “friend” in their decisions, either personal or business, rather than only a place of financing.
They also have a welcome statement from the President which partially repeats the mission statement, to bring a feeling of confidence, a sample of consistency and an idea of an effective team ready to help your business.
Here it is:
“Welcome to THE BANK!
As President and Chief Executive Officer of THE BANK, it is my pleasure to welcome you to our website. THE BANK prides itself on attracting experienced banking professionals whose motivation is to make meaningful and lasting contributions to the growth and vitality of the Roanoke THE BANK. Building strong and enduring relationships with our customers has been, and always will be the key to our success. Our employees have a sense of passion for their jobs”
Overall:
Both, the mission statement on the website and the undertaking they assert in their 10K-Form, seem to be effective in reaching their goal. It is not vague, it is not misleading, their customer target is clear, the way they see is straightforward and the statement is the succinct representation of the enterprise’s purpose for existence. It also incorporates social corporate responsibility and addresses the concept of moral responsibility. What could be claimed as insufficient is the lack of any expectations of growth and profitability.
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Attachment 5 – FINANCIAL ANALYSIS
In this attachment, a financial analysis for the period ending 2007 will be presented. It is based on the consolidated financial statements of the company and it conforms to generally accepted accounting principles. In addition, a financial analysis for the interim period based on the unaudited consolidated financial statements will be shown, to evaluate the company reaction to the financial turbulence during 2008.
Short overview about the business
The bank engages in the business of commercial banking, which provides a range of deposit services, including checking accounts, savings accounts and other time deposits of various types. In addition, the bank provides certain retirement account services, such as individual retirement accounts. The bank also provides lending services, including commercial loans, residential real estate loans, construction and development loans, and consumer loans.
Financial Highlights (In USD as of 12/31/2007)
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Financial Summary (In USD as of 12/31/2007)
Total Revenue 41,319,000
Net Interest Income 15,600,000
Net Income 2,928,000
Total Assets 600,967,000
Net Loans & Leases 482,281,000
Total Liabilities 560,251,000
Total Deposits 432,453,000
Stockholders' Equity 40,716,000
Profitability Ratios
ROA % (Net) 0.49
ROE % (Net) 7.90
Net Interest Margin % 40.01
Calculated Tax Rate % 26.38
Revenue per Employee 335,927.00
Liquidity Indicators
Loans to Deposits 1.12
Asset Management
Total Asset Turnover 0.07
Accrued Expenses Turnover 11.87
Property Plant & Equip Turnover 6.20
Cash & Equivalents Turnover 3.96
Stock Price and Valuation(Data as of 11/04/2008)
Market Cap (mil) 37
Shares Outstanding (000's) 4,673
52-Week Range 5.76 - 10.49
7-Day Average Closing Price 7.75
30-Day Average Closing Price 7.15
200-Day Average Closing Price 7.99
Dividend Per Share (TTM) 0.14
PE Ratio 11.94
Earnings Per Share (TTM) 0.67
Last Price 8
Last Day Range 8 - 8
Note: the above financial indicators will be further studied in this annex.
Balance sheet
As Reported Annual Balance Sheet 12/31/2007 12/31/2006 12/31/2005
Currency USD USD USD
Auditor Status Not Qualified Not Qualified Not Qualified
Accumulated other comprehensive income (loss) 36 (299) (447)
Total shareholders' equity (deficit) 40,716 33,401 30,715
Assets at a glance
Total assets at December 31, 2007 were $601.0 million, up $9.1 million or 1.5% from $591.9 million at December 31, 2006.
Total assets at December 31, 2006 were $591.9 million, up $93.0 million or 19% from $498.9 million at December 31, 2005.
The principal components of the Company’s assets at the end of 2007 were:
$487.1 million in gross loans $63.5 million in securities available-for-sale, including restricted equity securities, $17.6 million in securities held-to-maturity
The principal components of the Company’s assets at the end of 2006 were:
$471.0 million in gross loans$16.6 million in federal funds sold, $53.5 million in securities available-for-sale, including restricted equity securities, $20.1 million in securities held-to maturity
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Total liabilities at December 31, 2007 were $560.3 million, up from $558.5 million at December 31, 2006, an increase of $1.8 million or 0.3%.
Deposits decreased $9.0 million or 2.0% to $432.4 million from the $441.4 million level at December 31, 2006.
Total liabilities at December 31, 2006 were $558.5 million, up from $468.2 million at December 31, 2005, an increase of $90.3 million or 19.3%, with the increase primarily represented by a $76.1 million growth in deposits, along with the increase in short-term and long-term borrowings, the increase in securities sold under agreements to repurchase, and the increase in other liabilities.
Shareholder’s equity at a glance
Total shareholders’ equity at December 31, 2007 was $40.7 million, an increase of $7.3 million or 21.9% over the $33.4 million level at December 31, 2006. The increase is partially attributable to net income of $2.9 million.
Total shareholders’ equity at December 31, 2006 was $33.4 million, an increase of $2.7 million or 9% over the $30.7 million level at December 31, 2005.
The performance for 2007 was impacted by the unusually high level of nonperforming assets held throughout the year (1.24% of total assets).
The company adopted prudent steps by charging off in excess of $2 million in problem loan assets during 2007.
The company raised its capital with $4.2 million equity in the private placement offering.
