Michigan Banking: Why Am I In This Business? MBA Annual Convention June 18, 2010 Presented by: ________________________________________________________________ Robert J. Morgan Managing Director & Principal

The Old World

Failed Bank Data Several Hundred Bank Failures Expected in 2010 – 2011 YTD 06/11/10 Bank Failures by Region Region Number of Failures Aggregate Assets ($Bils) Mid-Atlantic6$19.8 Midwest27$14.5 Southeast24$13.0 Southwest6$3.9 New England1$0.2 West18$16.4 Total82$67.9 Number of Bank Failures Aggregate Assets of Failed Banks ($Bils)

Estimated Banks with CAMELS 3-5 Ratings Note: Includes Commercial Banks, Savings Banks & Savings Institutions. CAMELS Scores estimated based on Veribanc safety ratings. (Source: SNL Financial) Estimated CAMELS Scores of 3-5 Represent Moderate to Severe Degree of Regulatory Concern # 3-5 CAMEL Rated Banks % of Total Institutions

Regulatory Enforcement Actions C&D Orders & Written Agreements Issued by the FDIC, OCC, OTS & Federal Reserve Note: YTD 2010 through June 11, Number of C&D Orders based on the most recent data as provided by each regulatory agency. Totals shown do not net out those orders which were terminated or modified.

Careful expense reductions Aggressively reserve for problem assets Modest de-leveraging – customer/pricing oriented – with the goal of increasing margins Capital building – suspend stock repurchases, evaluate dividend levels Aggressively target next examination cycle to eliminate any regulatory issues Preserve and build shareholder confidence Establish the resources to benefit from less competition and a better economy PRESERVATION STRATEGIES

New World of Banking Disciplined Underwriting Disciplined Pricing Disciplined Use of Capital

Texas Ratio: Nonperforming Assets / (Tangible Equity + Loan Loss Reserve) Median U.S. Commercial Bank Data The Texas Ratio provides a measure of a bank’s ability to absorb losses given its current balance sheet resources.

# of Banks with a Texas Ratio Greater Than 100% U.S. Commercial Bank Data The spike in the number of banks nationwide with a Texas Ratio greater than 100% indicates a heightened risk of future bank failures. Percentage of Total Banks in Census 5.9% Percentage of Total Banks in Census 10.3%

Nonperforming Assets as a % of Total Assets Note: Nonperforming Assets = Nonperforming Loans + Other Real Estate Owned + Nonaccrual Debt Securities & Other Assets + Loans Past Due 90+ Days and Still Accruing. Median U.S. Commercial Bank Data Nonperforming assets relative to total assets have historically been higher in Michigan as compared to the Nation.

Loan Loss Reserve as a % of Nonperforming Loans Note: Nonperformning Loans = Nonaccrual Loans (excluding debt securities and other assets) + Restructured Loans less Guaranteed Portion of Nonaccrual Loans Guaranteed by the U.S. Government. Median U.S. Commercial Bank Data The significant decrease in the loan loss reserve relative to nonperforming loans indicates the need for banks to build their reserves to cover potential future losses.

Historical LLR and Nonperforming Loan Data Median U.S. Commercial Bank Data Nonperforming Loans have grown at a much faster pace than Loan Loss Reserves. Since 2006, NPLs/Loans increased 162 basis points LLR/Loans increased 33 basis points 4.5x Coverage 0.82x Coverage

Return on Average Assets Median U.S. Commercial Bank Data Banks have been hit hard by significant increases in loan loss provision and/or other non-operating expenses/losses. This has had a negative impact on the banking industry’s bottom line.

The Outlook The Economy De-Leveraging Commercial Real Estate Values Regulatory Changes Capital

State of Michigan Population (in millions)

State of Michigan Number of People with Jobs (in millions)

State of Michigan Financial Service Industry Jobs (in thousands) 2005 – 2010 Percent decline 15.6%

State of Michigan Financial Service Industry Jobs (in thousands)

Why Am I in This Business? Competition is Changing Loan Quality Improving Growth Will Happen Again

Speaker Contact Information Robert J. Morgan Managing Director & Principal Austin Associates, LLC 7205 W. Central Ave. Toledo, Ohio