1. Bank Financials 101 2014 “Needle Movers”

2. Today’s Agenda 1.The “business” of banking – how Banks make money 2.Financial statements 3.How each area can impact financial results.

3. What is the basic business of a Bank?

4. What are a Bank’s products: What do Banks “Sell”? Assets? Loans Investments Liabilities? Checking accounts Savings / NOW accounts CDs, etc. Wholesale Funds (brokered CDs, FHLB) Both Assets & Liabilities?

5. The basic business of a Bank: A Bank is a Financial Intermediary that buys and sells money

6. Basic Bank Income Statement: Revenues:Interest Income (loans & investments) Less:Interest Expense (deposits & borrowings) ________________________________ Net Interest Income (NII) Less:Provision for Loan Losses Plus:Other Income (Fees, etc.) Less:Operating Expense ___________________________ Net Income Before Taxes Less:Taxes ________________________________ Net Income ________________________________ Asset/Liability Management: Primary Focus

7. A more detailed look at Net Interest Income (NII) NII comprises between 75% and 90% of total income for most community banks. NII is a function of: Yield on assets (mix and rates) Cost of funds (mix and rates) Size of balance sheet (volume)

8. Net Interest Calculations Net interest spread calculation –Average yield on earnings Assets 4.46% –Average cost of funds on liabilities (1.67)% –Net interest spread 2.79% Net interest margin calculation –Net interest income$15,856,555 –Average earning asset$528,605,076 –Net interest margin = 3.05%

9. A bank’s goal is to Maximize NII (over both the short and long run) while managing levels of: Liquidity Interest Rate Risk Capital Adequacy

10. Liquidity Defined The ability of the Bank to raise money quickly at a reasonable cost and with minimal principal loss

11. Why is liquidity important to a Bank? Repay depositors Make loans and investments Money is our raw material!

12. Where does a Bank get its “raw material”? Core deposits “Non-core” deposits Wholesale sources of funds: –FHLB –Brokered CD’s –National Market CD’s –Repurchase Agreements –CDARS

13. Concluding comments on liquidity A Bank’s success in obtaining liquidity and the will impact role of wholesale funding will impact its: Deposit pricing Loan strategy Investment strategy Growth strategy its earningsAnd, therefore, its earnings!

14. What types of “non-interest income” do Banks generate? Fees on deposit relationships (service charges & NSF charges) and other services (safe deposit, etc.) Fees on trust & investment relationships (Wealth Management) Gains on the sale of loans “Other” non-interest income (International Fees, BOLI, Visa Check Card Fees and ATM Fees, etc.) Mortgage loan and related fees

15. What types of “non-interest expense” do Banks incur? Salaries and benefits Occupancy costs & FFE costs Professional and data processing fees Insurance & regulatory Loan / Lease Postage and telephone Advertising and marketing Stationery and supplies Bank service charges

16. Loan pricing example: 15 year fixed rate Mortgage-$250,000 Interest collected (life of the loan) Loan rate 5.00% Interest collected $105,856 Loan rate 4.85% Interest collected $102,350 Loan rate 4.50% Interest collected $94,246 10 similar loans 15bps higher generates an extra $35,000 of interest income for the Bank.

17. HELOC $50,000 balance assuming no rate change Interest collected (each year) Loan rate 6.00% Interest collected $3,000 Loan rate 5.00% Interest collected $2,500 Loan rate 4.00% Interest collected $2,000

18. Deposit pricing example: $500,000 Money Market Interest Paid (per year) Deposit rate 0.55% Interest paid $2,750 Deposit rate 0.45% Interest paid $2,250 Deposit rate 0.25% Interest paid $1,250 We want to price deposits at or below rates we can get wholesale funding for.

19. Needle Movers Questions?