The cost of funds has been increased resulting in a further squeeze on the net interest margin.
Note: the company did not participate in the subprime, Alt-A or third-party originated mortgageprograms that are now resulting in heavy loan losses at many banks.
Income statement
Net interest income is the principal source of earnings and is calculated as the amount by which loan and investment (earning assets) income exceeds the interest expense on deposits and borrowings (interest-bearing liabilities). Changes in the volume and mix of earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a
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significant impact on the level of net interest income. Changes in the interest rate environment and the company’s cost of funds also affect net interest income.
The company earned net income of $2.9 million for the year ended December 31, 2007, equivalent to the $2.9 million reported for the same period in 2006 which was a decrease of 15% over the $3.4 million reported for the same period in 2005.
The main component of the total interest income is interest income on loans including fees on loans. In this regard a loan portfolio summary is presented below:
Loan Portfolio Summary (in thousands)
6/30/08 12/31/07 6/30/07 $ % $ % $ %
Commercial 84,515 16.4 87,552 18.0 86,477 17.9Commercial real estate 195,238 37.9 170,599 35.1 177,461 36.8Real estate construction 106,194 20.6 106,195 21.8 92,990 19.3Residential real estate 122,773 23.9 115,458 23.7 118,005 24.5Loans to individuals (except those secured by real estate) 5,919 1.2 7,361 1.4 7,255 1.5
Total loans 514,639 100.0 487,165 100.0 482,188 100.0
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As Reported Annual Income Statement 12/31/2007 12/31/2006 12/31/2005
Currency USD USD USD
Auditor Status Not Qualified Not Qualified Not
Qualified Consolidated No No No Scale Thousands Thousands Thousands
Interest income &fees on loans 35,032 31,959 21,806
Interest income on taxable securities 3,350 2,340 2,104
Interest income on nontaxable securities 470 547 596
Interest on deposits in banks 141 71 73
Total interest income 38,993 34,917 24,579
Interest expense on deposits 17,501 14,270 8,122
Interest expense on long−term borrowings 2,092 2,033 1,576
Interest expense on short−term borrowings 1,241 1,145 621
Interest on guaranteed preferred beneficial interests in the Company’s junior subordinated debentures 1,188 815 364
Interest on federal funds purchased &securities sold under agreements to repurchase 1,371 974 297
Total interest expense 23,393 19,237 10,980
Net interest income 15,600 15,680 13,599
Provision for loan losses 1,250 2,796 1,297
Net interest income after prov for loan loss 14,350 12,884 12,302
Service charges on deposit accounts 1,178 992 914
Realized gains (loss) on sale of securs AFS (90) (3) 53
Realized gains on sales of derivative instruments 51 − −
Income earned on bank owned life insurance 522 467 325
Other income on real estate loans 63 135 86
Gain (loss) on disposal of equipment (4) 3 (7)
Other income 606 618 225
Total noninterest income 2,326 2,212 1,596
Compensation expense 6,678 6,040 4,743
Occupancy expense 763 690 611
Equipment expenses 567 544 469
Data processing expense 703 611 583
Advertising &marketing expense 277 384 278
Insurance expense 351 − −
Audit fees 335 276 262
Legal expense 209 − −
Franchise &purchase tax credit expense − 982 186
Franchise tax expense 338 − −
Business manager program expense 272 319 244
Deposit expense 257 290 304
Loan expenses 173 197 199
Foreclosed properties expense, net 10 − (141)
Computer software expense 330 384 316
Other expense 1,436 1,334 1,138
Total noninterest expense 12,699 12,051 9,192
Income (loss) before income taxes 3,977 3,045 4,706
Current income tax expense (benefit) 1,248 1,305 1,563
Deferred income tax expense (benefit) (199) (1,142) (249)
Income tax expense (benefit) 1,049 163 1,314
Net income (loss) 2,928 2,882 3,392
Weighted average shares outstanding − basic 4,266.658 4,101.634 4,075.812
Weighted average shares outstanding − diluted 4,331.697 4,215.241 4,251.37
Year end shares outstanding 4,593.581 4,112.074 4,076.993
Net income (loss) per share − basic 0.69 0.7 0.83
Net income (loss) per share − diluted 0.68 0.68 0.8
Long trends
2007 2006 2005 2004 2003
For the Year
Net interest income $ 15,600 $ 15,680 $ 13,599 $ 10,929 $ 9,465 Noninterest income 2,326 2,212 1,596 1,358 1,326
Interest and fees on loans $ 7,638 8,743 $ 15,970 $ 17,317 Interest on securities–taxable 1,047 793 2,064 1,555 Interest on securities-nontaxable 98 118 203 253 Interest on deposits in banks 12 1 17 109
Total interest income 8,795 9,655 18,254 19,234
Interest Expense:
Interest on deposits 3,487 4,248 7,572 8,598 Interest on short-term borrowings 147 316 299 593 Interest on long-term borrowings 550 551 1,107 1,132 Interest on guaranteed preferred beneficial
interests in the Company’s junior subordinated debentures 187 297 450 590
Interest on federal funds purchased and securities sold under agreements to repurchase 213 400 477 636
Total interest expense 4,584 5,812 9,905 11,549
Net interest income 4,211 3,843 8,349 7,685
Provision for loan losses 388 122 679 842
Net interest income after provision for loan losses 3,823 3,721 7,670 6,843
Noninterest Income:
Service charges on deposit accounts 289 314 551 605 Income earned on bank owned life insurance 142 130 278 257 Other income on real estate loans 9 20 15 33 Realized losses on sale of securities — (50) (14) (50)Realized gains on disposal of derivative
instruments — — — 51 Realized gain/(loss) on disposal of equipment (2) — (2) — Other income 240 155 366 304
Weighted average shares 4,627,582 4,161,546 4,622,761 4,143,326
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Overall
Generally, most years the bank kept an ascending trend from the stand point of the net income except in the year 2006 when a decrease was recorded. On the other hand, the influence of the economic crisis undoubtedly had its impact on the bank’s performance in 2008. The provision for loan losses increased in the event of possible increase in loan defaults. The net income was the most affected between March and June 2008. Overall, the total interest income suffered a decrease of 5% while the total interest expenses suffered a decrease of 14%. As a result, the net interest income showed an increase of 9% (the ratios refer to a six months period ending June 2008 compared with the same period in 2007). The increase in net interest margin is mainly the result of the bank effort in reduction of nonperforming assets.
