Thomas J. Parliment, Ph.D., Chairman & CEO Parliment Consulting Services, Inc

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1 Thomas J. Parliment, Ph.D., Chairman & CEO Parliment Consulting Services, Inc March 2015

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6 The Forward Interest Rate Curve Forecasts Higher Rates - #1

7 The Forward Interest Rate Curve Forecasts Higher Rates - #2

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12 3 Month 6 Month 2 Year 5 Year 10 Year 30 Year

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14 Wholesale Equivalent Retail Equivalent At the Margin Overnight 0.25 Credit Risk A Credit 0.25 Matched Duration Treasury (3 Year) 1.00 Liquidity Risk 0.00 Matched Duration Equivalent Investment (3 Year PAC) 2.00 Interest Rate Risk Option Risk Operating (Servicing) Expense 0.25 Required Marginal Yield to Be Indifferent Between Loan and Investment 2.50 CAREFUL! This is NOT the actual loan rate!

15 Amount Yield Interest Income 1,000, % 45,000 Change in Balances Change in Interest Income Marginal Yield 2,000, % 70,000 1,000,000 25, % 3,000, % 105,000 2,000,000 60, % 4,000, % 140,000 3,000,000 95, % 5,000, % 175,000 4,000, , % 6,000, % 210,000 5,000, , % 7,000, % 245,000 6,000, , % Marginal (Incremental) Yield = Change in Interest Income/Change in Balances If we start with $1 million of loans at a 4.50% yield, the interest income is $45k. The institution has to originate approximately $2 million net new loans at 3.50% to reach break-even of 2.50% (indifferent between the wholesale investment vs. the retail loan on a cost- and risk-adjusted basis).

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17 Loan Innovation & Product Development

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21 Advanced Underwriting In Prime & SuperPrime Traditional underwriting is a filtering process of pass/fail criteria aimed at avoiding bad loans Credit Score Loan Request DTI LTV Etc. DTI Score Cutoff LTV Loan Offer This approach has major limitation No Prediction of Probability of Default No Prediction of Loss Given Default No Prediction of Loan Life Cash flows No Prediction of Profitability Doesn t Make the Most of each Opportunity Verde International LLC Sales@VerdeAdvisor.com Phone: x15 Fax:

22 Advanced Underwriting In Prime & SuperPrime Advanced underwriting methods recognize that Customer Behaviors, Market and Business Economics and Loan Terms all influence the credit performance and profitability of any loan offer. Optimized offers account for these dynamics to engineer the best revenue and expense profile. Customer Behavior Terms & Conditions Revenue Expense & LDG Market & Business Economics Min Profit Max Prob of Default Risk weighed return Optimized & Compliant Offer PDP LGDP Cash FlowsP ProfitabilityP Most of each OpportunityP Verde International LLC Phone: x15 Fax:

23 Advanced Underwriting In Prime & SuperPrime Lorenz Curve Compares Underwriting Model Performance for a Given Population In a Lorenz curve, the distribution of losses (Y) is compared with the distribution of scored loans (X). The thin black diagonal line represents a random guess (poorest model). The red line represent actual behavior (perfect model). Therefore farther from the black and closer to the red signifies improving model performance. Shown here is a broad spectrum lending strategy. Holding X constant at 85% approval, we can compare expected losses of each model. In this case, the Verde model (green) outperforms the bureaus based model (blue) by a factor of 4X for a savings of about $5.3M per $100M booked Verde International LLC Sales@VerdeAdvisor.com Phone: x15 Fax:

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25 Sector Product Differentiation Market Segmentation Consumer Checking High Rate, High Balance High net worth customers, small business customers, small business bundling Internet ACH Clearing Account Broker Buster Rewards Checking (high rate up to a maximum amount, providing sufficient fee generating transactions) Guaranteed/Early Payday Business Checking Remote Capture Small business CDs Health Savings Accounts Health-cost hedgers Non-customers resistant to changing primary banking relationship and are on-line savvy Higher net worth commercial clients to obtain their personal balances Small- to intermediate balance customers Senior citizens, paycheck-to-paycheck workforce; reputable businesses for payroll Bump-up CDs Pick Your Own Maturity Inflation hedgers Maturity targeters