From the asset point of view the following strategic movements were recorded:
a general increase in total assets with 8% a net loan growth of 7% an increase in the interest-bearing deposits in banks, an increase in securities available for sale while a decrease in securities held-to maturity an increase in foreclosed assets net
From the standpoint of liabilities:
a general increase in total liabilities with 5% a total deposit growth of 8% an increase in long term borrowings and a decrease in short term borrowings a considerable increase in federal funds purchased and securities sold under agreements
to repurchase
Investments (including both available-for-sale and held-to-maturity) and 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).
THE BANK Financial Corporation's peer group consists of the following: Bay Banks of Virginia, Inc. (BAYK), Benchmark Bankshares, Inc.
(BMBN), CCF Holding Company (CCFH), Citizens Bancorp of Virginia, Inc. (CZBT), Citizens Bancshares Corporation (CZBS), Commonwealth
Bankshares, Inc. (CWBS), First West Virginia Bancorp, Inc. (FWV), Gateway Financial Holdings, Inc. (GBTS), Georgia-Carolina Bancshares, Inc.
(GECR)
THE BANK Financial Corporation's financial data, as well as peer financial data is as of 9/30/2008.
Asset management ratios – measure the company’s effectiveness in managing its assets. That is, the right amount in the right assets.
Total Assets Turnover measures turnover of all firm’s assets, the efficiency of a company's use of its assets in generating income to the company. Bank’s ratio is in the range of 0.07; The S&P 500 benchmark shows a ratio of 0.98. THE BANK is below; on the larger scale, the bank is not efficient in using its assets. However, the bank’s ratio is in the range of its competitors.
Reserve/ Loans- Reserves for loan losses as a percent of loans before reserves- THE BANK has a percent of 1.05 in a peer average of 1.24. The ratio shows that the bank keeps fewer reserves then its peer competitors. The bank explains, however, that the estimate is based on its historical loss experience, portfolio concentration and a good evaluation of individual loan and economic conditions.
Revenues/working capital ratio measures the management of the cash a business requires for day-to-day operations. Working capital represents the difference between current assets and liabilities and hence this ratio measures the revenue coverage of the difference. THE BANKs’ ratio is within the range of its competitors.
Capital ratios
Total Equity/ Total Assets -equity as a percent of assets. The Equity Ratio is a good indicator of the level of leverage used by a company. The Equity ratio measures the proportion of the total assets that are financed by stockholders and not creditors. Here THE BANK is again under the peer average, 6.62 as opposed to 9.53. A low equity ratio will produce good results for 32 | P a g e
stockholders as long as the company earns a rate of return on assets that is greater than the interest rate paid to creditors.
Tangible equity/ Tangible Assets- measure the tangible equity as a percent of tangible assets. THE BANK’s ratio of 6.62 is less than it is the peer average of 9.08.
Debt ratio = Total Debt / Total Assets indicates the percentage of a company's assets provided via debt. It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and assets. THE BANK’s ratio is 0.93 for the year ending 2007 which means that most of the company's assets are financed through equity. If the ratio is greater than one, most of the company's assets are financed through debt.
Profitability ratios
ROAA- Return on average assets - net income as a percent of average assets. The percentage shows how profitable a company's assets are in generating revenue, is an indicator of how profitable a company is before leverage. THE BANKs’ ratio is within the range of its competitors, 0.50, while the peer average is 0.57. Conversely, the ratio is significantly lower than S&P 500 benchmark of 8.12% which would lead to the conclusion that the bank and its peers are significantly less efficient in using their assets then other firms return on assets. Yet, number varies widely across different industries.
ROE- Return on average common equity- measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. ROE is viewed as one of the most important financial ratios. It measures a firm's efficiency at generating profits from every dollar of net assets (assets minus liabilities), and shows how well a company uses investment dollars to generate earnings growth.
THE BANK’s ROE is 7.9 in an average peer range of 11.49. Again, looking at the S&P 500 benchmark where ROE is 19.65%, the conclusion would be that bank’s shareholders are receiving lower return compared to competitors and other firms. For ROE as for the other indicators, the best is to compare companies in the same industry.
Something worth mentioning is that high ROE yields no immediate benefit. Since stock prices are most strongly determined by earnings per share (EPS), you will be paying twice as much (in Price/Book terms) for a 20% ROE company as for a 10% ROE company. The benefit comes from the earnings reinvested in the company at a high ROE rate, which in turn gives the company a high growth rate. ROE is presumably irrelevant if the earnings are not reinvested.
Net interest margin- is a measurement of the difference between the interest income generated by a bank and the amount of interest paid out to its lenders. THE BANK has a net interest margin of 2.88 as opposed to 3.89 for peer average.
Liquidity indicator
Loans/ Deposits - loans held for investment, before reserves, as a percent of total insured deposits. It evaluates a bank's ability to repay depositors and other creditors without incurring excessive costs and while continuing to fund growth. This ratio of 111.34 is far beyond the peer average of 90.49, the bank seems to be risk adverse.
Market value ratios
Price / earnings (P/E) - indicates how much investors are paying per dollar of reported profits. THE BANK’s ratio is 9.90, more than the peer average, 8.46. Higher P/E ratio means that investors are paying more for each unit of income.
Dividend Yield- the most recently announced regular dividend, annualized and expressed as a percent of the security's price. On a range of 3.92 and 4.48, peer average and peer median, THE BANK has a dividend yield of 2.14, considerably lower. However, the dividend yield for industry is 0.23 and for S&P500, 2.55.
Overall
The bank performs in the range of its peers, but underperforms the S&P 500 benchmark. From the standpoint of asset utilization, the bank does not excel but is still in the range of its comparable competitors. From the stand point of capital adequacy, the bank seeks to maintain a capital structure sufficient to absorb potential losses. Liquidity ratios show that bank is overall solvent; Loan/Deposit ratio shows a cautionary strategy. The company struggles to maintain a total risk based capital ratio of 10% or greater at the Bank level, as is required for a "well capitalized" institution. Nonetheless liquidity and the capital levels are currently adequate to fund anticipated near-term business expansion.
The debt ratio doesn’t show that the company extensively uses debts to finance its assets. Short-term borrowings contain 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.
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The profitability ratios shows an under peer level of performance and even more a descendent trend. Both ROA and ROE are under the average. THE BANK’s investors pay per dollar of reported profits more than their competitors’ investors while the dividend yield is lower. Profitability ratios, together with other ratios can be partially explained by the global financial and economical crisis.
Attachment 6 – SWOT ANALYSYS
An internal and external scan of the Company environment is important since it offers a broad picture of the following elements: the strengths and weaknesses of the company, its internal factors, as well as the opportunities and the threats the company faces, its external factors. This is what is referred to as a SWOT analysis.
Strengths – internal variable important to formulate company’s strategy and to achieve success if quite well exploited. Here is a list of strengths THE BANK has on hand.
Reach/Availability- the bank has a widespread network for the county of Roanoke- 7 offices in Roanoke City and one for Salem City, all of them opened between 1995 and 2005. In other words, THE BANK offers a fine delivery channel for this area, excellent availability as long as they do not cannibalize.
Expertise in the need of small-to-medium sized businesses - being focused on meeting the expectations of a small fraction of customers needs, the bank has developed its expertise in this area.
Personalized services- an extremely important feature for banks operating in small areas. Most customers of community banks prefer real contact to internet based bank services. Customization in banking business pays off for small banks for their effort on being the
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reliable partner for small business and individuals. Building strong and enduring relationships with its customers is the claimed key of success at THE BANK.
Heritage- the bank has a good reputation over the years. Here are few examples of the extensive implication in community life: The Presbyterian Community Center – a non-profit organization sponsored by THE BANK to provide economic, educational, and counseling to families in need; Emergency Services, a unit created to provide critical financial assistance to eligible low-income families and individuals for utilities, rent, mortgage, prescriptions, heating oil, and other necessities; Pathways for Youth, a neighborhood based, family-oriented, after-school program; and Pathfinders, an after-school mental health treatment program for southeast Roanoke children.
A well-capitalized bank- under regulations, THE BANK meets capital requirements in the range of “well capitalized” bank (the risk-based ratio Tier 1 and leverage ratio).
Quality of Staff- “Our employees have a sense of passion for their jobs,” says the President in the welcome message on THE BANK web-site. It is hard to judge the assertion without any real experience. However, the site itself gives the impression that the staff is knowledgeable, assertive and reliable. Everything is well explained, easy to understand and presented in a friendly manner both on the website and on reports.
Technology –cutting edge technology lets THE BANK help manage their resources in order to meet a wide range of customers’ expectations and concerns. For example, they came up with the Business Security Token. This is a small connectionless device that generates on-time passwords, so that customers using online services enjoy the highest security.
Weaknesses- internal variables that can impede the attainment of maximum efficiency. The absence of certain strengths may be viewed as a weakness.
Weak brand name- even thought THE BANK is a small bank, its name could be stronger. That would make it easier for them to extend their business in different areas over time. Furthermore, there are about 25 banks FDIC insured that have “THE BANK” in their name. This causes confusion and makes it more difficult for the Marketing Department to create a very personalized image.
Asset-management- THE BANK still struggles to improve the utilization of its assets. From 2007 to 2008 they slightly improved their ROA; more improvement regarding the nonperforming assets is needed.