26 Decile # of Accounts Balances Averages Medians % of Total ,032, , , % 55.1% of balances ,926,475 56,333 52, % 101,032,159 are in the top decile ,952,079 28,955 28, % 620 accounts ,723,647 17,296 16, % ,064,253 11,394 11, % ,813,676 7,764 7, % 50% of your depositors ,951,780 4,761 5, % 3,104 hold 6.0% ,600,738 2,582 2, % of balances 10,578, ,797 1,305 1, % , % 6, ,276,640 28,549 10, % The median reflects that half of your depositors 3,104 have balances of 10,034 or less Who are the higher balance customers that hold 55% of your balances? How rate sensitive will they be in a rising rate environment? How many CD customers have active checking accounts? How do you meet the marketing challenges and products of these different segmented customers? 4 customers have balances over $1 million and total $5.8 million 60 customers have balances >$250k and total $19.7 million 497 customers have balances between $100k and $250k and total $65 million

27 Current Current Current New Retain Total Forecast Product Group Product Group Balance Rate Int Exp Rate % Forecast Int Exp UP Comp 50 bp Ave FHLB 12 Mo Mo Mo Mo 1.25 n/a 60 Mo Certificates of Deposits Original Maturities Rates up 50bp NRS Balances 12 Mo 76, % % 100% 76, Mo 45, % % 100% 45, Mo 21, % % 100% 21, Mo 11, % % 100% 11, Mo 28, % % 100% 28, Totals: 182,275 1, ,275 2,133 Weighted Cost: 0.67% 1.17% Current Proposed Change Due to Due to Balance 182, ,275 0 Rate Volume Weighted Cost of Deposits 0.67% 1.17% 0.50% Change Change Interest Expense 1,221 2, Moving all CDs by 50bp increases interest expense by $911 thousand annualized.

28 Current Current Current New Retain Total Forecast Product Group Product Group Balance Rate Int Exp Rate % Forecast Int Exp UP Comp 50 bp Ave FHLB 12 Mo Mo Mo Mo 1.25 n/a 60 Mo Proposed Certificates of Deposits Original Maturities Up 50bp To Mkt Ave NRS Balances 12 Mo 76, % % 95% 72, Mo 45, % % 95% 43, Mo 21, % % 90% 18, Mo 11, % % 90% 10, Mo 28, % % 90% 25, Totals: 182,275 2, ,152 1,667 Weighted Cost: 1.17% 0.98% Current Proposed Change Due to Due to Balance 182, ,152-12,123 Rate Volume Weighted Cost of Deposits 1.17% 0.98% -0.19% Change Change Interest Expense 2,133 1, Gross Mgnl Savings of Reduced Deps 3.84% The marginal savings is 3.84%. In other words, it costs you 3.84% to hang onto the $12 million of rate sensitive balances. FHLB 5 year advances (up 50bp rate environment) are 2.36%. Note: This analysis does not evaluate cannibalization from or to non-maturity deposits. Marginal Cost or Savings = Change in Interest Expense Divided by Change in Balances

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30 Current Current Current New Retain Total Forecast Product Group Product Group Balance Rate Int Exp Rate % Forecast Int Exp Certificates of Deposits Original Maturities To Mkt Ave NRS Balances UP Comp 12 Mo 72, % % 100% 72, bp Ave FHLB 24 Mo 43, % % 100% 43, Mo Mo 18, % % 100% 18, Mo Mo 10, % % 100% 10, Mo Mo 25, % % 100% 25, Mo 1.25 n/a 60 Mo Proposed Balance Dstribution 15 Mo Spec to $10k 0.90% 6% Mo Spec to $50k 0.95% 25% 3, Mo Spec to $100k 1.05% 17% 2, Mo Spec >=$100k 1.15% 52% 6, Totals: 170,153 1, ,276 1,796 Weighted Cost: 0.98% 0.99% This Tiered Special is based on balances. It could incorporate relationship pricing as well, such as a higher rate with direct deposit checking. Current Proposed Change Due to Due to Balance 170, ,276 12,123 Rate Volume Weighted Cost of Deposits 0.98% 0.99% 0.01% Change Change Interest Expense 1,667 1, Gross Mgnl Cost of New Deps 1.07% You can retain the $12 million rate sensitive balances with a Defensive Tiered Special at a marginal cost of 1.07% vs. 3.84%. Marginal Cost or Savings = Change in Interest Expense Divided by Change in Balances

31 Call Us for a Strategic Financial Planning Session Parliment Consulting Services tparliment@parlimentconsulting.com jflockwood@parimentconsulting.com