Commercial real-estate expertise- a lack of diversification in loan management was and could be harmful for company considering the present crisis in real estate. Even thought
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the company 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, commercial real estate, real estate construction and residential real estate together counts for more than 80% of their loan portfolio.
A lack of formulated strategy- a comprehensible strategy does not results from the website (shareholder information), or from their consolidated statements. No public release is available for investors. In contrast, a defensive strategy seems to be followed and the effort is concentrated on how to react to change rather than how to develop an offensive plan.
Innovation – limitation in coming up with new financial products in order to attract new customers in new markets. Lack of innovative solutions for extending the business “outside the box”. No signal of openness for new opportunities in business area.
Opportunities – external factors that would positively affect the business if recognized and employed
Build in trust & diversification -the troubles that the large banks have been facing lately could be an opportunity for small banks to underline the healthiness of their business and build in trust and reliability. Nonetheless, movements toward new business opportunities might be proved successful.
Increase market share- in MSA Roanoke aria, THE BANK has a market share of 7.84% while Wells Fargo has 23.22%. The fact that recently Wells Fargo became the subject of public debates could cause customers to migrate. It is a good time for THE BANK to build on its customer base.
Mergers & Acquisitions –with the U.S. Government’s capital infusion in the banking sector, new opportunities were created for banks; as a result, it could be a good time for a fresh strategy. It is good time not only to capitalize on expertise but to think offensively and long-term. Mergers and acquisitions are possible ways of expansion.
The economy of the community- the lower level of unemployment rate in Virginia as opposed to the U.S. is an indicator that despite of the overall economic downturn, more opportunities are available locally. The Roanoke MSA’s position as a regional center creates a strong medical, legal and business professional community, and these areas are not the most affected areas by the economic crisis.
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Threats- external conditions that could be harmful for the business
The overall economy- the global economic and financial crisis and the volatility that comes as a result poses a threat to the healthiness of many kinds of businesses, but especially for banks. This is a time when taking a documented decision is almost a utopia. Changes are expected at an unusual frequency rate. Businesses focus on short-term decisions.
Reform in bank regulations- one consequence of the present financial crisis is the boost in official regulations and private governance mechanisms in order to foster well-functioning banks and to prevent unrealistic risk-taking. Yet, THE BANK is not going to feel a extra pressure from this perspective -as it has stayed in the range of “well capitalized” banks- but could be further discouraged to extend its investments (at least for a while).
Mergers and acquisitions, financial consolidations, put a pressure on small community banks as large banks tend to continuously grow. In 2007, for example, more than 300 banks were engaged in mergers. A trend of consolidation is attached to this annex for exemplification. What the table shows is that the number of institutions has decreased but number of branches has increased over time (see the table below).
Banking sector’s growth rate- despite the slowing of growth in the banking sector due to the economic condition, with low barriers to entry, the banking sector has always had a steady growing trend. Some businesses could see the actual financial instability as a good moment to enter- as a speculative movement or for following a sense of logic.
Area where the bank operates – could be particularly attractive for new entrants as over time it has been proven that Virginia (and/or Roanoke particularly) was spared the worst of the economic downturn when compared with the U.S. as a whole. For instance, the unemployment rate was always lower in Virginia and also in Roanoke; per capita personal income was higher; the rate of personal bankruptcy filings was less in Virginia (during the peak time of 2006-2007). More, in 2008, the employment growth shows considerable higher rate in Virginia compared with the U.S. (see charts below)
Residential real estate activity significantly slowed down and the trend is not going to recover soon. From 2005 to the second quarter of 2008, the rate has declined 32%. Yet again, about 30% of THE BANK’s loans are in the residential real estate area (see the table below).
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Overall
THE BANK has a number of solid strengths that have allowed it to grow and extend over time. A consistent strategy for a steady growth and low velocity kept the business on the profitability level even in the most turbulent economic periods. Broadly, they understood their core competences and capitalized upon them. The bank successfully emulated to the community needs, and had the solutions for their problems. To better understand people needs and to make themselves reliable and to increase their market share, they involved themselves in a variety of the community activities. Close to their customers they developed their expertise and invested in their reputation. Their focus on real estate loans, however, has affected their income in 2008 (especially the second quarter), the common effect of the global financial crisis. One another strength of THE BANK is the use of high technology.
Regarding their weaknesses, a too timid expansionary strategy is being adopted. The choice to open seven branches in the same county can be a signal of runner-up business, short-term oriented strategy, risk adverse approach and timidity in taking on business opportunities. There would be two other main weaknesses, assets management and loan diversification.
Unemployment rate 2008- Virginia vs. the US
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Employment growth rate 2008
Federal Deposit Insurance CorporationNumber of Institutions, Branches and Total Offices
FDIC-Insured Commercial Banks Virginia
Year Institutions Branches Offices
2007 104 2,346 2,450
2006 111 2,304 2,415
2005 128 2,177 2,305
2004 125 2,145 2,270
2003 125 2,089 2,214
2002 130 2,171 2,301
2001 138 2,178 2,316
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2000 143 2,148 2,291
The trend is a decrease in the number of institutions while an increase in number of branches and offices; the consolidation process counts among the reasons.
Federal Deposit Insurance CorporationLoans and Leases
Pricing analysis in important in evaluating industries where the value provided to buyers is quite the same from seller to seller and price competition is typically the ruling market force. The banking industry is representative with regards to pricing, unless we talk about large-size banks or/and multinationals banks or banks offerings a range of services that really differentiate them. THE BANK offers the following services:
PERSONAL SERVICES:
Checking Accounts in the form of : My LifeStyle Checking, Interest Checking and Free Checking
o Free Internet Banking o Free Online Bill Pay
Product My LifeStyle Checking
Interest Checking Free Checking
Monthly Fees No monthly service fee
15 $ No monthly service fee
Minimum Balance to Waive Monthly Fees
No minimum balance required
$1,000 minimum or $2,500 average balance
No minimum balance required
Balance to Earn Interest
No minimum balance required
No minimum balance required
Non-interest bearing account
Minimum Opening Balance
$ 100No minimum balance required
No minimum balance required
Benefits Visa® Check Card
Free Generations Gold® membership
Free access to any ATM*
Rewarded with an extraordinary tiered interest rate*
5.01% APY for balances up to $25,000 and 1.01% APY on the remaining balance over $25,000
Free eStatement available
Access to over 32,000 Allpoint® and Sheetz® surcharge-free ATMs
25% off safe deposit box rent
.25% discount on consumer loans
Fee-free cashier's checks
Fee-free travelers checks
No-annual-fee
Visa® Check Card
Free eStatement available
Access to over 32,000 Allpoint® and Sheetz® surcharge-free ATMs
No minimum balance required $ 200.00Balance to Earn APY:Earn 55% of the current Prime Rate for balances of $25,000 or greaterEarn 25% of the current Prime Rate for balances of $24,999 or less
All balances earn a competitive variable APY.
Minimum Balance to Waive monthly fees:
No minimum balance required$200 within three months from account opening
Monthly Fees:
No monthly service fee $2.00
Personal Loans*THE BANK offers loans for cars, boats, vacations and other purposes.
Home Equity Loans*A Home Equity Loan is an installment loan, repaid over a specific period of time with set monthly payments. Home Equity Loans are an excellent way to borrow for almost any reason.
Home Equity Line of Credit*THE BANK's Home Equity Line is a revolving line of credit secured by a customer’s home. *Subject to credit approval.
Overdraft Protection - Personal ReservePersonal Reserve Credit Line is a personal line of credit to cover checks which overdraw the account to avoid costly overdraft fees and embarrassing delays.Residential Mortgage Loans & Construction Loans
o Lot Loans
o Construction Loans
o Construction-Permanent Loans
o Bridge Loans
o Equity Loans
o Mortgage Loans. Fixed Rate, Land Lot Loans
Certificates of Deposit
IRA Certificates of Deposit
Money Market IRA
Product Certificates of Deposit IRA Certificates of Deposit Money Market IRAMonthly Fees N/A N/A $ 7
Minimum Balance to Waive Monthly Fees
N/A N/A $ 2,000
Minimum Opening Deposit
$ 500 $ 500 No minimum required
Benefits Competitive interest rates fixed and variable
Terms from 3 months to 5 years
Interest is compounded quarterly for maturities 18 months or higher
Competitive interest rates
Terms from 3 months to 5 years
Interest is compounded quarterly for maturities 18 months or higher
Automatic transfers of interest to THE BANK checking or savings account
Monthly interest checks for balance of $25,000 or more
Free Online Banking account access 24 hrs a day
Free Bill Pay
Monthly distributions are available, if qualified, by automatic transfers to your THE BANK checking account
BUSINESS SERVICES:
Business checking
Small Business Checking I
Small Business Checking I I
Business Checking Analysis
Business Interest Checking
Recommended Uses
No cost checking for the mid-sized business that has light account activity
Designed for businesses with larger balances and activity
Designed for businesses with larger balances and activity
This account is available only to sole proprietorships and non-profit organizations
Balance Required to Waive Monthly Maintenance Fee
No minimum balance required
$2,000 minimum balance None None
Monthly Maintenance Fee
No monthly service fee $15 $15 $8
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Transaction Fees
First 50 checks written each cycle are free
$0.25 each
additional check for
each transaction
over 50
First 250 deposited
items each cycle
are free
$0.25 each
additional
deposited item for
each transaction
over 250
Change orders are
$0.10 per coin roll
Outgoing currency
straps are $0.25
per strap
First 100 checks written each cycle are free
$0.25 each
additional check
for each
transaction over
100
First 250
deposited items
each cycle are
free
$0.25 each
additional
deposited item
for each
transaction over
250
Change orders
are $0.10 per
coin roll
Outgoing
currency straps
are $0.25 per
strap
$0.15 per checks paid
$0.35 per each deposit
$0.10 per each deposit item
Change orders are $0.10 per coin roll
Outgoing currency straps are $0.25 per strap
Incoming currency straps are free for the first $5,000 per month; then $0.07 per $100 unit
$0.14 per checks paid
$0.30 per each deposit
$0.10 per each deposit item
Change orders are $0.10 per coin roll
Outgoing currency straps are $0.25 per strap
Business savings account
Business Statement SavingsRecommended Uses Balance savings account for any business customer
Balance Required to Waive Monthly Maintenance Fee
No Minimum Balance
Monthly Maintenance Fee No monthly Service Charge
Balance to Earn APY
Earn 55% of the current Prime Rate for balances of $25,000 or greater
Earn 25% of the current Prime Rate for balances of $ $24,999 or less
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Special Features
This Variable rate is tied to the Prime Rate as published in the Wall Street Journal and the interest rate will move up or down based on the movement of Prime
Only make six pre-authorized, automatic, online banking, ACH, wire or telephone transfers or withdrawals per statement cycle. Only three of the six transactions may be made by check, draft, debit card/POS, or similar order to third parties
Each check over the limit generates a five ($5.00) for individual and ($10.00) for commercial service charge
Unlimited withdrawals and transfers are allowed by mail, automatic teller machine (ATM), messenger, or in a branch. If the transfer limitations set forth is exceed in any statement cycle the account will be subject to closure. The minimum transfer amount is $1.00
THE BANK offers certificates of deposits (CD) to Business customers as well. Some of the benefits of business CDs are:
o Competitive interest rates fixed and variable. o Terms from 3 months to 5 years. o Interest is compounded quarterly for maturities 18 months or higher. o Monthly interest checks for balance of $25,000 or more.o Automatic transfers of interest to THE BANK checking or savings account.o Security of FDIC insurance coverage.
Other business services offered:
Commercial Lending
Real Estate Finance
Prime Money Market
Merchant Bankcard
VB Leasing
Receivable Financing
Cash Management
Lines of Credit
To understand where THE BANK is situated, a rank of the yields among competitors is necessary. Here it is:
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Virginia
The Page THE BANK6.01
%$25,000
updated rvw: 03/11/08
Farmers & Merchants Bank * 5.02
%$50,000
updated rvw: 08/04/08
Coastal Federal Credit Union5.01
%$50,000
updated rvw: 11/02/08
TriStone Community Bank5.01
%$25,000
updated rvw: 09/16/08
New Generations FCU5.01
%$50,000
updated rvw: 04/01/08
First National Bank of Altavista5.01
%$50,000 initial rvw: 04/20/08
THE BANK5.01
%$25,000 initial rvw: 06/06/08
Chartway FCU5.00
%$20,000 initial rvw: 07/28/08
Central Virginia Bank4.01
%$35,000 initial rvw: 03/31/08
EVB Bank4.01
%$250,000 initial rvw: 04/27/08
Information available at: http://www.highyieldcheckingdeals.com/
As the table above shows, THE BANK offers a very good yield for checking accounts, occupying the third position in Virginia. For regular saving accounts they have variable yields and for prime money market accounts, the yields vary as follows: between $0-24,999 a yield of 5.62 and for $25,000 and over, 6.97; again good rates.
THE BANK chose a top position from the stand point of pricing its services; it is not surprisingly that they compete on price as long as their main income comes as interest income. What else makes a bank, the same size and the same business model as of THE BANK’s, to stand up in such competitive environment are: preferred rates, innovative ways to compete and investment services. In this regard, the new checking account product, MyLifeStyle Checking was launched at the beginning of 2008. In addition to a great interest rate paid on this account, customers get free access to any ATM nation-wide along with additional rewards. The net interest income increased in the first 6 months of 2008 as compared with the same period of 2007. The yield on earning assets decreased at 6.31% from 7.08% for the periods mentioned above.
While THE BANK competitors may be pulling back on issuing credit, THE BANK continues to experience strong loan demand and strong core deposit growth from customers who prefer dealing with a locally established community bank. THE BANK’s Prime Money Market account, which has an interest rate tied to the Wall Street Journal Prime rate, continues to attract customers and led to the accumulation of over $90 million in deposits, as of the end of the third quarter of 2008, which is an increase of 25% over the same period last year.
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Attachment 8 VRIO Analysis
Resource-based analysis of the bank will determine which resources and capabilities result in which strengths or weaknesses. The strategies are meant to build strengths and avoid (or eliminate) weaknesses. The framework for VRIO analysis is based on: Valuable, Rare, Inimitable and whether or not the organization can effectively exploit them.
Resources Valuable Rare Easy to imitate
Exploited Competitive Implications
Economic Implication
s
Service Yes No Yes Yes Sustained Advantage
Normal
Expertise Yes No No Yes Advantage Above
Normal
Technology Yes No Yes Yes Parity Normal
Strategic Alliances
Yes No No No Disadvantage
Below Normal
Market share Yes No No Yes Parity Normal
Human Resources
Yes No Yes Yes Parity Normal
Overall
THE BANK exploits its resources quite well; THE BANK’s competitive advantages are maintained not based on a high level of cost imitation, but rather based on the bank’s strategy of exploiting its advantages. Well capitalized, with a good utilization of assets, cutting edge technology and, most importantly, with a developed business expertise in area, THE BANK has been able to use its competitive advantages over time. Intangible resources are usually more costly to imitate than tangible resources and bundles of resources are more costly than single resources. In THE BANK’s case for example, the great relationship with the community is a strength that gives THE BANK a sustainable competitive advantage. Market share coupled with a possible strategic alliance could increase competiveness. The technology that THE BANK uses
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is another competitiveness enhancer. Services such as Cash Management for business, great yields on checking and saving accounts for individuals and businesses, and Investment Services cover a wide range of service expectations, and THE BANK capitalizes on it.
Attachment 9 THE ANSOFF Matrix
To represent alternative corporate growth strategies, Igor Ansoff came with a matrix that focuses on firm’s present and potential product and markets. By considering ways to grow through existing products and potential products as well as relying on the present customers and potential new markets, the matrix was structured for four strategies:
Existing Products New Products
Existing Markets
Market penetration
Maintain or increase the market share of current products;
Secure dominance of growth markets
Increase usage by existing customers – for example by introducing loyalty schemes
Product development
Develop services which appeal to existing markets and help customers overcome the economic downturn;
New Markets
Market development
New geographical markets
Improved services
New distribution channels
Different pricing policies to attract different customers or create new market segments
Diversification
Growth strategy where the bank markets new services in new markets; (not THE BANK’s case)
Overall
THE BANK is mainly concerned with market penetration and market development rather than diversification. Low fees, high yields on deposits and personalized services constitute competitive products offered to existing customers; the aim is a steadily, lowly growth rate. Product development for existing customer is among THE BANK’s strategies as well. The new checking account MyLifeStyle Checking, launched at the beginning of 2008 is a new product that offers great interest rate, free access to any ATM nation-wide and many additional rewards. Further plans of opening a new office (the ninth one) in 2009 in the same area, under the same
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business concept, targeting the same kind of customers, represents another example of market penetration rather than development of new market segments and/or diversification, which would have characterized more aggressive growth strategies.
Attachment 10 THE BANK’S MANAGEMENT
Board of directors list found on Proxy statement for 2007
George W. Logan, 63, 1994, Chairman of the Board of Directors of the Company and the Bank; Lecturer, Darden Graduate School of Business Administration, Charlottesville, VA;
Ward W. Stevens, M.D., 72, 1994, Vice Chairman, retired neurosurgeon;
Ellis L. Gutschall, 57, joined THE BANK in 1995, President & Chief Executive Officer (CEO),
Abney S. Boxley, III, 50, 1994, President and Chief Executive Officer, Boxley Materials Company (construction materials supplier); Roanoke, VA;
William D. Eliot, 62, 1994, Chairman, Davis H. Elliot Company, Incorporated (specialists in construction and maintenance of overhead electric power lines, industrial electric wiring and industrial process controls), Roanoke, VA;
James S. Frantz Jr., 51, 2005, President and Chief Executive Officer of Graham-White Manufacturing Company (manufacturer of custom products and solutions for the transportation industry), Salem, VA;
Mason Hainesworth, 67, 1997, Retired since 2000; former Director of Specialized Audits, Norfolk Southern Corporation (rail transportation company), Roanoke, VA;
Eddie F. Hearp, 64, 1994, President, National Financial Services, Inc. (personal and business insurance, retirement benefit planning), Roanoke, VA;
Anna L. Lawson, 64, 1994, Conservationist, Daleville, VA;
Barbara L. Lemon, 71, 1994, Civic Leader, Roanoke, VA;
A. Waine Lewis, 64, 1994, Retired since July, 2005; former Executive Vice President, Chief Financial Officer, and Corporate Secretary of the Company and the Bank, Roanoke, VA;
Samuel L. Lionberger Jr., 67, 2005, Chief Executive Officer, Lionberger Construction Company (general contracting company), Roanoke, VA;
Geoffrey M. Ottaway, 60, 2005, Chairman, Checker Leasing, Inc. (owner of Avis and Budget Rent-ACar franchises), Roanoke, VA;
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John M. Star M.D., 61, 1994, Cardiologist, Consultants in Cardiology, PC, Roanoke, VA;
Edward B. Walker, 40, 2007, Managing Member, Regeneration Partners, LLC, Roanoke, VA;
Michael L. Warner, 72, 1994, Private Investor, Roanoke, VA;
Executive officers and their position in the bank as found in the bank’s 2007 proxy statement:
Ellis L. Gutschall, 57, joined THE BANK in 1995, President & Chief Executive Officer (CEO), also member in bank’s board of directors;
Kimberly B. Snyder, , CPA, 37, joined THE BANK in 2005, Executive Vice President & Chief Financial Officer, Corporate Secretary of the Company;
John McCaleb, 55, 2006, Senior Vice President and Chief Lending Officer;
Andrew B. Agee, 46, 2006, Senior Vice President and Senior Real Estate Officer;
Overall
The board of directors and the Asset Liability Oversight Committee are together responsible for the interest rate risk control. The Directors’ Loan Committee composed of eight directors, review all loans on the watch list to determine proper action and report any loans identified as substandard by the credit quality review. The management is responsible for establishing and maintaining adequate internal control over financial reporting.
What has drawn attention is that many members of board of directors have specializations in different fields other than finance, most of them linked with construction/engineering, for example: construction and maintenance, manufacturing and rail transportation. There is a specialization in civic affairs and two other members have medical background. It could be speculated that there is a connection between the board of director’s expertise in diverse areas (most on construction) and in the loan portfolio (concentrated on real estate). There is nothing wrong with this fact as long as the executive officers have their specializations and expertise on the area each lead.
The board of directors’ average age is 50 and over. Yet, Executive Vice President Chief Financial Officer and Senior Vice President Head of Business Banking are young. As a whole, based on the assumption that experience is an ongoing process, human expertise is an extremely valuable resource for any enterprise and that diversity at the workplace has been proven beneficial in most the cases, there are no real concerns that these young ages of the Executive VP and the CFO would play against the company’s strategy or work against their best interest.
